##### Table of Contents



United States
Securities and Exchange Commission Washington, D.C. 20549
 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  For the quarterly period ended
    
    June 30, 2004
 Commission file number
    
    0-18046
 First Federal Capital Corp  Wisconsin
(State or other jurisdiction of
incorporation or organization)
    
    39-1651288
(IRS employer
identification)
 605 State Street
La Crosse, Wisconsin
(Address of principal executive office)
    
    54601
(Zip code)
 Registrants telephone number, including area code: (608) 784-8000 Not applicable
(Former name, former address, and former fiscal year,
if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period as the Registrant
has been subject to such requirements), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [   ] Indicate by check mark if the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes [X] No [   ] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class: Common Stock$.10 Par Value. Outstanding as of August 6, 2004:
22,543,511.




---



##### Table of Contents



Form 10-Q Table of Contents PagePart IFinancial InformationItem 1Financial Statements
    
    
    2Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4Controls and Procedures
    
    
    29Part IIOther InformationItem 1Legal Proceedings
    
    
    30Item 2Changes in Securities
    
    
    30Item 3Defaults Upon Senior Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
    
    
    30Item 4Submission of Matters to Vote of Security Holders
    
    
    30Item 5Other Information
    
    
    30Item 6Exhibits and Reports on Form 8-K
    
    
    30Signatures
    
    
    32Certifications
    
    
    33Certification of President and CEOCertification of Senior VP and Acting CFOCertification of VP and ControllerSection 1350 Certification of President and CEOSection 1350 Certification of Senior VP and Acting CFOSection 1350 Certification of VP and Controller
 1




---



##### Table of Contents



Part IFinancial Information 
 Item 1Financial Statements Consolidated Statements of Financial Condition
June 30, 2004, and December 31, 2003 June 302004
    
    December 31(Unaudited)
    
    2003ASSETSCash and due from banks
    
    $
    90,083,698
    
    
    $
    94,535,753Interest-bearing deposits with banks
    
    
    12,596,108
    
    
    
    6,444,374Mortgage-backed and related securities:Available for sale, at fair value
    
    
    370,501,921
    
    
    
    386,862,372Held for investment, at cost (fair value of $259,837,622 and $610,294, respectively)
    
    
    267,376,318
    
    
    
    613,076Loans held for sale
    
    
    18,085,165
    
    
    
    16,113,217Loans held for investment (net of allowance of $14,212,350 and $13,882,350, respectively)
    
    
    2,631,959,157
    
    
    
    2,518,683,388Federal Home Loan Bank stock
    
    
    61,486,100
    
    
    
    59,634,800Accrued interest receivable, net
    
    
    16,546,470
    
    
    
    15,802,753Office properties and equipment
    
    
    54,540,216
    
    
    
    53,020,583Mortgage servicing rights, net
    
    
    40,841,443
    
    
    
    36,340,856Goodwill
    
    
    78,063,720
    
    
    
    78,168,866Other intangible assets
    
    
    12,345,572
    
    
    
    13,358,976Other assets
    
    
    30,319,728
    
    
    
    28,745,265Total assets
    
    $
    3,684,745,616
    
    
    $
    3,308,324,280LIABILITIES AND STOCKHOLDERS EQUITYDeposit liabilities
    
    $
    2,690,177,909
    
    
    $
    2,552,837,027Federal Funds purchased
    
    
    
    
    
    
    24,500,000Federal Home Loan Bank advances
    
    
    643,200,000
    
    
    
    373,075,000Other borrowings
    
    
    22,083,790
    
    
    
    43,624,308Advance payments by borrowers for taxes and insurance
    
    
    8,407,401
    
    
    
    1,484,734Accrued interest payable
    
    
    2,528,726
    
    
    
    2,234,905Other liabilities
    
    
    33,908,656
    
    
    
    33,979,161Total liabilities
    
    
    3,400,306,482
    
    
    
    3,031,735,135Preferred stock, $.10 par value (5,000,000 shares authorized, none outstanding)
    
    
    
    
    
    
    Common stock, $.10 par value (100,000,000 shares authorized, 22,517,493 and 22,394,773 shares
issued, respectively)
    
