[ L O G O ]








                                ANNUAL REPORT FOR

                                 THE YEAR ENDED

                               SEPTEMBER 30, 2001

<PAGE>


                      [FIRST FEDERAL BANCORPORATION LETTER]


December 14, 2001



TO OUR STOCKHOLDERS:

It gives me great pleasure to give you our progress and profitability report for
First Federal  Bancorporation and its principal subsidiary,  First Federal Bank.
This report represents another exciting and productive year at First Federal.

Total  consolidated  net  earnings  for the year ended  September  30,  2001 was
$912,560.  Net income  increased  2.58%  over 2000  levels  primarily  due to an
increase  in  net  interest  income  and  increased   reliance  on  fee  income.
Consolidated  stockholders  equity was  $14,028,033  at September 30, 2001 which
represents 11.04% of total assets.

We are pleased to report the following positive changes during 2001:

     o    First  Federal Bank  expanded its ATM network with  additional  retail
          locations  including an exclusive  arrangement at the Paul Bunyan Mall
          in Bemidji. In early 2002 First Federal Bank will open a new branch at
          a new Walmart Supercenter in Bemidji.

     o    First  Federal  Bank  continued  to expand  its  deposit  base with an
          increase of 11.16% over the prior year.

     o    In addition  First  Federal Bank  expanded its consumer  loan business
          with a 26.89% increase over the prior year.

     o    On  January  24,  2001 First  Federal  Bancorporation  announced  a 5%
          repurchase of existing shares.

We pledge our continued time and energy towards  enhancing  shareholder value in
the future.

Sincerely,

/s/ William R. Belford

William R. Belford
President

<PAGE>

                              FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
                                                                 AT SEPTEMBER 30,                CHANGE
                                                            --------------------------     --------------------
                                                              2001              2000       AMOUNT       PERCENT
                                                            --------          --------     ------       -------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                       <C>              <C>              <C>           <C>
FINANCIAL POSITION:
  Total assets.........................................   $  127,032       $   140,218      ($13,186)    -9.40%
  Loans receivable, net................................       77,257            70,754         6,503      9.19
  Securities available for sale........................       12,605            25,211       (12,606)   -50.00
  Securities held to maturity..........................       16,727            33,735       (17,008)   -50.42
  Deposits.............................................       98,821            88,900         9,921     11.16
  Stockholders' equity.................................       14,028            12,813         1,215      9.48
  Number of common shares issued.......................    1,264,628         1,280,152       (15,524)    -1.21

</TABLE>
<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED
                                                                AT SEPTEMBER 30,                   CHANGE
                                                            --------------------------     --------------------
                                                              2001              2000       AMOUNT       PERCENT
                                                            --------          --------     ------       -------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                       <C>              <C>                  <C>       <C>
RESULTS OF OPERATIONS:
  Interest income......................................   $    9,902       $     9,575          $327      3.42%
  Interest expense.....................................        5,776             5,816           (40)    -0.69
  Net interest income..................................        4,126             3,759           367      9.76
  Provision for loan losses............................          268                45           223    495.56
  Net interest income after provision
    for loan losses....................................        3,858             3,714           144      3.88
  Non-interest income..................................          772               782           (10)    -1.28
  Non-interest expense.................................        3,158             3,067            91      2.97
  Earnings before income taxes.........................        1,472             1,429            43      3.01
  Net earnings.........................................          913               890            23      2.58
</TABLE>


                                       1
<PAGE>

                         SELECTED FINANCIAL INFORMATION

SUMMARY OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                       AT SEPTEMBER  30,
                                                  ---------------------------------------------------------
                                                  2001          2000         1999         1998        1997
                                                  -----        ------       ------       ------      ------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                             <C>         <C>           <C>          <C>         <C>
Total amount of:
  Assets.....................................   $  127,032  $  140,218    $  132,290   $  125,251  $   111,492
  Loans receivable, net......................       77,257      70,754        57,257       56,064       53,589
Investment securities:
  Available for sale.........................        4,189      13,633        16,071       19,732       28,757
  Held to maturity...........................       16,589      33,576        33,574       22,992           --

Mortgage-backed and related securities:
  Available for sale.........................        8,416      11,578        15,201       17,101       18,834
  Held to maturity...........................          138         159           234          307          530
Deposit accounts.............................       98,821      88,900        88,111       85,866       83,003
Advances from FHLB...........................        9,760      31,363        24,957       20,457        9,534
Other borrowings.............................        3,102       5,562         4,701        4,435        4,697
Stockholders' equity.........................       14,028      12,813        13,061       13,082       11,941
</TABLE>

SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
                                                                YEAR ENDED SEPTEMBER 30,
                                                    ---------------------------------------------------------
                                                    2001        2000         1999         1998        1997
                                                    -----      ------       ------       ------      -----
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                <C>        <C>          <C>          <C>          <C>
Interest income..............................      $ 9,902    $ 9,575      $ 8,756      $ 8,520      $ 7,891
Interest expense.............................        5,776      5,816        5,133        4,906        4,457
                                                   -------    -------      -------      -------      -------
Net interest income before
  provision for loan losses..................        4,126      3,759        3,623        3,614        3,434
Provision for loan losses....................          268         45           98          153           --
Noninterest income...........................          772        782          567          651          571
Noninterest expense..........................        3,158      3,067        2,849        2,811        2,805
                                                   -------    -------      -------      -------      -------
Income before income tax expense.............        1,472      1,429        1,243        1,301        1,200
Income tax expense...........................          559        539          473          487          492
                                                   -------    -------      -------      -------      -------
Net income...................................      $   913    $   890      $   770      $   814      $   708
                                                   =======    =======      =======      =======      =======
Per Share Data:
   Basic earnings per share..................      $ 0.93     $   .83      $   .66      $   .70      $   .58
   Diluted earnings per share................        0.89         .82          .64          .65          .56
Book value...................................       13.76       12.10        10.56        10.09         9.05
</TABLE>


                                       2
<PAGE>
KEY OPERATING RATIOS

<TABLE>
<CAPTION>
                                                                YEAR ENDED SEPTEMBER 30,
                                                    -------------------------------------------------------
                                                    2001        2000         1999         1998        1997
                                                    -----      ------       ------       ------      -----
<S>                                                <C>        <C>          <C>          <C>          <C>
Return on assets (net earnings divided
  by average total assets)...................       0.66%      0.65%        0.60%       0.69%         0.65%
Return on equity (net earnings
  divided by average equity).................       6.78       6.95         5.85        6.60          5.87
Tangible-equity-to-assets ratio
  (average equity divided by
  average total assets)......................       9.77       9.42        10.22       10.44         11.10
Interest rate spread.........................       2.64       2.47         2.61        2.87          2.94
Net interest margin (1)......................       3.12       2.90         2.94        3.23          3.32
Nonperforming loans to total loans (2).......       0.55       0.56         0.75        0.90          0.17
Nonperforming assets to total assets (3).....       0.34       0.48         0.53        0.53          0.32
Allowance for loan losses to total loans.....       0.86       0.72         0.95        0.86          0.78
Allowance for loan losses to
  nonperforming loans........................     156.78     128.78       126.14       96.14        464.13
Net charge-offs to average loans.............       0.15       0.13         0.07        0.15          0.05
Noninterest expense to average assets........       2.29       2.26         2.21        2.38          2.58
Average interest-earning assets to
  average interest-bearing
  liabilities................................     111.03     109.57       107.83      108.32        108.73
<FN>
____________
(1)      Net interest income/average interest earning assets.
(2)      Includes non-accruing loans and loans delinquent 90 days or more.
(3)      Includes non-performing loans and real estate owned.
</FN>
</TABLE>


Note:  The  following   discussion  is  provided  to  assist  readers  in  their
understanding  of  the  consolidated   financial  statements  of  First  Federal
Bancorporation.   This  discussion  should  be  read  in  conjunction  with  the
consolidated  financial  statements and other  financial  information  presented
elsewhere in this report.

                                       3
<PAGE>

                      BUSINESS OF THE COMPANY AND THE BANK

FIRST FEDERAL BANCORPORATION

     First Federal  Bancorporation  (the "Company") was  incorporated  under the
laws of the State of Minnesota in September  1994 at the  direction of the Board
of Directors of First Federal Banking and Savings,  FSB ("First  Federal" or the
"Bank") for the purpose of serving as a savings and loan holding  company of the
Bank upon the  acquisition  of all of the capital  stock issued by the Bank upon
its   conversion   from  the  mutual  to  the  stock  form  of  ownership   (the
"Conversion").  On April 3, 1995,  the Bank  completed  the  Conversion  and the
Company  completed its offering of Common Stock through the sale and issuance of
1,940,625  shares of Common Stock at a price of $4.44 per share  realizing gross
proceeds  of  $8.63  million  and net  proceeds  of  $7.96  million.  Since  the
Conversion,  the Company has repurchased 675,997 shares of its Common Stock, and
as of September 30, 2001, there were 1,264,628 shares of Common Stock issued and
1,017,095  shares of Common  Stock  outstanding.  Prior to the  Conversion,  the
Company did not engage in any  material  operations.  Currently,  the  Company's
principal  business is the business of the Bank.  The Company has no significant
assets other than the  outstanding  capital stock of the Bank,  $500,000 of cash
and cash  equivalents,  $499,000 in securities  available for sale,  $250,000 in
loans receivable, and $102,000 in other assets.

FIRST FEDERAL BANK

     First Federal was originally  chartered in 1910 as Beltrami  County Savings
and Building Association,  a state-chartered savings institution,  and commenced
operations  in that same year.  First  Federal  has been a member of the Federal
Home Loan Bank  ("FHLB") of Des Moines since 1933,  and its  deposits  have been
federally  insured  since 1938.  In August  1997,  the Bank  changed its name to
"First Federal Bank." First Federal currently operates as a federally  chartered
savings  bank  through its main office  located in Bemidji,  Minnesota  and four
branch  offices,  which are located in  Bemidji,  Bagley,  Baudette  and Walker,
Minnesota. The Bank has entered into an agreement with Wal-Mart Stores, Inc. for
an in-store banking  facility.  A full service in-store banking facility will be
located in the new  Wal-Mart  Supercenter  in Bemidji.  The Bank is  tentatively
scheduled to begin  operations  in February  2002 when the Wal-Mart  Supercenter
opens for business.  The Bank's market area is located  approximately  200 miles
north of Minneapolis, Minnesota.

     First Federal is primarily  engaged in the business of attracting  deposits
from the general  public and  originating  loans  secured by first  mortgages on
owner occupied one- to four-family  residences in First  Federal's  market area.
First Federal also originates loans on commercial real estate, multi-family real
estate,  home equity lines of credit and other  consumer  loans,  and commercial
business  loans.  Due to limited  demand in its market area,  First  Federal has
increased its consumer lending activities in recent years (primarily  automobile
and home equity  loans) and has  invested  excess funds in  mortgage-backed  and
related  securities and in other investment  securities,  and during fiscal 2001
continued to be active in originating and purchasing  participation interests in
commercial real estate loans.

     The Bank is subject to  examination  and  comprehensive  regulation  by the
Office of Thrift  Supervision  ("OTS"),  and the  Bank's  savings  deposits  are
insured  up to  applicable  limits by the  Savings  Association  Insurance  Fund
("SAIF"),  which is administered by the Federal  Deposit  Insurance  Corporation
("FDIC").  The Bank is a member  of, and owns  capital  stock in the FHLB of Des
Moines,  which  is one of 12  regional  banks in the  FHLB  System.  The Bank is
further  subject to regulations of the Board of Governors of the Federal Reserve
System (the "Federal  Reserve  Board')  governing  reserves to be maintained and
certain other matters.

     The  Company's  and the Bank's  executive  offices  are  located at 214 5th
Street,  Bemidji,  Minnesota  56601,  and the  main  telephone  number  is (218)
751-5120.

                                       4
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

     In addition to  historical  information  contained  herein,  the  following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.   Economic  circumstances,   the  Company's  operations  and  the
Company's actual results could differ  significantly from those discussed in the
forward-looking  statements.  Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Company's market area generally.

     Some of the  forward-looking  statements included herein are the statements
regarding management's determination of the amount and adequacy of the allowance
for losses on loans and the effect of certain recent accounting pronouncements.

GENERAL

     The Bank is primarily  engaged in the business of attracting  deposits from
the general public and originating  loans secured by mortgages on owner occupied
one- to four- family  residences in the Bank's  market area.  First Federal also
originates  loans on  commercial  real estate,  multi-family  real estate,  home
equity lines of credit and other consumer loans. In recent years, due to limited
demand in the Bank's market area, First Federal has significantly  increased its
origination of consumer loans,  including  automobile and home equity loans, and
has invested excess funds in mortgage-backed and related securities and in other
investment securities.

     The Bank's net income is dependent  primarily  on its net interest  income,
which is the difference  between interest earned on loans and  investments,  and
the interest  paid on  interest-bearing  liabilities,  primarily  deposits.  Net
interest income is determined by (a) the difference  between the yield earned on
interest  earning  assets  and  rates  paid  on   interest-bearing   liabilities
("interest rate spread") and (b) the relative amounts of interest earning assets
and  interest-bearing  liabilities.  The  Bank's  interest  rate  spread is also
affected by regulatory, economic and competitive factors that influence interest
rates,  loan demand and deposit flows. The Bank's net income is also affected by
the generation of  non-interest  income,  which  primarily  consists of fees and
service charges.  In addition,  net income is affected by the level of operating
expenses and provisions for loan loss.

     The  operations  of  financial   institutions,   including  the  Bank,  are
significantly   affected  by  prevailing   economic   conditions,   competition,
regulatory  policies,  and  the  monetary  and  fiscal  policies  of the  U.  S.
Government and  government  agencies.  Lending  activities are influenced by the
demand  for,  and supply of housing,  competition  among  lenders,  the level of
interest rates and  availability of funds.  Deposit flows and costs of funds are
influenced  by  prevailing  market  rates of  interest  primarily  on  competing
investments, account maturities and the levels of personal income and savings in
the market area of the Bank.

ASSET/LIABILITY MANAGEMENT

     General.  The interest rate  sensitivity of assets and  liabilities  may be
analyzed  by  examining  the extent to which such  assets and  liabilities  will
mature or reprice within the same period.  The interest rate  sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing  within a specific  time period and the amount of  interest-bearing
liabilities  maturing or repricing  within that time period. A gap is considered
positive  within a particular  period when the amount of interest rate sensitive
assets  exceeds  the  amount  of  interest  rate  sensitive  liabilities  and is
considered  negative  when the amount of  interest  rate  sensitive  liabilities
exceeds the amount of interest rate sensitive assets. Generally, during a period
of rising  interest  rates, a negative gap would  adversely  affect net interest
income while a positive gap would result in an increase in net interest  income.
Conversely,  during a period of falling  interest  rates,  a negative  gap would
result in an increase in net interest  income and a positive gap would adversely
affect net interest income.

     Interest  Rate Risk.  The Bank seeks to maximize  its net  interest  margin
within an  acceptable  level of interest  rate risk.  Interest  rate risk can be
defined as the change in the Bank's net portfolio value resulting from

                                       5
<PAGE>

favorable or  unfavorable  movements in interest  rates.  Interest rate risk, or
sensitivity,  arises when the  maturity or repricing  characteristics  of assets
differ   significantly  from  the  maturity  of  repricing   characteristics  of
liabilities.