    
    2,251,749
    
    
    
    2,239,477Additional paid-in capital
    
    
    89,266,193
    
    
    
    87,323,995Retained earnings
    
    
    199,472,671
    
    
    
    188,319,179Accumulated non-owner adjustments to equity, net
    
    
    (6,551,480
    )
    
    
    (1,293,508
    )Total stockholders equity
    
    
    284,439,134
    
    
    
    276,589,144Total liabilities and stockholders equity
    
    $
    3,684,745,616
    
    
    $
    3,308,324,280
 Refer to accompanying Notes to Consolidated Financial Statements. 2




---



##### Table of Contents



Consolidated Statements of Operations
Three months ended June 30, 2004 and 2003 Three Months Ended June 302004
    
    2003(Unaudited)
    
    (Unaudited)Interest on loans
    
    $
    35,657,893
    
    
    $
    30,791,501Interest on mortgage-backed and related securities
    
    
    6,068,381
    
    
    
    4,619,180Interest and dividends on investments
    
    
    927,415
    
    
    
    1,201,817Total interest income
    
    
    42,653,689
    
    
    
    36,612,497Interest on deposit liabilities
    
    
    10,497,041
    
    
    
    12,977,324Interest on FHLB advances and other borrowings
    
    
    4,050,562
    
    
    
    5,136,234Total interest expense
    
    
    14,547,603
    
    
    
    18,113,558Net interest income
    
    
    28,106,086
    
    
    
    18,498,939Provision for loan losses
    
    
    808,667
    
    
    
    139,130Net interest income after provision for loan losses
    
    
    27,297,419
    
    
    
    18,359,809Community banking revenue
    
    
    11,376,413
    
    
    
    10,048,223Mortgage banking revenue
    
    
    7,649,993
    
    
    
    9,867,403Other income
    
    
    684,701
    
    
    
    554,773Total non-interest income
    
    
    19,711,107
    
    
    
    20,470,400Compensation and employee benefits
    
    
    18,020,997
    
    
    
    14,759,383Occupancy and equipment
    
    
    3,665,386
    
    
    
    3,299,953Communications, postage, and office supplies
    
    
    1,782,788
    
    
    
    1,675,398ATM and debit card transaction costs
    
    
    1,329,745
    
    
    
    1,175,517Advertising and marketing
    
    
    989,373
    
    
    
    997,975Amortization of intangibles
    
    
    490,719
    
    
    
    202,781Merger-related expenses
    
    
    1,163,654
    
    
    
    Other expenses
    
    
    2,376,276
    
    
    
    2,738,800Total non-interest expense
    
    
    29,818,938
    
    
    
    24,849,807Income before income taxes
    
    
    17,189,588
    
    
    
    13,980,401Income tax expense
    
    
    6,781,340
    
    
    
    5,209,773Net income
    
    $
    10,408,248
    
    
    $
    8,770,628Per share informationDiluted earnings per share
    
    $
    0.46
    
    
    $
    0.44Basic earnings per share
    
    
    0.46
    
    
    
    0.44Dividends paid per share
    
    
    0.15
    
    
    
    0.14
 Refer to accompanying Notes to Consolidated Financial Statements. 3




---



##### Table of Contents



Consolidated Statements of Operations
Six months ended June 30, 2004 and 2003 Six Months Ended June 302004
    
    2003(Unaudited)
    
    (Unaudited)Interest on loans
    
    $
    71,204,940
    
    
    $
    63,217,480Interest on mortgage-backed and related securities
    
    
    10,988,974
    
    
    
    8,097,835Interest and dividends on investments
    
    
    1,920,712
    
    
    
    2,455,226Total interest income
    
    
    84,114,625
    
    
    
    73,770,541Interest on deposit liabilities
    
    
    20,867,907
    
    
    
    26,633,939Interest on FHLB advances and other borrowings
    
    
    7,389,119
    
    
    
    10,356,465Total interest expense
    
    
    28,257,026
    
    
    
    36,990,404Net interest income
    
    
    55,857,599
    
    
    
    36,780,137Provision for loan losses
    
    
    2,415,010
    
    
    
    518,029Net interest income after provision for loan losses
    
    
    53,442,589
    
    
    
    36,262,109Community banking revenue
    
    
    21,689,684
    
    
    
    18,875,952Mortgage banking revenue
    
    
    12,324,373
    
    
    
    18,379,729Other income
    
    
    1,322,952
    
    
    
    1,155,697Total non-interest income
    
    
    35,337,009
    
    
    
    38,411,379Compensation and employee benefits
    
    
    36,575,054
    
    
    
    28,755,147Occupancy and equipment
    
    
    7,243,786
    
    
    
    6,425,033Communications, postage, and office supplies
    
    
    3,536,800
    
    
    
    3,523,875ATM and debit card transaction costs
    
    
    2,678,805
    
    
    
    2,265,144Advertising and marketing
    
    
    1,769,569
    
    
    
    1,677,696Amortization of intangibles
    
    
    1,013,404
    
    
    
    384,887Merger-related expenses
    
    
    1,163,654
    
    
    
    Other expenses
    
    
    5,116,701
    
    
    
    4,943,272Total non-interest expense
    
    
    59,097,773
    
    
    
    47,975,054Income before income taxes
    
    
    29,681,825
    
    
    
    26,698,433Income tax expense
    
    
    11,232,360
    
    
    
    9,913,336Net income
    
    $
    18,449,465
    
    
    $
    16,785,097Per share informationDiluted earnings per share
    
    $
    0.81
    
    
    $
    0.84Basic earnings per share
    
    
    0.82
    
    
    
    0.85Dividends paid per share
    
    
    0.29
    
    
    
    0.27
 Refer to accompanying Notes to Consolidated Financial Statements. 4




---



##### Table of Contents



Consolidated Statements of Stockholders Equity
Three months ended June 30, 2004 and 2003 CommonStock and
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    Unearned
    
    Non-OwnerPaid-In
    
    Retained
    
    Treasury
    
    Restricted
    
    AdjustmentsCapital
    
    Earnings
    
    Stock
    
    Stock
    
    to Equity
    
    TotalUnauditedBalance at March 31, 2003
    
    $
    48,599,024
    
    
    $
    170,956,527
    
    
    
    ($10,180,511
    )
    
    
    ($18,333
    )
    
    $
    1,903,644
    
    
    $
    211,260,351Net income
    
    
    
    
    
    
    8,770,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,770,628Securities valuation adjustment,
net of income taxes of $1,312,390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,437,296
    
    
    
    2,437,296Net income and non-owner
adjustments to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,207,924Dividends paid
    
    
    
    
    
    
    (2,769,048
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,769,048
    )Exercise of stock options
    
    
    
    
    
    
    (1,428,333
    )
    
    
    1,670,332
    
    
    
    
    
    
    
    
    
    
    
    241,999Amortization of restricted stock
    
    
    
    
    
    
    179,406
    
    
    
    
    
    
    
    13,750
    
    
    
    
    
    
    
    193,156Balance at June 30, 2003
    
    $
    48,599,024
    
    
    $
    175,709,179
    
    
    
    ($8,510,179
    )
    
    
    ($4,583
    )
    
    $
    4,340,940
    
    
    $
    220,134,380UnauditedBalance at March 31, 2004
    
    $
    90,145,589
    
    
    $
    193,508,742
    
    
    
    (80,400
    )
    
    
    
    
    
    $
    522,978
    
    
    $
    284,096,910Net income
    
    
    
    
    
    
    10,408,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,408,248Securities valuation adjustment,
net of income taxes of ($3,809,324)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,074,458
    )
    
    
    (7,074,458
    )Net income and non-owner
adjustments to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,333,790Dividends paid
    
    
    
    
    
    
    (3,374,234
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,374,234
    )Exercise of stock options
    
    
    1,372,354
    
    
    
    (793,321
    )
    
    
    80,400
    
    
    
    
    
    
    
    
    
    
    
    659,433Amortization of restricted stock
    
    
    
    
    
    
    (276,764
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (276,764
    )Balance at June 30, 2004
    
    $
    91,517,942
    
    
    $
    199,472,671
    
    
    