     The following  table sets forth the Bank's interest rate repricing gaps for
selected maturity periods at September 30, 2001.
<TABLE>
<CAPTION>
                                                         RATE SENSITIVITY PERIOD
                                          -----------------------------------------------------------
                                          1-180        181-365        1-2        OVER 2
                                          DAYS          DAYS         YEARS        YEARS        TOTAL
                                          -----------------------------------------------------------
                                                                (IN THOUSANDS)
<S>                                       <C>        <C>          <C>           <C>           <C>
Earning assets:
   Loans:
     Fixed-rate.........................  $  4,563   $   4,197    $  8,036      $ 22,470      $39,266
     Variable rate......................    19,826       6,623       3,500         7,792       37,741
Securities:
     Fixed-rate (1).....................       679         255       1,337         8,117       10,388
     Variable rate (2)..................    31,045         180          --            --       31,225
                                          -----------------------------------------------------------
     Total earning assets...............    56,113      11,255      12,873        38,379      118,620
                                          -----------------------------------------------------------

Interest-bearing liabilities:
  Time deposits.........................    26,601      18,474      10,484         9,528       65,087
  NOW and money market deposits (3).....     2,784       2,784          --        16,683       22,251
  Savings deposits (3)..................       538         538          --         6,535        7,611
  Borrowings............................     4,662       4,200       1,000         3,000       12,862
                                          -----------------------------------------------------------
     Total interest-bearing liabilities.    34,585      25,996      11,484        35,746      107,811
                                          -----------------------------------------------------------
     Incremental asset (liability) gap..    21,528     (14,741)      1,389         2,633       10,809
                                          -----------------------------------------------------------
     Cumulative asset (liability) gap...    21,528       6,787       8,176        10,809       10,809
                                          -----------------------------------------------------------
<FN>
------------
(1)  Maturity of  mortgage-backed  and asset-backed  securities are presented on
     the current estimated cash flows.
(2)  Maturity of callable  securities  are  presented on the call dates based on
     management's  estimates and historical  experience in the current  interest
     rate  environment.  (3)  Historically  the Bank's NOW  accounts and savings
     deposits  have  been  relatively  insensitive  to  interest  rate  changes.
     However,  the Bank  considers  a portion  of  savings  deposits  to be rate
     sensitive based on historical growth trends and management's expectations.
</FN>
</TABLE>

     While the gap analysis provides an indication of interest rate sensitivity,
experience  has  shown  that it does not  fully  capture  the true  dynamics  of
interest  rate  changes.  Essentially,  the  analysis  presents  only  a  static
measurement of asset and liability volumes based on contractual  maturity,  cash
flow estimates or repricing  opportunity.  It fails to reflect the difference in
the timing and degree of  repricing  of assets and  liabilities  due to interest
rate changes.  To better  measure  interest  rate risk (IRR),  the Bank monitors
sensitivity  of its net portfolio  value (NPV).  NPV is the  difference  between
incoming  and  outgoing  discounted  cash flows from  assets,  liabilities,  and
off-balance  sheet contracts.  An institution's IRR is measured as the change to
its NPV as a result of a hypothetical  200 basis point change in market interest
rates.  The  following  table  presents the Bank's NPV at September 30, 2001, as
calculated by the OTS, based on information provided to the OTS by the Bank.


                                       6
<PAGE>
<TABLE>
<CAPTION>
                                                                 PERCENT OF                           CHANGE IN
           CHANGE INTEREST      ESTIMATED        AMOUNT OF        ESTIMATED            NPV          NPV RATIO (4)
        RATES (BASIS POINTS)       NPV          CHANGE (1)         NPV (2)          RATIO (3)      (BASIS POINTS)
-----------------------------------------------------------------------------------------------------------------
                                                                (DOLLARS IN THOUSANDS)
                 <S>             <C>               <C>               <C>            <C>                 <C>
                +300 bp          15,038           -560              -4%             11.77%             -20 bp
                +200 bp          15,325           -273              -2%             11.91%              -6 bp
                +100 bp          15,537            -61               0%             12.00%              +2 bp
                   --            15,598                                             11.97%
                -100 bp          15,231           -367              -2%             11.65%             -32 bp
                -200 bp          14,828           -770              -5%             11.30%             -67 bp
<FN>
------------
(1)  Represents  the excess  (deficiency)  of the  estimated  NPV  assuming  the
     indicated  change in interest  rates minus the  estimated  NPV  assuming no
     change in interest rates.
(2)  Calculated  as the  amount of change in the  estimated  NPV  divided by the
     estimated NPV assuming no change in interest rates.
(3)  Calculated as the estimated NPV divided by total assets.
(4)  Calculated  as the  excess  (deficiency)  of the  NPV  ratio  assuming  the
     indicated change in interest rates over the estimated NPV ratio assuming to
     change in interest rates.
</FN>
</TABLE>
     A principle objective of the Bank's asset/liability management effort is to
balance  the  various  factors  that  generate   interest  rate  risk,   thereby
maintaining  the interest rate  sensitivity of the Bank within  acceptable  risk
levels.  To manage  interest  rate risk,  the Bank  assesses  its  current  risk
position  in light of  interest  rate  forecasts  and  develops  and  implements
specific  lending,  funding  and  investment  strategies.  The Bank may also use
derivative financial  instruments,  including interest rate swaps, caps, floors,
futures and options, to manage interest rate risk. To date such instruments have
not been utilized.

     There  has  not  been  any  adverse  change  in the  Bank's  interest  rate
sensitivity since September 30, 2000.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The Company's  total assets  decreased by $13.19  million,  or 9.40%,  from
$140.22  million at September 30, 2000 to $127.03 million at September 30, 2001.
The decrease in total assets  resulted  primarily  from a decrease in investment
securities and mortgage-backed  and related securities of $29.61 million,  which
was partially  offset by an increase in federal funds sold of $7.35 million,  an
increase in loans receivable, net, of $6.50 million, and an increase in cash and
cash equivalents of $3.06 million.

     Investment  securities and  mortgage-backed and related securities totaling
$29.33 million at September 30, 2001,  consisted of $12.60 million in securities
classified as available for sale and $16.73 million in securities  classified as
held to maturity. Loans receivable,  net, increased $6.50 million as a result of
an excess of new loan originations and purchases over repayments and refinances.

     The Company experienced an increase in deposits during fiscal 2001 of $9.92
million,  or 11.16%, from $88.90 million at September 30, 2000 to $98.82 million
at September 30, 2001. Repurchase agreements decreased $2.46 million, or 44.24%,
from $5.56 million at September 30, 2000 to $3.10 million at September 30, 2001.

     Federal  Home Loan Bank  advances  have  decreased  from $31.36  million at
September 30, 2000 to $9.76 million at September 30, 2001.

COMPARISON  OF  OPERATING  RESULTS  FOR THE YEARS ENDED  SEPTEMBER  30, 2001 AND
SEPTEMBER 30, 2000

     Net  Earnings.  The Company had net earnings of $913,000 for the year ended
September  30, 2001,  as compared to $890,000 for the year ended  September  30,
2000. As discussed  below, the increase in net earnings of $23,000

                                       7
<PAGE>
was  primarily  the  result  of a  $367,000  increase  in net  interest  income,
partially  offset by a $223,000  increase  in the  provision  for loan  loss,  a
$90,000  increase  noninterest  expense and a $11,000  decrease  in  noninterest
income.

     Net Interest Income.  Net interest income increased by $367,000,  or 9.77%,
from $3.76  million for the year ended  September  30, 2000 to $4.13 million for
the year ended September 30, 2001.  Average  interest-earning  assets  increased
$2.41 million, or 1.86%, while average  interest-bearing  liabilities  increased
$614,000,  or 0.52%. During this same period, the interest rate spread increased
from 2.47% for the year  ended  September  30,  2000 to 2.64% for the year ended
September 30, 2001.

     Interest  Income.  Interest income  increased by $327,000,  or 3.42%,  from
$9.58  million for the year ended  September  30, 2000 to $9.90  million for the
year ended September 30, 2001. This increase was due primarily to an increase in
the  average  outstanding  balance of  interest-earning  assets.  Total  average
interest-earning  assets increased $2.41 million during the year ended September
30,  2001.  At the  same  time the  overall  yield  on  interest-earning  assets
increased  11 basis points from 7.38% for the year ended  September  30, 2000 to
7.49% for the year ended September 30, 2001.

     Interest  Expense.  Interest expense  decreased by $40,000,  or 0.69%, from
$5.82  million for the year ended  September  30, 2000 to $5.78  million for the
year ended  September 30, 2001. The decrease was primarily the result of a $3.78
million decrease in the average outstanding  balances of repurchase  agreements.
At the same time, the average cost of interest-bearing  liabilities  decreased 6
basis points from 4.91% for the year ended  September  30, 2000 to 4.85% for the
year ended September 30, 2001.

     Provision  for Losses on Loans.  The Bank  increased its provision for loan
losses by $223,000  during the year ended  September 30, 2001,  from $45,000 for
the year ended  September 30, 2000 to $268,000 for the year ended  September 30,
2001. This increase was primarily due to an increase in classified  assets,  and
an increase in the volume of consumer loans,  primarily  automobile loans, which
have a higher degree of credit risk.

     At September 30, 2001, nonperforming assets totaled $598,000 as compared to
$611,000 at September 30, 2000. The allowance  represented  0.86% of total loans
at September  30, 2001 and 0.73% at  September  30,  2000.  As a  percentage  of
nonperforming  assets, the allowance  represented  112.21% at September 30, 2001
and  84.94%  at   September   30,   2000.   Nonperforming   assets   consist  of
foreclosed/repossessed  assets  and  nonperforming  loans.  Nonperforming  loans
consist of nonaccruing loans and accruing loans 90 days or more past due.

     The  allowance  for loan  losses  is  maintained  at an  amount  considered
adequate to provide for probable losses.  The allowance for loan losses is based
on periodic  analysis of the loan  portfolio by  management.  In this  analysis,
management considers factors including but not limited to, specific occurrences,
general  economic  conditions,   loan  portfolio  composition,   and  historical
experience.  Loans are  charged  against  the  allowance  for loan  losses  when
management believes that collectibility of the principal is unlikely. Management
believes that the allowance for loan losses is adequate.  While  management used
available  information  to recognize  losses on loans,  future  additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory  agencies,  as an integral part of their examination process,
periodically  review the  allowance  for loan losses.  Such agencies may require
additions to the allowance based on their judgment about  information  available
to them at the time of their examination.

     Noninterest  Income.  Total  noninterest  income  decreased by $11,000,  or
1.39%,  from $782,000 for the year ended  September 30, 2000 to $771,000 for the
year ended  September  30, 2001.  This  decrease was  primarily due to a $58,000
increase in the provision for loss on investment securities, partially offset by
a $31,000 increase in fees and service  charges,  and an $18,000 increase on the
gains on the sales of securities and foreclosed real estate.

     Noninterest Expense.  Noninterest expense increased $90,000, or 2.95%, from
$3.07  million for the year ended  September  30, 2000 to $3.16  million for the
year ended  September  30, 2001.  This  increase was  primarily due to a $51,000
increase in  compensation  and  employee  benefits;  a $20,000  increase in data
processing  expense;  and a  $86,000  increase  in  other  noninterest  expense,
primarily  due to an increase in office  supplies and an increase in the expense
to insure the Bank's  interest in its  increased  automobile  lending  activity.
These increases were partially  offset by a $50,000  decrease in the advertising
expense, a $9,000 decrease in federal deposit insurance premium expense,  and an
$8,000  decrease in occupancy  expense.

                                       8
<PAGE>

     Income Tax Expense. Income tax expense increased by $20,000, or 3.73%, from
$539,000  for the year ended  September  30, 2000 to $559,000 for the year ended
September 30, 2001.

COMPARISON  OF  OPERATING  RESULTS  FOR THE YEARS ENDED  SEPTEMBER  30, 2000 AND
SEPTEMBER 30, 1999

     Net  Earnings.  The Company had net earnings of $890,000 for the year ended
September  30, 2000,  as compared to $770,000 for the year ended  September  30,
1999. As discussed below, the increase in net earnings of $119,000 was primarily
the result of a $215,000 increase in noninterest  income, a $135,000 increase in
net interest  income,  and a $53,000  decrease in the provision for loan losses,
partially offset by a $218,000 increase in noninterest expense.

     Net Interest Income.  Net interest income increased by $135,000,  or 3.74%,
from $3.62  million for the year ended  September  30, 1999 to $3.76 million for
the year ended September 30, 2000.  Average  interest-earning  assets  increased
$6.40 million, or 5.19%, while average  interest-bearing  liabilities  increased
$4.03  million,  or 3.52%.  During this same period,  the  interest  rate spread
decreased from 2.61% for the year ended September 30, 1999 to 2.47% for the year
ended September 30, 2000.

     Interest  Income.  Interest income  increased by $819,000,  or 9.36%,  from
$8.76  million for the year ended  September  30, 1999 to $9.58  million for the
year ended September 30, 2000. This increase was due primarily to an increase in
the  average  outstanding  balance of  interest-earning  assets.  Total  average
interest-earning  assets increased $6.40 million during the year ended September
30,  2000.  At the  same  time the  overall  yield  on  interest-earning  assets
increased  28 basis points from 7.10% for the year ended  September  30, 1999 to
7.38% for the year ended September 30, 2000.

     Interest Expense.  Interest expense increased by $684,000,  or 13.33%, from
$5.13  million for the year ended  September  30, 1999 to $5.82  million for the
year ended  September 30, 2000. The increase was primarily the result of a $3.91
million increase in the average  outstanding  balances of Federal Home Loan Bank
advances and a $2.58  million  increase in the average  outstanding  balances of
repurchase  agreements.  At the same time,  the average cost of the Federal Home
Loan Bank  advances  increased  94 basis  points,  from 5.16% for the year ended
September 30, 1999 to 6.10% for the year ended September 30, 2000.

     Provision  for Losses on Loans.  The Bank  decreased its provision for loan
losses by $53,000 during the year ended September 30, 2000, from $98,000 for the
year ended  September 30, 1999 to $45,000 for the year ended September 30, 2000.
The Bank  continues to monitor and modify its allowance for losses as conditions
dictate.  Although the Bank  maintains  its  allowance  for losses at a level it
considers  adequate to provide for  probable  losses,  there can be no assurance
that such  losses  will not exceed  the  estimated  amounts  or that  additional
provisions for loan losses will not be required in future periods.

     Noninterest  Income.  Total  noninterest  income increased by $215,000,  or
37.97%,  from $567,000 for the year ended September 30, 1999 to $782,000 for the
year ended  September  30, 2000.  This  increase was  primarily due to a $67,000
increase in fees and service  charges,  primarily due to an $83,000  increase in
deposit related fees,  partially  offset by an $18,000  decrease in loan related
fees;  and a $23,000  increase in income on  non-deposit  related  services.  In
addition,  the gain on the  sales  of  securities  and  foreclosed  real  estate
increased  $56,000,  from a loss of $4,000 for the year ended September 30, 1999
to gains of $52,000  for the year ended  September  30,  2000.  There was also a
$70,000  decrease in the provision for loss on securities,  from $83,000 for the
year ended September 30, 1999 to $13,000 for the year ended September 30, 2000.