    
    
    
    
    
    
    
    
    ($6,551,480
    )
    
    $
    284,439,134
 Refer to accompanying Notes to Consolidated Financial Statements. 5




---



##### Table of Contents



Consolidated Statements of Stockholders Equity
Six months ended June 30, 2004 and 2003 CommonStock and
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    Unearned
    
    Non-OwnerPaid-In
    
    Retained
    
    Treasury
    
    Restricted
    
    AdjustmentsCapital
    
    Earnings
    
    Stock
    
    Stock
    
    to Equity
    
    TotalUnauditedBalance at December 31, 2002
    
    $
    48,599,024
    
    
    $
    165,628,148
    
    
    ($
    10,178,374
    )
    
    ($
    32,083
    )
    
    $
    1,435,289
    
    
    $
    205,452,003Net income
    
    
    
    
    
    
    16,785,097
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,785,097Securities valuation adjustment,
net of income taxes of $1,564,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,905,651
    
    
    
    2,905,651Net income and non-owner
adjustments to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,690,748Dividends paid
    
    
    
    
    
    
    (5,330,973
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,330,973
    )Exercise of stock options
    
    
    
    
    
    
    (1,572,383
    )
    
    
    2,211,387
    
    
    
    
    
    
    
    
    
    
    
    639,004Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (474,112
    )
    
    
    
    
    
    
    
    
    
    
    (474,112
    )Amortization of restricted stock
    
    
    
    
    
    
    369,210
    
    
    
    
    
    
    
    27,500
    
    
    
    
    
    
    
    396,710Other activity
    
    
    
    
    
    
    (169,920
    )
    
    
    (69,080
    )
    
    
    
    
    
    
    
    
    
    
    (239,000
    )Balance at June 30, 2003
    
    $
    48,599,024
    
    
    $
    175,709,179
    
    
    ($
    8,510,179
    )
    
    ($
    4,583
    )
    
    $
    4,340,940
    
    
    $
    220,134,381UnauditedBalance at December 31, 2003
    
    $
    89,563,472
    
    
    $
    188,319,179
    
    
    
    
    
    
    
    
    
    
    ($
    1,293,508
    )
    
    $
    276,589,144Net income
    
    
    
    
    
    
    18,449,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,449,465Securities valuation adjustment,
net of income taxes of ($2,831,216)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,257,972
    )
    
    
    (5,257,972
    )Net income and non-owner
adjustments to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,191,493Dividends paid
    
    
    
    
    
    
    (6,508,486
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,508,486
    )Exercise of stock options
    
    
    1,954,470
    
    
    
    (755,902
    )
    
    
    344,366
    
    
    
    
    
    
    
    
    
    
    
    1,542,934Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (322,866
    )
    
    
    
    
    
    
    
    
    
    
    (322,866
    )Amortization of restricted stock
    
    
    
    
    
    
    (31,584
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,584
    )Other activity
    
    
    
    
    
    
    
    
    
    
    (21,500
    )
    
    
    
    
    
    
    
    
    
    
    (21,500
    )Balance at June 30, 2004
    
    $
    91,517,942
    
    
    $
    199,472,671
    
    
    
    
    
    
    
    
    
    
    ($
    6,551,480
    )
    
    $
    284,439,134
 Refer to accompanying Notes to Consolidated Financial Statements. 6




---



##### Table of Contents



Consolidated Statements of Cash Flows
Three months ended June 30, 2004 and 2003 Three Months June 302004
    
    2003(Unaudited)
    
    (Unaudited)Cash flows from operating activities:Net income
    
    $
    10,408,248
    
    
    $
    8,770,628Adjustments to reconcile net income to net cash provided (used) by operations:Provision for loan and real estate losses
    
    
    749,877
    
    
    
    105,619Increase (decrease) in mortgage servicing rights valuation allowance
    
    
    (631,000
    )
    
    
    1,000,000Net loan costs deferred
    
    
    (578,646
    )
    
    
    (1,373,016
    )Amortization of mortgage servicing rights
    
    
    2,566,392
    
    
    
    10,739,235Other amortization
    
    
    2,469,554
    
    
    
    3,984,610Depreciation
    
    
    1,234,577
    
    
    
    974,250Gains on sales of mortgage loans
    
    
    (6,024,958
    )
    
    
    (18,393,195
    )Increase in accrued interest receivable
    
    
    781,465
    
    
    
    677,990Decrease in accrued interest payable
    
    
    (148,072
    )
    
    
    (252,743
    )Increase (decrease) in current and deferred income taxes
    
    
    1,074,777
    
    
    
    (5,578,454
    )Other accruals and prepaids, net
    
    
    (1,505,180
    )
    
    
    (2,087,713
    )Net cash provided (used) by operations before loan originations and sales
    
    
    10,397,034
    
    
    
    (1,432,789
    )Loans originated for sale
    
    
    (262,685,230
    )
    
    
    (867,053,825
    )Sales of loans originated for sale or transferred from held for investment
    
    
    295,661,789
    
    
    
    864,803,843Net cash provided (used) by operations
    
    
    43,373,593
    
    
    
    (3,682,771
    )Cash flows from investing activities:Decrease in interest-bearing deposits with banks
    
    
    (4,581,483
    )
    
    
    (23,188,100
    )Purchases of mortgage-backed and related securities available for sale
    
    
    
    
    
    
    (204,275,726
    )Principal repayments on mortgage-backed and related securities available for sale
    
    
    66,663,922
    
    
    
    147,024,631Principal repayments on mortgage-backed and related securities held for investment
    
    
    28,820,740
    
    
    
    6,767,705Loans originated for investment
    
    
    (347,721,112
    )
    
    
    (265,694,898
    )Loans purchased for investment
    
    
    (12,452,400
    )
    
    
    (40,253,010
    )Loan principal repayments
    
    
    286,990,662
    
    
    
    305,633,879Additions to office properties and equipment
    
    
    (1,706,268
    )
    
    
    (2,285,917
    )Other, net
    
    
    2,990,685
    
    
    
    (1,645,391
    )Net cash provided (used) by investing activities
    
    
    19,004,746
    
    
    
    (77,916,827
    )Cash flows from financing activities:Increase in deposit liabilities
    
    
    18,105,966
    
    
    
    59,930,655Decrease in short-term Federal Home Loan Bank borrowings
    
    
    (7,000,000
    )
    
    
    Decrease in Federal Funds purchased
    
    
    (46,200,000
    )
    
    
    Decrease (increase) in other borrowings
    
    
    (14,778,123
    )
    
    
    1,757,760Increase in advance payments by borrowers for taxes and insurance
    
    
    3,462,861
    
    
    
    3,652,642Dividends paid
    
    
    (3,374,234
    )
    
    
    (2,769,048
    )Other, net
    
    
    (8,294,075
    )
    
    
    15,072,520Net cash provided (used) by financing activities
    
    
    (58,077,605
    )
    
    
    77,644,529Net increase (decrease) in cash and due from banks
    
    
    4,300,734
    
    
    
    (3,955,069
    )Cash and due from banks at beginning of period
    
    
    85,782,964
    
    
    
    88,137,004Cash and due from banks at end of period
    
    $
    90,083,698
    
    
    $
    84,181,935Supplemental disclosures of cash flow information:Interest and dividends received on loans and investments
    
    $
    43,435,154
    
    
    $
    37,290,488Interest paid on deposits and borrowings
    
    
    14,695,675
    
    
    
    18,366,301Income taxes paid
    
    
    7,759,500
    
    
    
    10,907,000Income taxes refunded
    
    
    2,048,436
    
    
    
    119,687Transfer of loans from held for investment to held for sale
    
    
    11,553,378
    
    
    
    24,718,003
 Refer to accompanying Notes to Consolidated Financial Statements. 7




---



##### Table of Contents



Consolidated Statements of Cash Flows
Six months ended June 30, 2004 and 2003 Six Months June 302004
    
    2003(Unaudited)
    
    (Unaudited)Cash flows from operating activities:Net income
    
    $
    18,449,465
    
    
    $
    16,785,097Adjustments to reconcile net income to net cash provided (used) by operations:Provision for loan and real estate losses
    