     Noninterest Expense. Noninterest expense increased $218,000, or 7.65%, from
$2.85  million for the year ended  September  30, 1999 to $3.07  million for the
year ended  September  30, 2000.  This  increase was  primarily due to a $78,000
increase in compensation and employee benefits;  a $60,000 increase in occupancy
expense;  a $41,000  increase in  advertising  expense to promote  the  internet
banking product; and a $63,000 increase in other noninterest expense,  primarily
due to a decrease in income on the sale of foreign  currency,  and  professional
service.  These increases were partially offset by a $24,000 decrease in federal
deposit insurance premiums.

     Income Tax Expense.  Income tax expense  increased  by $66,000,  or 14.09%,
from  $473,000  for the year ended  September  30, 1999 to $539,000 for the year
ended September 30, 2000.

                                       9
<PAGE>

ALLOWANCE FOR LOAN LOSSES

     In originating  loans,  the Company  recognizes  that credit losses will be
experienced  and that the risk of loss will vary with,  among other things,  the
type of loan being made, the  creditworthiness  of the borrower over the term of
the loan,  general  economic  conditions and, in the case of a secured loan, the
quality of the security for the loan. It is  management's  policy to maintain an
adequate  allowance for loan losses based on, among other things,  the Company's
historical  loan loss  experience,  evaluation of economic  conditions,  regular
reviews of delinquencies and loan portfolio  quality.  The Company increases its
allowance  for loan losses by charging  provisions  for loan losses  against the
Company's  income.  Management  will continue to actively  monitor the Company's
asset quality and allowance  for loan losses.  Management  will charge off loans
and properties  acquired in settlement of loans against the allowance for losses
on such loans and such  properties when  appropriate  and will provide  specific
loss allowance when  necessary.  Although  management  believes it uses the best
information  available to make  determinations with respect to the allowance for
losses,  future  adjustments  may be  necessary  if economic  conditions  differ
substantially from the economic conditions in the assumptions used in making the
initial determination.

     The following table reflects the activity in the allowance for loan losses.
<TABLE>
<CAPTION>
                                                                                 AT OR FOR THE
                                                                           YEAR ENDED SEPTEMBER 30,
                                                                         ----------------------------
                                                                          2001                   2000
                                                                          ----                   ----
                                                                             (DOLLARS IN THOUSANDS)

         <S>                                                           <C>                       <C>
         Balance at beginning of the year............................  $     519                 $   555
         Provision for losses........................................        268                      45

         Charge-offs.................................................       (163)                   (106)
         Recoveries..................................................         47                      25
                                                                       ---------                 -------
              Net charge-offs........................................       (116)                    (81)
                                                                       ---------                 -------
         Balance at end of the year..................................  $     671                 $   519
         Ratio of net charge-offs to average loans
            outstanding during the period............................      0.15%                    0.13%
                                                                       --------                  -------
         Ratio of allowance for loan losses to total loans...........      0.86%                    0.73%
                                                                       --------                  -------
</TABLE>
NON-PERFORMING ASSETS

     Non-performing  assets  totaled  $598,000 at September 30, 2001 compared to
$611,000 at September 30, 2000.

     Non-performing assets are summarized in the following table.
<TABLE>
<CAPTION>
                                                                           YEAR ENDED SEPTEMBER 30,
                                                                          ---------------------------
                                                                          2001                   2000
                                                                          ----                   ----
                                                                             (DOLLARS IN THOUSANDS)
         <S>                                                           <C>                       <C>
         Nonperforming loans.........................................  $     428                 $   403
         Foreclosed assets...........................................        170                     208
                                                                       ---------                 -------
              Total nonperforming assets.............................  $     598                 $   611

         Nonperforming assets to total assets........................      0.47%                   0.48%
                                                                       --------                  ------
         Nonperforming assets to total loans.........................      0.74%                   0.86%
                                                                       --------                  ------
         Allowance for loan losses to nonperforming loans............    156.78%                 128.78%
                                                                       --------                  ------
</TABLE>

     The nonperforming  loans reflected above consist of non-accruing  loans and
accruing loans 90 days or more past due.

                                       10
<PAGE>

AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

     The  following  table  sets  forth  certain  information  relating  to  the
Company's average  interest-earning assets and interest-bearing  liabilities and
reflects  the average  yield on assets and average cost of  liabilities  for the
periods  indicated.  Such  yields and costs are  derived by  dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods presented. Average balances are derived from daily balances.

     The table also presents  information for the periods indicated with respect
to the differences between the weighted average yield earned on interest-earning
assets  and  weighted  average  rate paid on  interest-bearing  liabilities,  or
"interest rate spread," which savings institutions have traditionally used as an
indicator of  profitability.  Another indicator of an institution's net interest
income is its "net yield on interest-earning  assets," which is its net interest
income  divided  by the  average  balance  of  interest-earning  assets  or "net
interest  margin." Net interest  income is affected by the interest  rate spread
and by the  relative  amounts of  interest-earning  assets and  interest-bearing
liabilities. When interest-earning assets approximate or exceed interest-bearing
liabilities,  any  positive  interest  rate spread will  generate  net  interest
income.
<TABLE>
<CAPTION>
                                                                                FOR THE YEAR ENDED  SEPTEMBER 30,
                                                                    ----------------------------------------------------------
                                            AT SEPTEMBER 30, 2001              2001                              2000
                                            ---------------------   -----------------------------    -------------------------
                                                         AVERAGE                          AVERAGE                      AVERAGE
                                                          YIELD/    AVERAGE                YIELD/    AVERAGE            YIELD/
                                            BALANCE        COST     BALANCE     INTEREST    COST     BALANCE  INTEREST   COST
                                            -------      -------    -------     --------  -------    -------  -------- -------
                                                                                     (DOLLARS IN THOUSANDS)
<S>                                         <C>            <C>      <C>        <C>           <C>       <C>       <C>       <C>
Interest-earning assets:
    Loans receivable (1)..................  $   77,257     8.48%    $  74,991  $   6,508     8.68%   $ 62,045  $ 5,386   8.68%
    Marketable securities (2).............      20,778     6.23        40,948      2,621     6.40      48,044    3,119   6.49
    Mortgage-backed securities and
        related securities................       8,555     6.39        10,223        649     6.35      13,433      860   6.40
    Other.................................      15,108     3.22         6,028        124     2.06       6,255      210   3.36
                                            ----------    -----     ---------  ---------    -----    --------  -------  -----
        Total interest-earning assets.....     121,698     7.30       132,190      9,902     7.49     129,777    9,575   7.38
                                                                               ---------                       -------
Noninterest-earning assets................       5,334                  5,573                           6,164
                                            ----------              ---------                        --------
        Total assets......................  $  127,032              $ 137,763                        $135,941
                                            ==========              =========                        ========

Interest-bearing liabilities:
  Deposits:
    NOW accounts..........................  $   10,196     0.50%    $   9,107  $      97     1.07%   $  9,116      150   1.65
    Passbook accounts.....................       7,628     1.05         7,901        134     1.70       8,238      155   1.88
    Money market accounts.................      12,051     2.32        12,631        400     3.17      13,463      510   3.79
    Certificate accounts..................      65,087     5.32        59,336      3,424     5.77      53,745    2,959   5.51
  Borrowings:
    FHLB advances.........................       9,760     4.31        28,445      1,513     5.72      26,466    1,615   6.10
    Other borrowed money..................       3,102     4.52         3,636        208     5.72       7,415      427   5.76
                                            ----------    -----     ---------  ---------    -----    --------  -------  -----
        Total interest-bearing
          liabilities.....................     107,824     4.11       119,056      5,776     4.85     118,443    5,816   4.91
Noninterest-bearing liabilities...........       5,180                  5,249   ========                4,699  =======
                                            ----------              ---------                        --------
        Total liabilities.................     113,004                124,305                         123,142
Stockholders' equity......................      14,028                 13,458                          12,799
                                            ----------              ---------                        --------
        Total liabilities and
          stockholders' equity............  $  127,032              $ 137,763                        $135,941
                                            ==========              =========                        ========

Net interest income.......................                                     $   4,126                       $   3,759
                                                                               =========                       =========
Interest rate spread......................                 3.19%                             2.64%                       2.47%
                                                          =====                             =====                        =====
Net interest margin.......................                 3.67%                             3.12%                       2.90%
                                                          =====                             =====                        =====
Ratio of average interest-earning
   assets  to average interest-bearing
   liabilities............................               112.87%                           111.03%                         109.57%
                                                         ======                            ======                          ======
<FN>
____________
(1)  Average balance of  non-accruing  loans are included in the average balance
     of  loans  receivable.  Loan  fees  included  in  interest  income  are not
     material.
(2)  Interest on tax exempt  investments  is not presented at the tax equivalent
     yield.
</FN>
</TABLE>


                                       11
<PAGE>

RATE/VOLUME ANALYSIS

     The table  below  sets  forth  certain  information  regarding  changes  in
interest income and interest  expense of the Company for the periods  indicated.
For each  category of  interest-earning  asset and  interest-bearing  liability,
information  is  provided  on changes  attributable  to:  (a)  changes in volume
(change in volume  multiplied by the old rate); and (b) changes in rates (change
in  rate  multiplied  by old  volume).  For  purposes  of  this  table,  changes
attributable  to both rate and volume,  which  cannot be  segregated,  have been
allocated proportionately to the change due to volume and change due to rate.
<TABLE>
<CAPTION>
                                                         YEAR ENDED SEPTEMBER 30,
                                     -----------------------------------------------------------------
                                        2001       VS.       2000          2000      VS.       1999
                                     -----------------------------------------------------------------
                                           INCREASE (DECREASE)                  INCREASE (DECREASE)
                                                 DUE TO                               DUE TO
                                     -----------------------------------------------------------------
                                     VOLUME      RATE       TOTAL      VOLUME      RATE        TOTAL
                                     ------      ----       -----      ------      ----        ------
                                                            (IN THOUSANDS)
<S>                                 <C>       <C>          <C>        <C>         <C>        <C>
Interest income:
  Loans receivable...............   $ 1,122   $      --    $1,122     $    590    $  159     $   749
  Marketable securities..........      (456)        (42)    (498)          118        23         141
  Mortgage-backed securities and
      related securities.........      (204)         (7)    (211)         (198)       37        (161)
  Other..........................        (8)        (78)     (86)           21        69          90
                                    -------   ---------    -----      --------    ------     -------
       Total interest-earning
         assets..................       454        (127)     327           531       288         819

Interest expense:
  Deposits:
    NOW accounts.................        --         (53)     (53)          (35)       54          19
    Passbook accounts............        (6)        (15)     (21)            6        19          25
    Money market accounts........       (31)        (79)    (110)           66        66         132
    Certificate accounts.........       320         145      465          (111)      (11)       (122)

  Borrowings:
    FHLB advances................        (1)       (101)    (102)          221       231         452
    Other borrowed money.........      (216)         (3)    (219)          146        32         178
                                    -------   ---------    -----      --------    ------     -------
      Total interest-bearing
        liabilities..............        66        (106)     (40)          293       391         684
                                    -------   ---------    -----      --------    ------     -------
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds for operations are deposits from its
market area; principal and interest payments on loans,  securities available for
sale and  securities  held to maturity;  proceeds from the sale or maturation of
securities  and  advances  from the FHLB of Des  Moines.  While  maturities  and
scheduled amortization of loans and securities are predictable sources of funds,
deposit  flows and  mortgage  prepayments  are  greatly  influenced  by  general
interest rates, economic conditions, and competition.

     The primary  lending  activities of the Company are the origination of one-
to four family  loans,  the  origination  of consumer  loans and the purchase of
securities.  During the years ended September 30, 2001 and 2000, the Bank's loan
originations  totaled  $29.83  million  and $26.34  million,  respectively.  The
Company  purchased   investment   securities  and  mortgage-backed  and  related
securities  during the years ended September 30, 2001, and 2000 of $6.22 million
and $16.15 million, respectively.

     The  primary  financing  activity  of  the  Company  is the  attraction  of
deposits.  During the year ended September 30, 2001, the Bank  experienced a net
increase in deposits of $9.92 million. During the year ended September 30, 2000,
the Bank experienced a net increase in deposits of $789,000.

     During the year ended  September 30, 2001,  the Bank continued to be active
in the area of  repurchase  agreements.  Repurchase  agreements at September 30,
2001 totaled $3.10 million compared to a total of $5.56 million at September 30,
2000.

                                       12
<PAGE>

     At September 30, 2001,  the FHLB advances are secured by the FHLB stock and
a blanket pledge of residential loans, and government agency  securities.  Under
the agreement,  the Bank must maintain eligible  collateral in amounts exceeding
120 percent of the  outstanding  advances.  At September 30, 2001,  the Bank had
$9.76 million in advances outstanding with the FHLB.

     The  Company's  most  liquid  assets are cash and cash  equivalents,  which
consist of short-term highly liquid investments with original maturities of less
than three  months that are  readily  convertible  to known  amounts of cash and
interest-bearing  deposits.  The  level  of these  assets  is  dependent  on the
Company's operating, financing and investing activities during any given period.
At September 30, 2001 and 2000, cash and cash equivalents  totaled $7.59 million
and $4.53 million, respectively.

     The Bank  anticipates  that it will have sufficient funds available to meet
its current  commitments.  At September 30, 2001,  the Bank had  commitments  to
originate/purchase  loans of $1.15 million.  Certificates  of deposits which are
scheduled to mature in one year or less at September  30, 2001,  totaled  $44.90
million.  Management  believes that a significant  portion of such deposits will
remain with the Bank.

     At  September  30, 2001,  the Bank  exceeded  each of the three  regulatory
capital requirements.

IMPACT OF INFLATION AND CHANGING PRICES

     The Consolidated  Financial  Statements and Notes thereto  presented herein
have been prepared in accordance with generally accepted accounting  principles,
which require the  measurement  of financial  position and operating  results in
terms of  historical  dollars  without  considering  the change in the  relative
purchasing  power of  money  over  time  and due to  inflation.  The  impact  of
inflation is reflected in the increased  cost of the Bank's  operations.  Unlike
most industrial companies,  nearly all the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the Company's
performance  than do the effects of general levels of inflation.  Interest rates
do no necessarily  move in the same direction or to the same extent as the price
of goods and services.

STOCK REPURCHASES

     During the year ended  September 30, 2001, the Company  repurchased  24,033
shares which are held as treasury  stock and  repurchased  an additional  15,524
shares which were retired. The Board of Directors has previously  authorized the
repurchase of up to an  additional  64,007  shares.  Periodic  share  repurchase
programs have been  authorized by the Board of Directors as a means of enhancing
shareholder  value by  improving  earnings  per share and return on  equity.  In
addition, at the current trading price for the Common Stock relative to its book
value, the Common Stock represents an attractive investment for the Company.

     Assuming  all  shares of Common  Stock  repurchased  during  the year ended
September  30, 2001 had  remained  outstanding,  basic and diluted  earnings per
share would have been $.93 and $.88 for the year ended September 30, 2001. These
pro forma  numbers  reflected an earnings  credit equal to the average  yield on
securities times the repurchased amount, less applicable income taxes.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

     In September  2000, the Financial  Accounting  Standards Board (the "FASB")
issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial  Assets
and Extinguishments of Liabilities",  which revises the standards for accounting
for  securitizations  and other transfers of financial assets and collateral and
requires  certain  disclosures,  but carries over most of the provisions of SFAS
No. 125 without  reconsideration.  SFAS No. 140 is effective  for  transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The Statement is effective for recognition and  reclassification
of collateral and for disclosures  relating to  securitization  transactions and
collateral for fiscal years ending after December 15, 2000.  Management  adopted
SFAS No. 140 effective  April 1, 2001, as required,  without  material effect on
the Company's financial position or results of operations.

                                       13
<PAGE>

     In June 2001, the FASB issued SFAS No. 141 "Business  Combinations,"  which
requires  that all  business  combinations  initiated  after  June  30,  2001 be
accounted  for using the purchase  method.  The  pooling-of-interests  method of
accounting is prohibited except for combinations initiated before June 30, 2001.
The  remaining  provisions  of SFAS No. 141  relating to  business  combinations
accounted for by the purchase  method,  including  identification  of intangible
assets,  accounting for negative goodwill,  financial statement presentation and
disclosure, are effective for combinations completed after June 30, 2001.

     In June  2001,  the FASB  issued  SFAS No.  142  "Goodwill  and  Intangible
Assets," which prescribes  accounting for all purchased  goodwill and intangible
assets.  Pursuant to SFAS No. 142,  acquired  goodwill is not amortized,  but is
tested for  impairment  at the  reporting  unit level  annually  and whenever an
impairment  indicator arises. All goodwill should be assigned to reporting units
that are expected to benefit from the goodwill.  Goodwill  impairment  should be
tested with a two-step  approach.  First,  the fair value of the reporting  unit
should be compared to its carrying value,  including goodwill.  If the reporting
unit's  carrying  value  exceeds its fair value,  then any  goodwill  impairment
should be  measured  as the  excess of the  goodwill's  carrying  value over its
implied fair value.  The implied fair value of goodwill  should be calculated in
the same manner as goodwill is calculated for a business combination,  using the
reporting unit's fair value as the "purchase price."  Therefore,  the goodwill's
implied fair value will be the excess of the  "purchase  price" over the amounts
allocated to assets,  including unrecognized  intangible assets, and liabilities
of the  reporting  unit.  Goodwill  impairment  losses should be reported in the
income  statement  as a separate  line item within  operations,  except for such
losses  included  in  the  calculation  of a  gain  or  loss  from  discontinued
operations.

     An acquired intangible asset, other than goodwill, should be amortized over
its useful  economic life. The useful life of an intangible  asset is indefinite
if it extends beyond the foreseeable  horizon. If an asset's life is indefinite,
the asset should not be  amortized  until the life is  determined  to be finite.
Intangible  assets being amortized should be tested for impairment in accordance
with SFAS No. 121.  Intangible  assets not being amortized  should be tested for
impairment  annually  and  whenever  there  are  indicators  of  impairment,  by
comparing the asset's fair value to its carrying amount.

     SFAS No. 142 is effective  for fiscal years  beginning  after  December 15,
2001.  Early  adoption is permitted  for companies  with fiscal years  beginning
after March 15, 2001, but only if the first quarter  financial  statements  have
not  previously  been  issued.  SFAS No. 142 is not  expected to have a material
effect on the Corporation's financial position or results of operations.

     In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible  long-lived assets and the associated
asset  retirement  costs.  It applies to legal  obligations  associated with the
retirement of long-lived assets that result from the acquisition,  construction,
development  and (or) the normal  operation  of a long-lived  asset,  except for
certain  obligations  of  lessees.  SFAS  No.  143 is  effective  for  financial
statements  issued for fiscal years  beginning after June 15, 2002. SFAS No. 143
is not expected to have a material effect on the Company's financial position or
results of operations.

     In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived  Assets",  which  addresses  financial  accounting and
reporting for the  impairment or disposal of  long-lived  assets.  The Statement
supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived  Assets and
for  Long-Lived  Assets to Be Disposed  Of", and the  accounting  and  reporting
provisions  of APB  Opinion  No. 30,  "Reporting  the  Results of  Operations  -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently  Occurring Events and Transactions" for the disposal of
a segment of a business.  This  Statement  also amends ARB No. 51  "Consolidated
Financial  Statements",  to  eliminate  the  exception  to  consolidation  for a
subsidiary  for  which  control  is  likely  to be  temporary.  SFAS No.  144 is
effective  for  financial  statements  issued for fiscal years  beginning  after
December 15, 2001,  and interim  periods  within those fiscal years,  with early
application  encouraged.  SFAS No. 144 is not expected to have a material effect
on the Company's financial position or results of operations.

                                       14
<PAGE>



                        CONSOLIDATED FINANCIAL STATEMENTS
                  FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

                                                                            PAGE

Independent Auditors' Report.................................................16

Consolidated Statements of Financial Condition
  September 30, 2001 and 2000................................................17

Consolidated Statements of Income for the years ended
  September 30, 2001 and 2000................................................18

Consolidated Statements of Stockholders' Equity for the years ended
  September 30, 2001 and 2000................................................19

Consolidated Statements of Cash Flows for the years ended
  September 30, 2001 and 2000................................................21

Notes to Consolidated Financial Statements  .................................23


                                       15
<PAGE>

[LOGO OF MCGLADREY & PULLEN, LLP]


                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
First Federal Bancorporation
Bemidji, Minnesota


We have audited the accompanying  consolidated statements of financial condition
of First Federal  Bancorporation  and subsidiaries (the Company) as of September
30,  2001  and  2000,  and  the  related  consolidated   statements  of  income,
stockholders'  equity,  and cash flows for the years then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of First  Federal
Bancorporation  and  subsidiaries  as of  September  30, 2001 and 2000,  and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.




                                            /s/ MCGLADREY & PULLEN, LLP




Duluth, Minnesota
October 26, 2001



                                       16
<PAGE>

FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2001 AND 2000
<TABLE>
<CAPTION>

                                                                                  2001                 2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                  <C>
ASSETS
Cash                                                                             $   1,681,380         $  1,495,072
Interest-Bearing Deposits with Banks                                                 5,913,452            3,037,224
                                                                                 ----------------------------------
     CASH AND CASH EQUIVALENTS                                                       7,594,832            4,532,296

Federal Funds Sold                                                                   7,352,000                    -
Available-for-Sale Securities                                                       12,605,500           25,210,541
Held-to-Maturity Securities                                                         16,726,958           33,734,853
Loans Receivable, less allowance for loan losses
  $671,174 in 2001 and $519,083 in 2000                                             77,257,046           70,753,934
Federal Home Loan Bank Stock, at cost                                                1,842,100            1,568,400
Foreclosed Real Estate, net                                                            170,371              207,781
Accrued Interest Receivable                                                            887,570            1,112,226
Premises and Equipment, net                                                          1,994,914            2,165,511
Other Assets                                                                           601,104              932,955
                                                                                 ----------------------------------
                                                                                 $ 127,032,395         $140,218,497
                                                                                 ==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits                                                                         $  98,820,683         $ 88,899,733
Borrowings                                                                          12,861,694           36,925,367
Advance Payments by Borrowers for Taxes and Insurance                                  186,543              201,624
Accrued Interest Payable                                                               512,729              629,902
Accrued Expenses and Other Liabilities                                                 622,713              748,529
                                                                                 ----------------------------------
     TOTAL LIABILITIES                                                             113,004,362          127,405,155
                                                                                 ----------------------------------
Commitments and Contingencies

Stockholders' Equity
Common stock ($.01 par value); authorized 4,000,000 shares;
  issued 1,264,628 and 1,280,152 shares in 2001 and 2000                                12,646               12,802
Additional paid-in capital                                                           5,335,929            5,342,404
Retained earnings, subject to certain restrictions                                  10,511,686            9,677,265
Accumulated other comprehensive income (loss)                                          153,251             (335,392)
Unearned employee stock ownership plan shares                                         (207,000)            (276,000)
Treasury stock, at cost, 349,437 and 320,338 shares
  in 2001 and 2000                                                                  (2,428,336)          (2,213,893)
Deferred compensation payable in common stock                                          649,857              606,156
                                                                                 ----------------------------------
     TOTAL STOCKHOLDERS' EQUITY                                                     14,028,033           12,813,342
                                                                                 ----------------------------------
                                                                                 $ 127,032,395         $140,218,497
                                                                                 ==================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       17
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
<TABLE>
<CAPTION>

                                                                                  2001                 2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                  <C>
Interest Income
  Loans receivable                                                                 $ 6,507,555          $ 5,385,699
  Mortgage-backed and related securities                                               648,919              861,290
  Other marketable securities                                                        2,621,052            3,117,598
  Interest-bearing deposits with banks                                                  33,348              114,184
  Dividends                                                                             91,324               96,397
                                                                                   --------------------------------
                                                                                     9,902,198            9,575,168
                                                                                   --------------------------------
Interest Expense
  Deposits                                                                           4,054,550            3,774,510
  Borrowings                                                                         1,721,513            2,041,827
                                                                                   --------------------------------
                                                                                     5,776,063            5,816,337
                                                                                   --------------------------------
     NET INTEREST INCOME                                                             4,126,135            3,758,831

Provision for Loan Losses                                                              267,719               44,804
                                                                                   --------------------------------
     NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                             3,858,416            3,714,027
                                                                                   --------------------------------
Noninterest Income
  Fees and service charges                                                             683,841              652,738
  Loss on impairment of securities available-for-sale                                  (71,410)             (13,167)
  Gain on sales of securities                                                               --                9,453
  Gain on sales of foreclosed real estate                                               69,836               42,421
  Other income                                                                          89,062               90,784
                                                                                   --------------------------------
                                                                                       771,329              782,229
                                                                                   --------------------------------
Noninterest Expense
  Compensation and employee benefits                                                 1,711,413            1,660,662
  Occupancy                                                                            568,107              575,561
  Federal deposit insurance premiums                                                    17,534               26,720
  Data processing                                                                       97,449               77,152
  Advertising                                                                          112,694              162,979
  Other expenses                                                                       650,589              564,249
                                                                                   --------------------------------
                                                                                     3,157,786            3,067,323
                                                                                   --------------------------------
     INCOME BEFORE INCOME TAX EXPENSE                                                1,471,959            1,428,933

Income Tax Expense                                                                     559,399              539,291
                                                                                   --------------------------------
     NET INCOME                                                                    $   912,560          $   889,642
                                                                                   ================================

Earnings per Common Share
  Basic                                                                            $      0.93          $      0.83
                                                                                   ================================
  Diluted                                                                          $    $ 0.89          $      0.82
                                                                                   ================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       18
<PAGE>

FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2001 and 2000
<TABLE>
<CAPTION>
                                                                                     Additional
                                                        Comprehensive     Common       Paid-In       Retained
                                                           Income         Stock        Capital       Earnings
--------------------------------------------------------------------------------------------------------------
<S>                                                      <C>              <C>        <C>             <C>
Balance, September 30, 1999                                               $ 14,311   $ 5,971,251
                                                                                                    $ 9,260,477
Comprehensive income:
  Net income                                             $   889,642             -             -        889,642
  Change in net unrealized gain (loss) on
    securities available for sale, net of
    tax effect                                                   456             -             -              -
                                                         -----------
      Comprehensive income                               $   890,098
                                                         ===========

Increase in deferred compensation
  payable in common stock                                                        -             -              -
Settlement of deferred compensation
  payable in common stock                                                        -             -              -
Purchase of treasury stock                                                       -             -              -
Purchase and retirement of common stock                                     (1,509)     (668,561)      (472,854)
Amortization of management recognition plan                                      -         3,000              -
Earned employee stock ownership plan shares                                      -        36,714              -
                                                                          ----------------------    -----------

Balance, September 30, 2000                                                 12,802     5,342,404      9,677,265

Comprehensive income:
  Net income                                             $   912,560             -             -        912,560
  Change in net unrealized gain (loss) on
    securities available for sale, net of
    tax effect                                               488,643             -             -              -
                                                         -----------
      Comprehensive income                               $ 1,401,203
                                                         ===========

Increase in deferred compensation
  payable in common stock                                                        -             -              -
Settlement of deferred compensation
  payable in common stock                                                        -             -              -
Purchase of treasury stock                                                       -             -              -
Purchase and retirement of common stock                                       (156)      (68,773)       (78,139)
Earned employee stock ownership plan shares                                      -        62,298              -
                                                                          ----------------------    -----------
Balance, September 30, 2001                                               $ 12,646   $ 5,335,929    $10,511,686
                                                                          ======================    ===========

See Notes to Consolidated Financial Statements.
<PAGE>
<CAPTION>
                                               Unearned                              Deferred
                                Accumulated    Employee      Unearned              Compensation
                                   Other         Stock      Management              Payable in
                                Comprehensive  Ownership   Recognition    Treasury    Common
                                Income (Loss) Plan Shares  Plan Shares     Stock       Stock        Total
------------------------------------------------------------------------------------------------------------
<S>                               <C>         <C>          <C>         <C>           <C>         <C>
Balance, September 30, 1999       $(335,848)  $(345,000)   $(94,444)   $(1,989,226)  $ 579,840   $13,061,361

Comprehensive income:
  Net income                              -           -           -              -           -       889,642
  Change in net unrealized
    gain (loss) on securities
    available for sale, net
    of tax effect                       456           -           -              -           -           456

      Comprehensive income

Increase in deferred
  compensation payable in
  common stock                            -           -           -        (76,546)     76,546             -
Settlement of deferred
  compensation payable in
  common stock                            -           -           -         50,230     (50,230)            -
Purchase of treasury stock                -           -           -       (198,351)          -      (198,351)
Purchase and retirement
  of common stock                         -           -           -              -           -    (1,142,924)
Amortization of management
   recognition plan                       -           -      94,444              -           -        97,444
Earned employee stock
  ownership plan shares                   -      69,000           -              -           -       105,714
                                ----------------------------------------------------------------------------
Balance, September 30, 2000        (335,392)   (276,000)          -     (2,213,893)    606,156    12,813,342


Comprehensive income:
  Net income                              -           -           -              -           -       912,560
  Change in net unrealized
    gain (loss) on  securities
    available for sale, net
    of tax effect                   488,643           -           -              -           -       488,643

Increase in deferred
    compensation payable
    in common stock                       -           -           -        (59,288)     59,288             -
  Settlement of deferred
    compensation payable in
    common stock                          -           -           -         15,587     (15,587)            -
  Purchase of treasury stock              -           -           -       (170,742)          -      (170,742)
  Purchase and retirement of
    common stock                          -           -           -              -           -      (147,068)
  Earned employee stock
    ownership plan shares                 -      69,000           -              -           -       131,298
                                ----------------------------------------------------------------------------
Balance, September 30, 2001       $ 153,251   $(207,000)   $      -    $(2,428,336)  $ 649,857   $14,028,033
                                ============================================================================
 </TABLE>