    
    2,545,792
    
    
    
    329,559Increase in mortgage servicing rights valuation allowance
    
    
    
    
    
    
    2,800,000Net loan costs deferred
    
    
    (798,471
    )
    
    
    (2,551,839
    )Amortization of mortgage servicing rights
    
    
    4,356,107
    
    
    
    19,434,104Other amortization
    
    
    4,587,081
    
    
    
    7,652,048Depreciation
    
    
    2,417,306
    
    
    
    1,939,159Gains on sales of mortgage loans
    
    
    (9,784,036
    )
    
    
    (34,503,469
    )Decrease (increase) in accrued interest receivable
    
    
    (743,717
    )
    
    
    1,392,811Increase (decrease) in accrued interest payable
    
    
    293,821
    
    
    
    (553,687
    )Increase (decrease) in current and deferred income taxes
    
    
    5,335,112
    
    
    
    (1,153,399
    )Other accruals and prepaids, net
    
    
    (5,430,719
    )
    
    
    (3,790,550
    )Net cash provided by operations before loan originations and sales
    
    
    21,227,741
    
    
    
    7,779,834Loans originated for sale
    
    
    (471,747,574
    )
    
    
    (1,500,679,127
    )Sales of loans originated for sale or transferred from held for investment
    
    
    502,024,328
    
    
    
    1,540,044,876Net cash provided by operations
    
    
    51,504,495
    
    
    
    47,145,583Cash flows from investing activities:Decrease (increase) in interest-bearing deposits with banks
    
    
    (6,151,734
    )
    
    
    45,948,135Purchases of mortgage-backed and related securities available for sale
    
    
    (101,835,468
    )
    
    
    (531,315,491
    )Principal repayments on mortgage-backed and related securities available for sale
    
    
    108,765,305
    
    
    
    258,911,669Purchases of mortgage-backed and related securities held for investment
    
    
    (303,767,334
    )
    
    
    Principal repayments on mortgage-backed and related securities held for investment
    
    
    35,982,407
    
    
    
    27,159,627Loans originated for investment
    
    
    (609,049,701
    )
    
    
    (532,169,300
    )Loans purchased for investment
    
    
    (13,740,067
    )
    
    
    (40,253,010
    )Loan principal repayments
    
    
    473,964,002
    
    
    
    586,336,283Additions to office properties and equipment
    
    
    (4,095,554
    )
    
    
    (4,607,852
    )Purchases of mortgage servicing rights
    
    
    (1,348,797
    )
    
    
    Other, net
    
    
    1,826,257
    
    
    
    11,317,278Net cash used by investing activities
    
    
    (419,450,684
    )
    
    
    (178,672,661
    )Cash flows from financing activities:Increase in deposit liabilities
    
    
    137,340,882
    
    
    
    144,663,052Long-term advances from Federal Home Loan Bank
    
    
    311,050,000
    
    
    
    Repayment of long-term Federal Home Loan Bank advances
    
    
    
    
    
    
    (24,350,000
    )Decrease in short-term Federal Home Loan Bank borrowings
    
    
    (40,925,000
    )
    
    
    Decrease in Federal Funds purchased
    
    
    (24,500,000
    )
    
    
    Decrease in other borrowings
    
    
    (21,540,518
    )
    
    
    (1,733,742
    )Increase (decrease) in advance payments by borrowers for taxes and insurance
    
    
    6,922,667
    
    
    
    (3,817,865
    )Purchase of treasury stock
    
    
    (322,866
    )
    
    
    (474,112
    )Dividends paid
    
    
    (6,508,486
    )
    
    
    (5,330,973
    )Other, net
    
    
    1,977,455
    
    
    
    22,269,931Net cash provided by financing activities
    
    
    363,494,134
    
    
    
    131,226,291Net decrease in cash and due from banks
    
    
    (4,452,055
    )
    
    
    (300,787
    )Cash and due from banks at beginning of period
    
    
    94,535,753
    
    
    
    84,482,722Cash and due from banks at end of period
    
    $
    90,083,698
    
    
    $
    84,181,935Supplemental disclosures of cash flow information:Interest and dividends received on loans and investments
    