                                       20
<PAGE>
                  FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
<TABLE>
<CAPTION>
                                                                                        2001                2000
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>                 <C>
Cash Flows from Operating Activities
  Net income                                                                                 $ 912,560           $ 889,642
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Provisions for loan losses                                                                 267,719              44,804
    Gain on sale of foreclosed real estate                                                     (69,836)            (42,421)
    Depreciation and amortization                                                              322,611             291,745
    Amortization of premium and discount, net                                                  (44,959)            (72,069)
    (Increase) decrease in accrued interest receivable                                         224,656             (36,827)
    Increase (decrease) in accrued interest payable                                           (117,173)             52,317
    Loss on sale of securities and provisions for loss on
      securities available-for-sale                                                             71,410               3,714
    Increase in other assets                                                                    (7,715)           (155,268)
    Increase (decrease) in accrued expenses and other liabilities                             (125,816)             52,378
    Increase in deferred compensation payable in common stock                                   59,288              76,546
    Earned ESOP shares priced above original cost                                               62,298              39,714
    Decrease in unearned ESOP shares                                                            69,000              69,000
    Decrease in unamortized restricted stock                                                         -              94,444
                                                                                          --------------------------------
       NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES                                       1,624,043           1,307,719
                                                                                          --------------------------------
Cash Flows from Investing Activities
  Net increase in loans receivable                                                          (7,125,638)        (13,541,797)
  Purchase of securities available for sale                                                 (6,217,170)        (16,152,350)
  Net increase in federal funds sold                                                        (7,352,000)                  -
  Purchase of Federal Home Loan Bank stock                                                    (273,700)           (320,400)
  Purchase of premises and equipment                                                          (152,014)           (333,393)
  Proceeds from maturities/sales of securities available-for-sale                           15,972,170          18,626,823
  Proceeds from maturities of securities held to maturity                                   17,000,000                   -
  Principal payments on mortgage-backed and related
    securities available for sale                                                            3,639,214           3,655,919
  Principal payments on mortgage-backed and related
    securities held to maturity                                                                 20,480              73,779
  Proceeds from sale of foreclosed real estate                                                 462,053              22,939
                                                                                          --------------------------------
       NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES                            15,973,395          (7,968,480)
                                                                                          --------------------------------
Cash Flows from Financing Activities
  Net increase in deposits                                                                   9,920,950             788,975
  Increase (decrease) in advance payments by borrowers
    for taxes and insurance                                                                    (15,081)             15,501
  Net increase (decrease) in repurchase agreements                                          (2,460,475)            860,677
  FHLB long-term advances                                                                    7,000,000                   -
  Repayment of long-term FHLB advances                                                               -         (24,036,845)
  Net increase (decrease) in short-term FHLB advances                                      (28,603,198)         30,443,198
  Purchase of treasury stock                                                                  (230,030)           (274,897)
  Purchase and retirement of common stock                                                     (147,068)         (1,142,924)
                                                                                          --------------------------------
       NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES                           (14,534,902)          6,653,685
                                                                                          --------------------------------
                                                      (Continued)
</TABLE>

                                       21
<PAGE>

FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
<TABLE>
<CAPTION>

                                                                                      2001                 2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                     <C>
     NET INCREASE (DECREASE) IN CASH
       AND CASH EQUIVALENTS                                                        $ 3,062,536          $   (7,076)

Cash and Cash Equivalents
  Beginning of year                                                                 4,532,296            4,539,372
                                                                                   --------------------------------
  End of year                                                                      $ 7,594,832          $ 4,532,296
                                                                                   ================================
Supplemental Disclosures of Cash Flow Information
  Cash paid during the year for:
    Interest                                                                       $ 5,893,236          $ 5,764,020
                                                                                   ================================
    Income taxes                                                                   $   699,000          $   585,000
                                                                                   ================================
Supplemental Schedule of Noncash Investing and
  Financing Activities
  Net change in unrealized gain (loss) on securities
    available for sale                                                             $   488,643          $       456
                                                                                   ================================
  Loans receivable exchanged for other real estate sold                            $    71,900          $         -
                                                                                   ================================
  Real estate acquired in settlement of loan                                       $   426,707          $   198,981
                                                                                   ================================
  Stock issued in settlement of deferred compensation obligation                   $    15,587          $    50,230
                                                                                   ================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       22
<PAGE>

FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1.  DESCRIPTION OF THE BUSINESS

First Federal Bancorporation (the Company) is the unitary thrift holding company
for First Federal Bank (the Bank) with its main office in Bemidji, Minnesota and
four branch offices located in Bemidji, Bagley, Baudette and Walker,  Minnesota.
The Bank provides retail and commercial loan and deposit services principally to
customers within a 30-mile radius of the Bank's locations.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS  OF  FINANCIAL  STATEMENT  PRESENTATION  AND  ACCOUNTING  ESTIMATES:   The
consolidated   financial  statements  have  been  prepared  in  conformity  with
accounting  principles  generally  accepted in the United States of America.  In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the  statement of financial  condition and revenues and expenses for the
period.  Actual  results  could differ  significantly  from those  estimates.  A
material estimate that is particularly  susceptible to significant change in the
near-term relates to the determination of the allowance for loan losses.

PRINCIPLES OF  CONSOLIDATION:  The consolidated  financial  statements  included
herein are for the Company,  the Bank, and the Bank's  wholly-owned  subsidiary,
First Federal Service  Corporation.  All significant  intercompany  accounts and
transactions have been eliminated in consolidation.

CASH EQUIVALENTS AND CASH FLOWS: Cash equivalents primarily represent amounts on
deposit at other financial  institutions and highly liquid financial instruments
with original  maturities at the date of purchase of three months or less.  Cash
flows from loans, deposits, federal funds and short-term borrowings are reported
net.

AVAILABLE-FOR-SALE SECURITIES: Securities classified as available-for-sale (AFS)
are debt and marketable  equity  securities that the Company intends to hold for
an indefinite  period of time, but not necessarily to maturity.  Any decision to
sell an AFS security would be based on factors  including  movements in interest
rates,  changes in the maturity  mix of the  Company's  assets and  liabilities,
liquidity needs,  regulatory capital  considerations,  and similar factors.  AFS
securities  are carried at fair value.  Unrealized  gains or losses,  net of the
related  deferred  tax  effect,  are  reported  as  increases  or  decreases  in
stockholders' equity.  Realized gains or losses,  determined on the basis of the
cost  of  specific  securities  sold,  and  provisions  for  impairment  of  AFS
securities are included in earnings.

HELD-TO-MATURITY SECURITIES: Securities classified as held to maturity are those
debt  securities the Company has both the intent and ability to hold to maturity
regardless  of  changes in market  conditions,  liquidity  needs,  or changes in
general economic  conditions.  These securities are carried at cost adjusted for
amortization  of premiums and  discounts,  computed by the interest  method over
contractual  lives.  The sale of a security  within three months of its maturity
date or  after  at  least  85  percent  of the  principal  outstanding  has been
collected  is  considered  a  maturity  for  purposes  of   classification   and
disclosure.

LOANS,  ALLOWANCE  FOR LOAN  LOSSES:  Loans are  stated at the  amount of unpaid
principal, reduced by an allowance for loan losses.

Discounts  and  premiums on loans  purchased  are  amortized to income using the
interest  method over the  estimated  average loan life.  Loan  origination  and
commitment  fees and certain  direct loan  origination  costs are  deferred  and
amortized over the life of the related loans using the interest method.

                                       23
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The allowance for loan losses is maintained at an amount considered  adequate to
provide for probable losses.  The allowance for loan losses is based on periodic
analysis of the loan  portfolio  by  management.  In this  analysis,  management
considers factors including,  but not limited to, specific occurrences,  general
economic  conditions,  loan portfolio  composition,  and historical  experience.
Loans are charged against the allowance for loan losses when management believes
that  collectibility of the principal is unlikely.  Management believes that the
allowance  for  loan  losses  is  adequate.   While  management  used  available
information to recognize losses on loans,  future additions to the allowance may
be  necessary  based on changes in economic  conditions.  In  addition,  various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the  allowance  for loan losses.  Such agencies may require
additions to the allowance based on their judgment about  information  available
to them at the time of their examination.

The Company  defines a loan as impaired when it is probable it will be unable to
collect  principal and interest payments due in accordance with the terms of the
loan  agreement.  Impaired  loans  that  have  been  separately  identified  for
evaluation are measured based on the present value of expected future cash flows
or, alternatively, the observable market price of the loans or the fair value of
the collateral. However, for those loans that are collateral dependent (that is,
if repayment of those loans is expected to be provided  solely by the underlying
collateral) and for which management has determined foreclosure is probable, the
measure  of  impairment  of those  loans is to be based on the fair value of the
collateral.

Interest on loans is  recognized  over the terms of the loans and is  calculated
using the simple interest method on principal amounts outstanding.  For impaired
loans,  accrual of interest is  generally  stopped  when a loan is greater  than
three months past due.  Interest on these loans is recognized only when actually
paid by the borrower if collection of the principal is likely to occur.  Accrual
of interest is generally  resumed when the customer is current on all  principal
and  interest  payments  and has been  paying on a timely  basis for a period of
time.

FORECLOSED  REAL  ESTATE:  Real estate  acquired in the  settlement  of loans is
carried  at the  lower of the  unpaid  loan  balance  plus  settlement  costs or
estimated fair market value less selling costs at the time of  foreclosure.  The
carrying value of individual properties is periodically evaluated and reduced to
the extent  cost  exceeds  estimated  fair value less  selling  costs.  Costs of
developing and improving such properties are  capitalized.  Expenses  related to
holding such real estate,  net of rental and other income,  are charged  against
income as incurred.

PREMISES AND EQUIPMENT:  Land is carried at cost.  Bank premises,  improvements,
furniture,  and  equipment  are carried at cost less  accumulated  depreciation.
Depreciation  is computed on a  straight-line  basis over the  estimated  useful
lives of 20 to 40 years for bank premises and improvements and 3 to 10 years for
furniture and equipment.

INCOME  TAXES:  Deferred  taxes are  provided on an asset and  liability  method
whereby deferred tax assets are recognized for deductible temporary differences,
operating  loss or tax credit  carryforwards  and deferred tax  liabilities  are
recognized for taxable  temporary  differences.  Temporary  differences  are the
differences  between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.  Deferred tax assets are reduced
by a valuation allowance when management  determines that it is more likely than
not that some  portion or all of the  deferred  tax assets will not be realized.
Deferred tax assets and  liabilities  are adjusted for the effects of changes in
tax rates on the date of enactment.

                                       24
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

EARNINGS PER COMMON  SHARE:  Earnings per common share data has been computed on
the basis of the  weighted-average  number of common shares  outstanding  during
each period  presented.  Following is information  about the  computation of the
earnings per share data for the years ended September 30, 2001 and 2000.
<TABLE>
<CAPTION>
                                                         Year Ended September 30,
                          --------------------------------------------------------------------------------------
                                            2001                                         2000
                          ----------------------------------------      ----------------------------------------
                                                        Net Income                                    Net Income
                          Numerator     Denominator      Per Share      Numerator     Denominator     Per Share
----------------------------------------------------------------------------------------------------------------
<S>                          <C>               <C>            <C>          <C>            <C>               <C>
Basic earnings
  per share,
  income available
  to common
  stockholders               $912,560          980,838        $ 0.93       $889,642       1,067,526         $ 0.83
Effect of dilutive
  securities:
  Stock options                     -           47,107         (0.04)             -          19,866          (0.01)
  Management
  recognition plan                  -                -             -              -           2,359              -
                             -------------------------------------------------------------------------------------
Diluted earnings
  per share,
 income available
  to common
  stockholders               $912,560        1,027,945        $ 0.89       $889,642       1,089,751         $ 0.82
                             =====================================================================================
</TABLE>


OTHER  ACCOUNTING  POLICIES:  The  Company's  accounting  policies  for employee
benefit plans, retirement plans and the methods and assumptions used to estimate
fair  values of  financial  instruments  are  disclosed  in Notes 14, 15 and 19,
respectively.

                                       25
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3.  SECURITIES AVAILABLE FOR SALE

Summaries of  securities  available  for sale at September 30, 2001 and 2000 are
presented below:
<TABLE>
<CAPTION>

                                                                           2001
                                              --------------------------------------------------------------------
                                                                     Gross              Gross
                                              Amortized            Unrealized         Unrealized
                                                 Cost                Gains              Losses          Fair Value
------------------------------------------------------------------------------------------------------------------

<S>                                           <C>                  <C>                    <C>          <C>
Mortgage-Backed Securities                    $ 6,074,306          $ 187,815              $ 723        $ 6,261,398
Collateralized Mortgage
  Obligations and REMICS                        2,117,945             37,185                 28          2,155,102
                                              --------------------------------------------------------------------
    Total mortgage-backed
      and related securities                    8,192,251            225,000                751          8,416,500
                                              --------------------------------------------------------------------
Other Marketable Securities
  U.S. government and agency
    securities                                      3,276                  -                  -              3,276
  Corporate bonds and notes                     3,150,226             62,204              9,792          3,202,638
  Mutual funds                                  1,000,000                  -             16,914            983,086
                                              --------------------------------------------------------------------
    Total other marketable
      securities                                4,153,502             62,204             26,706          4,189,000
                                              --------------------------------------------------------------------
                                              $12,345,753          $ 287,204           $ 27,457        $12,605,500
                                              ====================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                                 2000
                                              --------------------------------------------------------------------
<S>                                           <C>                    <C>              <C>              <C>
Mortgage-Backed Securities                    $ 8,116,003            $ 9,649          $ 157,666        $ 7,967,986
Collateralized Mortgage
  Obligations and REMICS                        3,714,407                  -            104,652          3,609,755
                                              --------------------------------------------------------------------
    Total mortgage-backed
      and related securities                   11,830,410              9,649            262,318         11,577,741
                                              --------------------------------------------------------------------

Other Marketable Securities
  U.S. government and agency
    securities                                  8,888,243                  -            248,508          8,639,735
  Corporate bonds and notes                     3,815,806              4,692             19,988          3,800,510
  Municipal bonds                                 244,543              3,569                  -            248,112
  Mutual funds                                  1,000,000                  -             55,557            944,443
                                              --------------------------------------------------------------------
    Total other marketable
      securities                               13,948,592              8,261            324,053         13,632,800
                                              --------------------------------------------------------------------
                                              $25,779,002           $ 17,910          $ 586,371        $25,210,541
                                              ====================================================================
</TABLE>


                                       26
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The amortized cost and fair value of other marketable  securities  available for
sale at September  30, 2001 by  contractual  maturity is shown  below.  Expected
maturities may differ from contractual  maturities because obligors may have the
right  to  call  or  prepay  obligations  with or  without  call  or  prepayment
penalties:
<TABLE>
<CAPTION>
                                                                                                    2001
                                                                                   --------------------------------
                                                                                    Amortized
                                                                                      Cost               Fair Value
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                  <C>
Due in one year or less                                                            $ 1,422,522          $ 1,432,846
Due after one year through five years                                                1,462,899            1,494,526
Due after five years through ten years                                                 253,081              262,250
Due after ten years                                                                     15,000               16,292
Mortgage-backed securities                                                           8,192,251            8,416,500
Mutual funds with no stated maturity                                                 1,000,000              983,086
                                                                                  ---------------------------------
                                                                                  $ 12,345,753         $ 12,605,500
                                                                                  =================================
</TABLE>

Anticipated   maturities   on   mortgage-backed   securities   are  not  readily
determinable  since they may be prepaid  without penalty and mutual funds do not
have stated maturity dates.

Proceeds from  maturities of securities  available for sale during 2001 and 2000
were  $15,972,170  and  $18,110,858,   respectively.   Proceeds  from  sales  of
securities available for sale were $0 for 2001 and $515,965 for 2000.

Securities are pledged under various borrowing arrangements as discussed in Note
12.

Changes in the unrealized gain (loss) on available-for-sale securities:
<TABLE>
<CAPTION>
                                                                                         Year Ended September 30,
                                                                                    --------------------------------
                                                                                        2001                 2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                  <C>
Balance, beginning                                                                   $(335,392)          $ (335,848)
Unrealized gain during the year                                                        828,208                  772
Deferred tax effect related to unrealized gain                                        (339,565)                (316)
                                                                                     ------------------------------
Balance, ending                                                                      $ 153,251           $ (335,392)
                                                                                     ==============================
</TABLE>


                                       27
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


NOTE 4.  SECURITIES HELD TO MATURITY

Summaries  of  securities  held to maturity at  September  30, 2001 and 2000 are
presented below:
<TABLE>
<CAPTION>
                                                                               2001
                                                 ------------------------------------------------------------------
                                                                     Gross             Gross
                                                 Amortized          Unrealized       Unrealized
                                                   Cost              Gains             Losses           Fair Value
-------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                 <C>                    <C>           <C>
Mortgage-Backed Securities                    $    70,168           $  1,985         $        -        $    72,153
Collateralized Mortgage
  Obligations and REMICS                           68,115              1,233                  -             69,348
                                              --------------------------------------------------------------------
    Total mortgage-backed
      and related securities                      138,283              3,218                  -            141,501

Other Marketable Securities
  U.S. government and agency
    securities                                 16,588,675             80,872                  -         16,669,547
                                              --------------------------------------------------------------------
    Total securities held to
      maturity                                $16,726,958           $ 84,090         $        -        $16,811,048
                                              ====================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                                 2000
                                              --------------------------------------------------------------------
<S>                                           <C>                   <C>              <C>               <C>
Mortgage-Backed Securities                    $    90,654           $    986         $      390        $    91,250
Collateralized Mortgage
  Obligations and REMICS                           68,126                  -              2,854             65,272
                                              --------------------------------------------------------------------
    Total mortgage-backed
      and related securities                      158,780                986              3,244            156,522

Other Marketable Securities
  U.S. government and agency
    securities                                 33,576,073                  -          1,876,888         31,699,185
                                              --------------------------------------------------------------------
    Total securities held to
      maturity                                $33,734,853           $    986         $1,880,132        $31,855,707
                                              ====================================================================
</TABLE>


All of the securities held to maturity that are not  mortgage-backed  are due in
five to ten years.  The securities may be subject to call before their scheduled
maturity.

Securities are pledged under various borrowing arrangements as discussed in Note
12.

                                       28
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5.  LOANS RECEIVABLE

Loans receivable consisted of the following:
<TABLE>
<CAPTION>
                                                                                        September 30,
                                                                                  ---------------------------------
                                                                                  2001                 2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                  <C>
One-to-four family residential loans                                              $ 25,980,079         $ 29,660,113
Commercial real estate and multifamily residential loans                            16,234,337           14,187,997
Consumer loans                                                                      33,714,119           26,619,062
Construction loans                                                                   3,980,707              619,750
Commercial business loans                                                              399,774              609,932
                                                                                  ---------------------------------
                                                                                    80,309,016           71,696,854
Add (subtract):
Loans in process                                                                    (2,428,140)            (488,873)
Unamortized loan origination fees/costs and
discounts/premiums, net                                                                 47,344               65,036
Allowance for loan losses                                                             (671,174)            (519,083)
                                                                                  ---------------------------------
                                                                                  $ 77,257,046         $ 70,753,934
                                                                                  =================================
</TABLE>

Nonaccrual loans, totaling $246,751 and $307,487 at September 30, 2001 and 2000,
respectively,  are considered by management as impaired.  The related  allowance
for credit  losses was  $61,991  and  $46,123 at  September  30,  2001 and 2000,
respectively.  The average  investment in impaired  loans during fiscal 2001 and
2000 was $292,932 and $394,755, respectively.

The aggregate amount of loans to directors, executive officers and their related
interests  was  $1,338,069  and  $1,339,536  at  September  30,  2001 and  2000,
respectively.  Activity  with respect to these loans during fiscal 2001 included
net decreases of $1,467. Activity with respect to these loans during fiscal 2000
included net  increases of $196,178.  In the opinion of  management,  such loans
were made in the ordinary  course of business on normal credit terms,  including
interest rate and collateralization,  and do not represent more than normal risk
of collection.

The Bank grants  residential and commercial real estate loans and consumer loans
primarily  to  customers  in  northern  Minnesota.   Although  the  Bank  has  a
diversified loan portfolio,  a substantial  portion of its debtors' abilities to
honor their loans is dependent upon the local economy in northern Minnesota.

At  September  30, 2001 and 2000 the Bank was  servicing  real estate  loans for
others with aggregate  unpaid principal  balances of approximately  $111,267 and
$351,717, respectively.

Certain loans are pledged under various  borrowing  arrangements as discussed in
Note 12.

                                       29
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6.  ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
                                                                                        Year Ended September 30,
                                                                                     ------------------------------
                                                                                       2001                  2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                  <C>
Balance, beginning                                                                   $ 519,083            $ 555,388
Provision for loan losses                                                              267,719               44,804
Charge-offs                                                                           (162,335)            (106,375)
Recoveries                                                                              46,707               25,266
                                                                                     ------------------------------
Balance, ending                                                                      $ 671,174            $ 519,083
                                                                                     ==============================
</TABLE>

NOTE 7.  FORECLOSED REAL ESTATE

The balance of real estate in judgment  was  $170,371  and $207,781 at September
30, 2001 and 2000, respectively.

NOTE 8.  ACCRUED INTEREST RECEIVABLE

Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
                                                                                              September 30,
                                                                                     ------------------------------
                                                                                         2001                2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                 <C>
Mortgage-backed and related securities                                               $  38,262           $   52,513
Other marketable securities                                                            372,237              658,717
Loans receivable                                                                       477,071              400,996
                                                                                     ------------------------------
                                                                                     $ 887,570           $1,112,226
                                                                                     ==============================
</TABLE>

NOTE 9.  PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
                                                                                              September 30,
                                                                                     ------------------------------
                                                                                        2001                 2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                  <C>
Land and improvements                                                                $ 235,172            $ 235,172
Office buildings                                                                     1,676,663            1,673,495
Furniture and equipment                                                              2,190,835            2,171,318
Leasehold improvements                                                                 187,930              187,930
Automobile                                                                              26,153               26,153
                                                                                   --------------------------------
                                                                                     4,316,753            4,294,068
Less accumulated depreciation and amortization                                       2,321,839            2,128,557
                                                                                   --------------------------------
                                                                                   $ 1,994,914          $ 2,165,511
                                                                                   ================================
</TABLE>

                                       30
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10. DEPOSITS

Deposits consisted of the following:
<TABLE>
<CAPTION>
                                                              September 30,
                           ----------------------------------------------------------------------------------------
                                              2001                                           2000
                           ----------------------------------------      ------------------------------------------
                           Weighted                                      Weighted
                           Average                         Percent        Average                          Percent
                           Rate              Amount        of Total        Rate              Amount        of Total
-------------------------------------------------------------------------------------------------------------------
<S>                        <C>            <C>                <C>           <C>            <C>                <C>
Noninterest NOW               - %         $ 3,858,218        3.90%            - %         $ 3,717,596        4.18%
NOW                        0.50            10,196,466       10.32          1.68             8,671,599        9.75
Passbook                   1.05             7,628,048        7.72          2.09             8,417,654        9.47
Money Market               2.32            12,051,206       12.20          4.01            13,261,495       14.92
                           --------------------------------------------------------------------------------------
                           1.22            33,733,938       34.14          2.51            34,068,344       38.32
                           --------------------------------------------------------------------------------------
Certificates
2-2.99%                    2.82                30,361        0.03             -                     -           -
3-3.99%                    3.66             7,727,011        7.82             -                     -           -
4-4.99%                    4.50            15,009,176       15.19          4.73             5,509,312        6.20
5-5.99%                    5.50            23,850,169       24.13          5.58            21,737,609       24.45
6-6.99%                    6.41            17,321,189       17.53          6.35            25,534,209       28.72
7-7.99%                    7.12             1,148,839        1.16          7.07             2,050,259        2.31
                           --------------------------------------------------------------------------------------
                           5.32            65,086,745       65.86          5.91            54,831,389       61.68
                           --------------------------------------------------------------------------------------
                           3.92%          $98,820,683      100.00%         4.60%          $88,899,733      100.00%
                           ======================================================================================
</TABLE>

At  September  30,  2001 and  2000,  the Bank had  $13,173,310  and  $8,360,915,
respectively,  of time deposits  accounts with balances of $100,000 or more. The
Bank had  $3,524,853 in brokered  deposits at September 30, 2001.  There were no
brokered deposits at September 30, 2000.

Certificates had the following remaining maturities:
<TABLE>
<CAPTION>

                                                                           September 30,
                                                -----------------------------------------------------------------
                                                           2001                                 2000
                                                ---------------------------           ---------------------------
                                                                   Weighted                              Weighted
                                                                    Average                               Average
                                                    Amount           Rate                Amount            Rate
-----------------------------------------------------------------------------------------------------------------
<S>                                             <C>                  <C>              <C>                  <C>
0-6 months                                      $ 26,233,884         5.35%            $ 18,396,089         5.71%
7-12 months                                       18,668,369         5.03               15,984,357         5.99
13-36 months                                      14,705,404         5.32               14,893,941         5.96
Over 36 months                                     5,479,088         6.14                5,557,002         6.19
                                                ----------------------------------------------------------------
                                                $ 65,086,745         5.32%            $ 54,831,389         5.91%
                                                ================================================================
</TABLE>


Mortgage-backed  securities  with a fair value of $1,811,423  and  $2,453,184 at
September  30,  2001 and 2000,  respectively,  were  pledged as  collateral  for
certain deposits.

                                       31
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
                                                                                        Year Ended September 30,
                                                                                   --------------------------------
                                                                                       2001                 2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                 <C>
NOW                                                                                 $   96,617           $  150,284
Passbook                                                                               133,848              155,329
Money Market                                                                           400,314              509,980
Certificates                                                                         3,423,771            2,958,917
                                                                                    -------------------------------
                                                                                    $4,054,550           $3,774,510
                                                                                    ===============================
</TABLE>
NOTE 11. INCOME TAXES

Federal and state income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
                                                                                       Year Ended September 30,
                                                                                     ------------------------------
                                                                                        2001                 2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                  <C>
Current
  Federal                                                                            $ 504,375            $ 428,637
  State                                                                                163,026              138,144
                                                                                     ------------------------------
                                                                                       667,401              566,781
                                                                                     ------------------------------
Deferred
  Federal                                                                              (81,847)             (20,833)
  State                                                                                (26,155)              (6,657)
                                                                                     ------------------------------
                                                                                      (108,002)             (27,490)
                                                                                     ------------------------------
                                                                                     $ 559,399            $ 539,291
                                                                                     ==============================
</TABLE>

The actual  effective  tax rate  differs  from the  "expected"  income tax rate,
computed at the statutory federal corporate tax rate, as follows:
<TABLE>
<CAPTION>
                                                                                     Year Ended September 30,
                                                                                    ----------------------------
                                                                                    2001                   2000
----------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                    <C>
Statutory federal rate                                                              34.0 %                 34.0 %
State tax, net of federal benefit                                                    6.7                    6.5
Other                                                                               (2.7)                  (2.8)
                                                                                    ---------------------------
                                                                                    38.0%                  37.7%
                                                                                    ===========================
</TABLE>

                                       32
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The tax effects of  temporary  differences  that give rise to the  deferred  tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
                                                                                             September 30,
                                                                                     ------------------------------
                                                                                       2001                 2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                  <C>
Deferred Tax Assets
  Allowance for loan losses                                                         $ 268,856            $ 173,778
  Deferred compensation                                                               330,081              316,886
  Unrealized loss on securities available for sale                                          -              233,069
  Other                                                                                46,659               46,742
                                                                                    ------------------------------
      Total gross deferred tax assets                                                 645,596              770,475
                                                                                    ------------------------------

Deferred Tax Liabilities
  Premises and equipment                                                               86,826               85,487
  FHLB stock                                                                          102,627              102,627
  Accrued real estate taxes                                                            23,117               25,345
  Unrealized gain on securities available for sale                                    106,496                    -
  Prepaid insurance                                                                     1,783                  706
                                                                                    ------------------------------
      Total deferred tax liabilities                                                  320,849              214,165
                                                                                    ------------------------------
      Net deferred tax assets                                                       $ 324,747            $ 556,310
                                                                                    ==============================
</TABLE>


No valuation allowance was required as of September 30, 2001 or 2000.

In prior  years,  the Company was  permitted  to deduct an annual  addition to a
reserve for bad debts.  Bad debt deductions for income tax purposes are included
in  taxable  income of later  years only if the bad debt  reserves  are used for
purposes other than to absorb bad debt losses.  Because the Bank does not intend
to use the reserve for purposes other than to absorb losses,  no deferred income
taxes have been  provided.  Retained  earnings at  September  30,  2001  include
approximately $2,860,000 for which no deferred taxes have been provided.

NOTE 12. BORROWINGS
<TABLE>
<CAPTION>
                                                                                            September 30,
                                                                                       2001                 2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                  <C>
Repurchase agreements                                                              $ 3,101,694          $ 5,562,169
Borrowing from the Federal Home Loan Bank                                            9,760,000           31,363,198
                                                                                   --------------------------------
                                                                                   $12,861,694          $36,925,367
                                                                                   ================================
</TABLE>

Repurchase  agreements  consist  of  sales of  securities  under  agreements  to
repurchase the identical securities.  The agreements generally mature within 180
days and bear a weighted average interest rate of approximately 4.52 percent and
6.34 percent at September 30, 2001 and 2000,  respectively.  The  agreements are
treated as financings with the obligations to repurchase securities reflected as
a  liability  and  the  dollar  amount  of the  securities  collateralizing  the
agreements remaining in the asset accounts.  The securities  collateralizing the
agreements are in safekeeping at the Federal Home Loan Bank of Des Moines in the
Bank's  account.  At September 30, 2001, the agreements were  collateralized  by
securities totaling approximately $4,812,000.


                                       33
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Advances  from the Federal  Home Loan Bank (FHLB) of Des Moines as of  September
30, 2001 mature as follows:
<TABLE>
<CAPTION>
                                                                               Average
Year Ending September 30                                                        Rate             Amount
----------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>
2002                                                                            4.29%          $ 5,760,000
2003                                                                            3.65             1,000,000
2004                                                                            4.24             1,000,000
2005                                                                            4.60             1,000,000
2006 and beyond                                                                 4.86             1,000,000
                                                                                --------------------------
                                                                                4.31%          $ 9,760,000
                                                                                ==========================
</TABLE>

At  September  30, 2001,  the FHLB  advances are secured by the FHLB stock and a
blanket pledge of residential  mortgage loans, and government agency securities.
Under the  agreement,  the Bank must  maintain  eligible  collateral  in amounts
exceeding 125 percent of the outstanding advances.