    $
    83,370,908
    
    
    $
    75,163,352Interest paid on deposits and borrowings
    
    
    27,963,205
    
    
    
    37,544,091Income taxes paid
    
    
    7,946,500
    
    
    
    11,186,400Income taxes refunded
    
    
    2,051,352
    
    
    
    119,687Transfer of loans from held for investment to held for sale
    
    
    29,211,267
    
    
    
    56,033,454
 Refer to accompanying Notes to Consolidated Financial Statements. 8




---



##### Table of Contents



Notes to Consolidated Financial Statements Note 1Principles of Consolidation The consolidated financial statements include the accounts and balances of
First Federal Capital Corp (the Corporation), First Federal Capital Bank (the
Bank), and the Banks wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation. Note 2Basis of Presentation The accompanying interim consolidated financial statements are unaudited
and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles (GAAP). However, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Operating results for the three and six month
periods ended June 30, 2004, may not necessarily be indicative of the results
that may be expected for the entire year ending December 31, 2004. Certain 2003 balances have been reclassified to conform to the 2004
presentation. Note 3Earnings Per Share Basic and diluted earnings per share data are based on the
weighted-average number of common shares outstanding during each period.
Diluted earnings per share is further adjusted for potential common shares that
were dilutive and outstanding during the period. Potential common shares
generally consist of stock options outstanding under the Corporations stock
incentive plans. The dilutive effect of potential common shares is computed
using the treasury stock method. All stock options are assumed to be 100%
vested for purposes of the earnings per share computations. The computation of
earnings per share for the three and six month periods ended June 30, 2004 and
2003, is as follows: Three Months Ended June 302004
    
    2003Diluted
    
    Basic
    
    Diluted
    
    BasicNet income
    
    $
    10,408,248
    
    
    $
    10,408,248
    
    
    $
    8,770,628
    
    
    $
    8,770,628Average common shares issued, net of actual treasury shares
    
    
    22,488,724
    
    
    
    22,488,724
    
    
    
    19,766,629
    
    
    
    19,766,629Potential common shares issued under stock options
(treasury stock method)
    
    
    296,300
    
    
    
    
    
    
    
    211,701
    
    
    
    Average common shares and potential common shares
    
    
    22,785,024
    
    
    
    22,488,724
    
    
    
    19,978,330
    
    
    
    19,766,629Earnings per share
    
    $
    0.46
    
    
    $
    0.46
    
    
    $
    0.44
    
    
    $
    0.44
 Six Months Ended June 302004
    
    2003Diluted
    
    Basic
    
    Diluted
    
    BasicNet income
    
    $
    18,449,465
    
    
    $
    18,449,465
    
    
    $
    16,785,097
    
    
    $
    16,785,097Average common shares issued, net of actual treasury shares
    
    
    22,441,047
    
    
    
    22,441,047
    
    
    
    19,732,813
    
    
    
    19,732,813Potential common shares issued under stock options
(treasury stock method)
    
    
    264,463
    
    
    
    
    
    
    
    234,855
    
    
    
    Average common shares and potential common shares
    
    
    22,705,510
    
    
    
    22,441,047
    
    
    
    19,967,668
    
    
    