NOTE 13. REGULATORY CAPITAL REQUIREMENTS

The  Company's   subsidiary  Bank  is  subject  to  various  regulatory  capital
requirements  administered  by the Bank's  primary  federal  regulatory  agency.
Failure to meet minimum capital  requirements can initiate certain mandatory and
possibly  additional  discretionary  actions by regulators  that, if undertaken,
could have a direct  material  effect on the  Company's  consolidated  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt corrective  action,  the Bank must meet specific capital  guidelines that
involve  quantitative  measures of assets and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum ratios (set forth in the following  table)
of total and Tier I capital  to  risk-weighted  assets  and of Tier I capital to
average  assets (as  defined in the  regulations).  Management  believes,  as of
September 30, 2001,  that the Bank meets all capital  adequacy  requirements  to
which it is subject.

As of September 30, 2001, the most recent  notification from the Federal Deposit
Insurance  Corporation  categorized  the Bank as "well  capitalized"  under  the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I  leverage  ratios  as set  forth in the  table  below.  There  are no
conditions  or events since that  notification  that  management  believes  have
changed the Bank's category.


                                       34
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Bank's actual capital amounts and ratios are also presented in the table:
<TABLE>
<CAPTION>
                                                                                                To Be Well Capitalized
                                                                                                     Under Prompt
                                                                  For Capital Adequacy           Corrective Action
                                                Actual                    Purposes                    Provisions
                                         ------------------       --------------------          ----------------------
                                          Amount                    Amount                      Amount
                                          (000's)     Ratio        (000's)       Ratio          (000's)        Ratio
----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>          <C>            <C>            <C>           <C>
As of September 30, 2001:
Total capital (to risk-
weighted assets)                         $ 13,147     17.2%        $ 6,112  >     8.0%           $7,640  >     10.0%
                                                                            -                            -
Tier I capital (to risk-
weighted assets)                           12,538     16.4%          3,056  >     4.0%            4,584  >      6.0%
                                                                            -                            -
Tier I capital (to
average assets)                            12,538      9.2%          5,467  >     4.0%            6,834  >      5.0%
                                                                            -                            -
As of September 30, 2000:
Total capital (to risk-
weighted assets)                         $ 12,108     16.7%        $ 5,811  >     8.0%           $7,264  >     10.0%
                                                                            -                            -
Tier I capital (to risk-
weighted assets)                           11,632     16.0%          2,906  >     4.0%            4,359  >      6.0%
                                                                            -                            -
Tier I capital (to
average assets)                            11,632      8.3%          5,584  >     4.0%            6,980  >      5.0%
                                                                            -                            -
</TABLE>

NOTE 14. EMPLOYEE BENEFITS

EMPLOYEE  STOCK  OWNERSHIP  PLAN:  The Company  has  adopted an  Employee  Stock
Ownership Plan (the ESOP), which meets the requirements of Section 4975(e)(7) of
the  Internal  Revenue Code and Section  407(d)(6)  of the  Employee  Retirement
Income  Security  Act of 1974,  as amended  (ERISA),  and, as such,  the ESOP is
empowered  to borrow in order to finance  purchases  of the common  stock of the
Company.  The ESOP borrowed $690,000 from the Company to purchase 155,250 shares
of  common  stock  of the  Company.  The  Bank  has  committed  to  make  annual
contributions to the ESOP necessary to repay the loan, including interest.

As the debt is repaid, ESOP shares that were initially pledged as collateral for
its debt are released from collateral and allocated to active employees based on
the  proportion of debt service paid in the year.  The Company  accounts for its
ESOP in accordance  with Statement of Position 93-6,  Employers'  Accounting for
Employee Stock Ownership  Plans.  Accordingly,  the shares pledged as collateral
are  reported as unearned  ESOP shares in  stockholders'  equity.  As shares are
determined  to  be  ratably  released  from  collateral,   the  Company  reports
compensation  expense equal to the current  market price of the shares,  and the
shares become outstanding for earnings per share computations. ESOP compensation
benefit expense was $131,298 and $105,714 for 2001 and 2000, respectively.


                                       35
<PAGE>

FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

All employees of the Company are eligible to  participate in the ESOP after they
attain age 21 and complete one year of service during which they worked at least
1,000 hours. In 2001 and 2000, the Company committed to release 15,525 shares of
common stock each year which were allocated to eligible  participants subject to
the restrictions of the ESOP.
                                                                 Amount
------------------------------------------------------------------------
Shares Released and Allocated                                    108,675
Unreleased Shares                                                 46,575
                                                                --------
Total ESOP shares                                                155,250
                                                                ========
Fair Value of Unreleased Shares at September 30, 2001           $442,463
                                                                ========

MANAGEMENT  RECOGNITION PLAN: The Management Recognition Plan (MRP) provides for
the grant of shares of stock to eligible  directors and employees in the form of
restricted  stock,  which vest over a five-year period at the rate of 20 percent
per year. Under the MRP, 77,625 shares of restricted stock were granted. The MRP
shares were fully vested in 2000. MRP expense was $94,444 in 2000.

STOCK  OPTION  PLANS:  The stock  option  plans  provide for granting of 344,063
options  for the  purpose of  attracting  and  retaining  key  personnel  and to
facilitate their purchase of a stock interest in the Company. The options become
exercisable  over a  five-year  period at the rate of 20 percent per year except
for the 1998 plan which  vests 50  percent at the grant date and 50 percent  one
year from the grant  date.  If unused,  the options  expire in October  2005 and
January  2009 for 1998  plan.  A summary of the  status of the  Company's  stock
option plans as of  September  30, 2001 and 2000,  and changes  during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
                                                  2001                                    2000
                                         ----------------------------            ----------------------------
                                                            Weighted-                               Weighted-
                                                             Average                                 Average
                                                            Exercise                                Exercise
                                         Shares               Price              Shares               Price
------------------------------------------------------------------------------------------------------------
<S>                                      <C>                  <C>                <C>                  <C>
Outstanding at Beginning
  of Year                                306,693              $ 7.52             312,008              $ 7.84
  Granted                                      -                   -                   -                   -
  Exercised                                    -                   -                   -                   -
  Forfeited                                    -                   -              (5,315)               8.53
                                         ---------------------------             ---------------------------
Outstanding at End of Year               306,693              $ 7.52             306,693              $ 7.52
                                         ---------------------======             ---------------------======
Exercisable at End of Year               301,804                                 297,315
                                         =======                                 =======
</TABLE>

                                       36
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

At September 30, 2001, the options  outstanding under the stock option plan have
exercise  prices  from  $6.083  to  $12.50  and  a  weighted-average   remaining
contractual life of 5.2 years. The shares and exercise prices were 128,092.50 at
$6.083,  1,941.75  at  $6.778,  19,125.00  at  $7.778,  2,658.00  at $12.50  and
154,875.00 at $8.5833.  All of the nonvested  options are expected to eventually
vest.

As permitted under generally accepted  accounting  principles,  grants under the
plan are accounted  for  following the  provisions of APB Opinion No. 25 and its
related interpretations.  Accordingly,  no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method  prescribed in the FASB Statement No. 123,  reported net income and
earnings per share would have been reduced to the proforma amounts shown below:
<TABLE>
<CAPTION>
                                                   Year Ended September 30,
                                                ------------------------------
                                                  2001                 2000
--------------------------------------------------------------------------------
<S>                                             <C>                  <C>
Net income:
  As reported                                   $ 912,560            $ 889,642
  Proforma                                        827,571              541,480

Basic earnings per share:
  As reported                                        0.93                 0.83
  Proforma                                           0.84                 0.51

Diluted earnings per share:
  As reported                                        0.89                 0.82
  Proforma                                           0.81                 0.50
</TABLE>


In  determining  the pro forma  amounts  above,  the fair value of each grant is
estimated at the grant date using the Black-Scholes  option-pricing  model, with
weighted-average  assumptions for dividends;  risk-free interest rate,  expected
life and price volatility.

NOTE 15. RETIREMENT PLANS

The  Company  has a 401(k)  plan that  covers all  full-time  employees  meeting
certain minimum employment service  requirements.  The Company's expense for the
years ended September 30, 2001 and 2000 was $71,078 and $54,215, respectively.

The Company has individual  deferred  compensation and  supplemental  retirement
agreements  with certain  directors  and officers.  The cost of such  individual
agreements is being  accrued over the period of actual  service from the date of
the respective  agreement.  The cost of such  agreements was $72,087 and $72,099
for the years ended  September 30, 2001 and 2000,  respectively.  The agreements
are  funded  through a grantor  trust with  assets  which  match the  investment
options selected by the directors and officers.

Under the stock  investment  option,  funds are  invested in common stock of the
Company. Investment elections are irrevocable. In accordance with the provisions
of the FASB Emerging  Issues Task Force Issue No. 97-14 the cost of common stock
held in the  grantor  trust is  classified  as treasury  stock and the  deferred
compensation  obligation payable in common stock is classified as a component of
stockholders' equity.

                                       37
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 16. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS

The Company was  incorporated  for the purpose of becoming  the savings and loan
holding  company of the Bank in  connection  with the Bank's  conversion  from a
federally  chartered mutual savings bank to a federally  chartered stock savings
bank.

In order to grant a priority to eligible  account holders in the event of future
liquidation,  the Bank,  at the time of  conversion,  established  a liquidation
account equal to its regulatory capital as of December 31, 1994. In the event of
future  liquidation  of the Bank,  eligible  account  holders  who  continue  to
maintain their deposit accounts shall be entitled to receive a distribution from
the liquidation  account.  The total amount of the  liquidation  account will be
decreased as the balance of eligible  account  holders is reduced  subsequent to
the conversion, based on an annual determination of such balance.

The Bank may not declare or pay a cash dividend to the Company in excess of 100%
of its net income to date during the current  calendar year plus the amount that
would reduce by one-half the Bank's  surplus  capital  ratio at the beginning of
the  calendar  year  without  prior  notice to the Office of Thrift  Supervision
(OTS).  Additional  limitations on dividends declared or paid on, or repurchases
of, the Bank's capital stock are tied to the Bank's level of compliance with its
regulatory capital requirements.

The Bank, as a member of the Federal Home Loan Bank System,  is required to hold
a specified  number of shares of capital  stock in the Federal Home Loan Bank of
Des Moines  which is carried  at cost.  In  addition,  the Bank is  required  to
maintain  cash and other  liquid  assets in an amount  equal to 5 percent of its
deposit accounts and other obligations due within one year.  Management believes
the Bank has met these requirements.

NOTE 17. COMMITMENT

The Company has entered into an agreement with Wal-Mart Stores, Inc., subject to
regulatory  approval,  for an in-store banking facility. A full service in-store
banking  facility  will be located in the new  Wal-Mart  Supercenter  in Bemidji
located at the  current  Beltrami  Electric  Cooperative  site.  Operations  are
scheduled to begin in early 2002 when the Wal-Mart  Supercenter opens. The terms
of the agreement call for a five-year  lease term with monthly  rental  payments
starting at $2,000.

NOTE 18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with  off-balance-sheet  risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These  financial   instruments  include  commitments  to  extend  credit.  These
instruments  involve,  to varying degrees,  elements of credit and interest rate
risk in excess of the amount  recognized in the balance sheet.  The  contractual
amount of these  instruments  reflects the extent of involvement by the Company.
The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the  financial  instrument  for  commitments  to extend credit is
represented by the contractual amount of these commitments. The Company uses the
same  credit  policies  in making  commitments  as it does for  on-balance-sheet
instruments.  The contractual amount of these financial instruments at September
30, 2001 and 2000 is as follows (in 000's):
<TABLE>
<CAPTION>
                                                   2001               2000
--------------------------------------------------------------------------------
<S>                                                <C>              <C>
Unused lines of credit                             $ 3,282          $ 1,358
Commitments to originate and purchase loans          1,148              161
                                                   ------------------------
                                                   $ 4,430          $ 1,519
                                                   ========================
</TABLE>


                                       38
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Commitments to extend credit are agreements to lend to a customer provided there
is no  violation  of any  condition  established  in the  contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since a portion of the commitments may expire without
being drawn upon, the total  commitment  amount does not  necessarily  represent
future cash requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained,  if deemed necessary
by the  Company  upon  extension  of  credit,  is based on the loan  type and on
management's credit evaluation of the borrower. Collateral consists primarily of
residential real estate and personal property.

NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures About Fair Values of Financial  Instruments,  requires
disclosures  of estimated  fair values of the Company's  financial  instruments,
including  assets,  liabilities,  and  off-balance  sheet  items for which it is
practicable  to estimate  fair value.  The fair value  estimates  are made as of
September  30,  2001  and  2000  based  upon  relevant  market  information,  if
available, and upon the characteristics of the financial instruments themselves.
Because no market  exists for a significant  portion of the Company's  financial
instruments,  fair value  estimates are based upon  judgments  regarding  future
expected loss experience,  current economic conditions,  risk characteristics of
various financial  instruments,  and other factors. The estimates are subjective
in nature and involve  uncertainties  and matters of  significant  judgment and,
therefore,  cannot be determined  with precision.  Changes in assumptions  could
significantly affect the estimates.

Fair value estimates are based only on existing  financial  instruments  without
attempting to estimate the value of anticipated  future business or the value of
assets  and  liabilities  that  are not  considered  financial  instruments.  In
addition,  the tax  ramifications  related to the  realization of the unrealized
gains and losses can have a significant  effect on the fair value  estimates and
have not been considered in any of the estimates.

The estimated fair value of the Company's financial  instruments as of September
30, 2001 and 2000 are shown below.  Following the table, there is an explanation
of the methods and assumptions  used to estimate the fair value of each class of
financial instruments.
<TABLE>
<CAPTION>
                                                                      September 30,
                                              --------------------------------------------------------------------
                                                            2001                                  2000
                                              --------------------------------------------------------------------
                                                Carrying          Estimated           Carrying          Estimated
                                                 Amount           Fair Value           Amount           Fair Value
------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                <C>                <C>                <C>
Financial Assets
  Cash and cash equivalents                   $ 7,594,832        $ 7,594,832        $ 4,532,296        $ 4,532,296
  Federal funds sold                            7,352,000          7,352,000                  -                  -
  Securities available for sale                12,605,500         12,605,500         25,210,541         25,210,541
  Securities held to maturity                  16,726,958         16,811,048         33,734,853         31,855,707
  Loans receivable                             77,257,046         78,716,000         70,753,934         70,420,000
  Federal Home Loan Bank stock                  1,842,100          1,842,100          1,568,400          1,568,400
  Accrued interest receivable                     887,570            887,570          1,112,226          1,112,226

Financial Liabilities
  Deposits                                     98,820,683        100,377,000         88,899,733         88,649,000
  Borrowings                                   12,861,694         12,974,000         36,925,367         36,920,000
  Accrued interest payable                        512,729            512,729            629,902            629,902

</TABLE>

                                       39
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

CASH AND CASH  EQUIVALENTS:  The  carrying  amount of cash and cash  equivalents
approximates their fair value.

FEDERAL FUNDS SOLD: The carrying amount of federal funds sold approximate  their
fair value.

SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY: The fair value of
securities is based upon quoted market prices.

LOANS  RECEIVABLE:  The fair  value of loans  receivable  has been for groups of
loans with similar  characteristics.  The fair value of the loan  portfolio  was
calculated  by  discounting  the  scheduled  cash flows  through  the  estimated
maturity  using  anticipated  prepayment  speeds and using  discount  rates that
reflect the credit and interest rate risk inherent in each loan  portfolio.  The
fair value of the adjustable  loan portfolio was estimated by grouping the loans
with similar  characteristics and comparing the characteristics of each group to
the prices quoted for similar types of loans in the secondary market.

FEDERAL HOME LOAN BANK STOCK: The carrying amount of FHLB stock approximates its
fair value.

ACCRUED INTEREST RECEIVABLE:  The carrying amount of accrued interest receivable
approximates  its fair  value  since it is  short-term  in  nature  and does not
present unanticipated credit concerns.

DEPOSITS:  Under  SFAS No.  107,  the  fair  value of  deposits  with no  stated
maturity, such as checking,  savings, and money market accounts, is equal to the
amount payable on demand.  The fair value of certificates of deposit is based on
the discounted value of contractual cash flows using as discount rates the rates
that were offered by the Company as of September  30, 2001 and 2000 for deposits
with maturities similar to the remaining maturities of the existing certificates
of deposit.

The fair value  estimate for deposits  does not include the benefit that results
from the low cost  funding  provided  by the  Company's  existing  deposits  and
long-term  customer  relationships  compared to the cost of obtaining  different
sources of funding.  This  benefit is commonly  referred to as the core  deposit
intangible.

BORROWINGS:  The fair value of  borrowings is based on the  discounted  value of
contractual  cash flows using as discount rates the rates that were available to
the Company as of September  30, 2001 and 2000 for  borrowings  with  maturities
similar to the remaining maturities of the existing borrowings.

ACCRUED  INTEREST  PAYABLE:  The  carrying  amount of accrued  interest  payable
approximates its fair value since it is short-term in nature.

OFF-STATEMENT  OF  FINANCIAL  CONDITION  INSTRUMENTS:  Since the majority of the
Company's  off-statement  of  financial  condition  instruments  consist  of non
fee-producing, variable rate commitments, the Company has determined they do not
have a distinguishable fair value.

                                       40
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 20. FIRST FEDERAL  BANCORPORATION  FINANCIAL  INFORMATION  (PARENT  COMPANY
ONLY)

The following are the condensed financial statements for the parent company only
as of and for the years ended September 30, 2001 and 2000:
<TABLE>
<CAPTION>
                                                                   2001                 2000
-----------------------------------------------------------------------------------------------
<S>                                                              <C>                  <C>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Assets
  Cash and cash equivalents                                      $   500,293          $   365,850
  Securities available for sale                                      499,366              997,562
  Loans                                                              250,000                    -
  Investment in subsidiary                                        12,690,870           11,293,820
  Other assets                                                       102,384              181,263
                                                                 --------------------------------
     Total assets                                                $14,042,913          $12,838,495
                                                                 ================================

Liabilities and Stockholders' Equity
  Accrued expenses                                               $    14,880             $ 25,153
  Stockholders' equity                                            14,028,033           12,813,342
                                                                 --------------------------------
     Total liabilities and stockholders' equity                  $14,042,913          $12,838,495
                                                                 ================================
CONDENSED STATEMENTS OF INCOME
Interest Income                                                  $   111,512          $   161,462
Gain on Sale of Investments                                                -                9,688
Equity in Earnings of Subsidiary                                     904,837              843,127
Noninterest Expense                                                  (98,422)             (92,311)
                                                                 --------------------------------
     Income before income tax expense                                917,927              921,966

Income Tax Expense                                                     5,367               32,324
                                                                 --------------------------------
     Net income                                                  $   912,560          $   889,642
                                                                 ================================
</TABLE>


                                       41
<PAGE>
FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,                                                     2001                 2000
-------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                  <C>
CONDENSED STATEMENTS OF CASH FLOWS
Operating Activities
  Net income                                                            $   912,560         $    889,642
  Decrease in other assets                                                   78,879               54,240
  Increase (decrease) in accrued expenses                                   (10,273)               2,006
  Equity in earnings of subsidiary                                         (904,837)            (843,127)
  Increase in deferred compensation payable in common stock                  59,288               76,546
  Earned ESOP shares priced above original cost                              62,298               39,714
  Decrease in unamortized restricted stock                                        -               94,444
  Decrease in unearned ESOP shares                                           69,000               69,000
  Amortization of premium and discount, net                                 (31,997)             (55,324)
                                                                        --------------------------------
     Net cash provided by operating activities                              234,918              327,141
                                                                        --------------------------------
Investing Activities
  Increase in loans receivable                                             (250,000)                   -
  Purchase of securities available for sale                              (6,007,377)         (11,514,111)
  Proceeds from sales of securities available for sale                    6,534,000           12,690,043
                                                                        --------------------------------
     Net cash provided by investing activities                              276,623            1,175,932
                                                                        --------------------------------
Financing Activities
  Purchase and retirement of common stock                                  (147,068)          (1,142,924)
  Purchase of treasury stock                                               (230,030)            (274,897)
                                                                        --------------------------------
     Net cash used in financing activities                                 (377,098)          (1,417,821)
                                                                        --------------------------------
     Increase in cash and cash equivalents                                  134,443               85,252

Cash and Cash Equivalents
  Beginning of year                                                         365,850              280,598
                                                                        --------------------------------
  End of year                                                           $   500,293         $    365,850
                                                                        ================================
</TABLE>



                                       42
<PAGE>

FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized  quarterly  selected  operations data for fiscal 2001 and 2000 are as
follows:
<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                             ----------------------------------------------------------------------
                                             September 30,         June 30,          March 31,         December 31,
                                                  2001               2001               2001               2000
------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                <C>                <C>                <C>
Interest Income                               $ 2,285,517        $ 2,452,106        $ 2,558,049        $ 2,606,526
Interest Expense                                1,191,742          1,362,177          1,548,951          1,673,193
                                              --------------------------------------------------------------------
     Net interest income                        1,093,775          1,089,929          1,009,098            933,333

Provision for Loan Losses                          60,017             88,450             82,851             36,401
Noninterest Income                                202,382            157,887            191,126            219,934
Noninterest Expense                               838,577            777,401            811,691            730,117
Income tax Expense                                152,040            145,646            114,369            147,344
                                              --------------------------------------------------------------------
     Net income                               $   245,523        $   236,319        $   191,313        $   239,405
                                              ====================================================================
Earnings per Common Share
  Basic                                       $      0.25        $      0.24        $      0.20        $      0.24
                                              ====================================================================
  Diluted                                     $      0.23        $      0.23        $      0.19        $      0.24
                                              ====================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                             ----------------------------------------------------------------------
                                             September 30,         June 30,          March 31,         December 31,
                                                  2000               2000               2000               1999
------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                <C>                <C>                <C>
Interest Income                               $ 2,547,993        $ 2,389,302        $ 2,347,638        $ 2,290,235
Interest Expense                                1,599,649          1,467,513          1,406,812          1,342,363
                                              --------------------------------------------------------------------
     Net interest income                          948,344            921,789            940,826            947,872

Provision for Loan Losses                          40,404              1,565                  -              2,835
Noninterest Income                                184,204            194,707            179,209            224,108
Noninterest Expense                               746,048            750,141            853,031            718,102
Income Tax Expense                                130,176            137,814             98,123            173,178
                                              --------------------------------------------------------------------
     Net income                               $   215,920        $   226,976        $   168,881        $   277,865
                                              ====================================================================
Earnings per Common Share
  Basic                                       $      0.21        $      0.23        $      0.15        $      0.24
                                              ====================================================================
  Diluted                                     $      0.21        $      0.22        $      0.15        $      0.24
                                              ====================================================================
</TABLE>

                                       43
<PAGE>

FIRST FEDERAL BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
                                            September 30,         June 30,          March 31,         December 31,
                                                 2001               2001               2001               2000
------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>                <C>                <C>
Total Assets                                 $127,032,395       $138,190,264       $137,981,873       $143,529,558

Securities                                     29,332,458         49,555,349         51,756,966         57,711,342

Net Loans                                      77,257,046         77,475,995         75,420,972         73,191,173

Deposits                                       98,820,683         96,245,696         93,786,244         90,086,982

Stockholders' Equity                           14,028,033         13,728,366         13,550,949         13,238,723
</TABLE>
<TABLE>
<CAPTION>

                                            September 30,         June 30,          March 31,         December 31,
                                                2000               2000               2000               1999
------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>                <C>                <C>
Total Assets                                 $140,218,497       $137,313,013       $136,591,018       $134,600,290

Securities                                     58,945,394         59,278,497         62,075,167         61,999,162

Net Loans                                      70,753,934         66,601,900         60,518,847         57,950,950

Deposits                                       88,899,733         87,952,619         88,650,099         86,650,388

Stockholders' Equity                           13,230,130         12,516,127         13,142,271         13,165,367
</TABLE>

                                       44


<PAGE>

                         MARKET AND DIVIDEND INFORMATION

TRADING IN THE COMMON STOCK

     The Company's Common Stock is traded on the Nasdaq SmallCap  Market.  There
were,  as  of  September  30,  2001,   1,264,628  shares  of  the  Common  Stock
outstanding,  and  approximately  210 holders of record of the Common Stock (not
including  shares held in "street name") as of December 3, 2001. The December 3,
2001 closing sale price of the Common Stock as traded on the SmallCap Market was
$10.40 per share.

     The following  table sets forth certain  information as to the range of the
high and low bid prices for the Company's Common Stock for the calendar quarters
indicated during the most recent two fiscal years.
<TABLE>
<CAPTION>
                                    HIGH (1)         LOW (1)           DIVIDENDS PAID
                                    --------         -------           --------------
         <S>                        <C>              <C>                    <C>
         FISCAL 2001:
            First Quarter           $  7.75          $6.063                 $ --
            Second Quarter             9.00           6.375                   --
            Third Quarter             10.49           6.375                   --
            Fourth Quarter            10.80           9.400
         FISCAL 2000:
            First Quarter             7.750           5.000                   --
            Second Quarter            7.750           6.125                   --
            Third Quarter             8.000           7.063                   --
            Fourth Quarter            8.000           7.063                   --
<FN>
____________
(1)      Quotations reflect inter-dealer price, without retail mark-up,
         mark-down or commissions, and may not represent actual transactions.
</FN>
</TABLE>

DIVIDEND RESTRICTIONS

     Under OTS  regulations,  First Federal may not pay dividends on its capital
stock if its  regulatory  capital would thereby be reduced below the amount then
required  for the  liquidation  account  established  for the benefit of certain
depositors of First Federal at the time of the Conversion. In addition,  savings
institution  subsidiaries of savings and loan holding  companies are required to
give the OTS 30 days' prior notice of any proposed  declaration  of dividends to
the holding company. Savings institutions must submit notice to the OTS prior to
making a capital  distribution if (a) they would not be  well-capitalized  after
the distribution,  (b) the distribution would result in the retirement of any of
the  institution's  common or preferred  stock or debt counted as its regulatory
capital,  or (c) the institution is a subsidiary of a holding company. A savings
institution  must make  application to the OTS to pay a capital  distribution if
(x)  the  institution  would  not  be  adequately   capitalized   following  the
distribution,  (y) the institution's  total  distributions for the calendar year
exceeds the  institution's net income for the calendar year to date plus its net
income (less distributions) for the preceding two years, or (z) the distribution
would  otherwise  violate  applicable  law or regulation or an agreement with or
condition imposed by the OTS.

     Under the OTS' prompt corrective action regulations,  First Federal is also
prohibited   from  making  any  capital   distribution   if  after   making  the
distribution,  First Federal would have: (i) a total risk-based capital ratio of
less than 8.0%;  (ii) a Tier 1 risk-based  capital  ratio of less than 4.0%;  or
(iii) a leverage ratio of less than 4.0%. The OTS, after  consultation  with the
FDIC,  however,  may permit an otherwise  prohibited stock repurchase if made in
connection  with the issuance of additional  shares in an equivalent  amount and
the repurchase will reduce the institution's  financial obligations or otherwise
improve the institution's financial condition.

     Furthermore,  earnings of the Bank  appropriated  to bad debt  reserves for
federal  income tax purposes are not available for payment of cash  dividends or
other  distributions to the Company without payment of taxes at the then current
tax rate by First  Federal on the amount of earnings  removed  from the reserves
for such  distributions.  The Company intends to make full use of this favorable
tax treatment afforded to First Federal and the Company and does not contemplate
use of any  post-Conversion  earnings of First  Federal in a manner  which would
limit either the Bank's bad debt deduction or create federal tax liabilities.


                                       45

<PAGE>
<TABLE>
<CAPTION>
                                                    BOARD OF DIRECTORS

<S>                                              <C>                                    <C>
RALPH T. SMITH                                   WILLIAM R. BELFORD                     WALTER R. FANKHANEL
Chairman of the Board of the Company and the     President and Chief Executive          Director of the Company and the
Bank                                             Officer of the Company and the Bank    Bank


MARTIN R. SATHRE                                 JAMES R. SHARP                         DEAN J. THOMPSON
Vice Chairman and Director of the Company and    Director of Company and the Bank       Director of the Company and the
the Bank                                                                                Bank


                                                    EXECUTIVE OFFICERS

RALPH T. SMITH                                   MARTIN R. SATHRE                       WILLIAM R. BELFORD
Chairman of the Board of the Company and the     Vice Chairman and Director of the      President and Chief Executive
Bank                                             Company and the Bank                   Officer of the Company and the Bank

DENNIS M. VORGERT                                KAREN JACOBSON                         WARREN MEISSNER
Treasurer of the Company and the Bank            Secretary of the Company and the Bank  Vice President of the Bank

                                                 MIKE SHERWOOD
                                                 Vice President of the Bank

                                                     OFFICE LOCATIONS

MAIN OFFICE:                                     BRANCH OFFICES:
214 5th Street                                   22 First Street, N.E.                  109 Main Street West
Bemidji, Minnesota  56601                        Bagley, Minnesota  56621               Baudette, Minnesota  56623

                                                 550 Paul Bunyan Drive, N.W.            527 Minnesota Avenue
                                                 Bemidji, Minnesota  56601              Walker, Minnesota 56484


                                                    GENERAL INFORMATION

INDEPENDENT PUBLIC ACCOUNTANTS                 ANNUAL MEETING                           ANNUAL REPORT ON FORM 10-KSB
McGladrey & Pullen LLP                         The 2002 Annual Meeting of               A copy of the Company's Annual
Certified Public Accountants                   Stockholders will be held on January     Report on Form 10-KSB for the
Duluth, Minnesota                              14, 2002 at 2:30 p.m. at the main        fiscal year ended September 30,
                                               office, 214 5th Street, Bemidji,         2001 as filed with the Securities
GENERAL COUNSEL                                Minnesota 56601.                         and Exchange Commission will be
Smith Law Firm                                                                          furnished without charge to
Bemidji, Minnesota  56601                      TRANSFER AGENT AND REGISTRAR             stockholders as of the record date
                                               Stock Transfer Department                for the 2001 Annual Meeting upon
SPECIAL COUNSEL                                Wells Fargo Shareowner Services          written request to Karen Jacobson,
Stradley Ronon Housley Kantarian               P.O. Box 119                             214 5th Street, Bemidji, Minnesota
  & Bronstein, LLP                             So. St. Paul, Minnesota 55075-9988       56601
1220 19th Street, N.W.  Suite 700
Washington, D.C.  20036
</TABLE>