    19,732,813Earnings per share
    
    $
    0.81
    
    
    $
    0.82
    
    
    $
    0.84
    
    
    $
    0.85
 9




---



##### Table of Contents



Note 4Contingencies The Corporation and its subsidiaries are engaged in various routine legal
proceedings occurring in the ordinary course of business, which considered
together are believed by management to be immaterial to the consolidated
financial condition and operations of the Corporation. First Cap Holdings, Inc. (FCHI), a Nevada company and wholly-owned
subsidiary of the Bank, has not been subject to taxation in Wisconsin since
FCHIs formation in 1993. FCHI is incorporated in the State of Nevada, which
does not currently impose a corporate income tax. Although the earnings of
FCHI are not currently subject to taxation in the State of Wisconsin, from
time-to-time legislation is proposed which, if adopted, would require combined
income tax returns for entities headquartered in the state and result in
taxation of FCHIs earnings. To date, none of these legislative proposals have
been adopted. In addition, the Wisconsin Department of Revenue (WDR) has
increased its examinations of banking entities in the state and is proposing
that income of out-of-state investment subsidiaries (like FCHI) be allocated to
their parent banks. Indeed, in 2003 the WDR began examinations of a number of
financial institutions, including the Bank, specifically aimed at their
relationships with their investment subsidiaries. The WDR is now taking the
position that some or all investment subsidiary income is allocable to the
parent banks and taxable in Wisconsin and has written to all affected Wisconsin
banks, including the Bank, indicating a willingness to discuss settlements.
While the WDR has indicated settlement terms would depend on individual
situations, the WDR letter indicates that settlement payments would be less
than the tax, interest, and penalties that would be sought based on an
assessment and that some limited future use of investment subsidiaries may be
permitted. The WDR letter further indicates that a number of banks have agreed
to settlements. Management believes the Bank, as well as FCHI, have complied
with the tax rules relating to the income of out-of-state subsidiaries, and
with the private rulings the WDR issued to the Bank in 1993 and 1997 in
connection with its formation and operation of FCHI. While the WDR has
indicated it may repudiate these rulings, the WDR exam has not yet resulted in
an assessment against the Bank. The Bank will oppose an assessment, if any,
and is not currently engaged in any settlement discussion with the WDR. If the WDR is successful in allocating FCHIs income to the Bank, or if
legislation referred to in the previous paragraph were to become law, such
could result in the earnings of FCHI being subject to taxation in the State of
Wisconsin. Furthermore, if the WDR determines that the earnings of FCHI in
open tax years prior to 2004 should have been subject to tax in Wisconsin,
management estimates that the Bank may be subject to a tax obligation of up to
$16.0 million, also net of federal and state tax benefit. This amount includes
an estimate for interest, but excludes any penalties that may be assessed by
the WDR, which could be as high as 25% of the gross assessment. As previously
mentioned, however, the Bank will oppose any assessment related to this issue Note 5Segment Information Reportable SegmentsThe Corporation tracks profitability in six major
areas: (i) residential lending, (ii) commercial real estate lending, (iii)
consumer lending, (iv) education lending, (v) business banking, and (vi)
investment and mortgage-related securities. Residential lending is divided
into two profit centers for segment reporting purposes: (i) a mortgage banking
profit center that is responsible for loan origination, sales of loans in the
secondary market, and servicing of residential loans, and (ii) a residential
loan portfolio that consists of loans held by the Corporation for investment
purposes (loans held for sale are included in the mortgage banking profit
center). This profit center also includes mortgage-backed securities that are
collateralized by loans that were originated by the Corporation. Commercial
real estate lending consists of the Corporations portfolio of multi-family and
non-residential mortgage loans, excluding loans assigned to the business
banking profit center, as well as functions related to the origination and
servicing of such loans. Consumer lending consists of the Corporations second
mortgage, automobile, and other consumer installment loans, excluding loans
assigned to the business banking profit center, as well as functions related to
the origination and servicing of such loans. Education lending consists of the
Corporations portfolio of education loans, as well as functions related to the
origination and servicing of such loans. Business banking consists of the
Corporations portfolio of commercial business loans, including certain
commercial real estate and consumer loans assigned to the business banking
profit center, as well as functions related to the origination and servicing of
such loans. Finally, the Corporations investment and mortgage-related
securities 10




---



##### Table of Contents



portfolio is considered a profit center for segment reporting purposes.
As previously noted, however, mortgage-backed securities collateralized by
loans originated by the Corporation are included in the residential loan profit
center, rather than the investment and mortgage-related securities portfolio. The Corporations extensive branch network, which delivers checking,
savings, certificates of deposit and other financial products and services to
customers, is considered a support department for segment reporting purposes,
as more fully described in a subsequent paragraph. Measurement of Segment Profit (Loss)Management evaluates the after-tax
performance of the Corporations profit centers as if each center were a
separate entityeach with its own earning assets, actual and/or allocated
non-earning assets, and allocated funding resources. Each profit center has
its own interest income, non-interest income, and non-interest expense as
captured by the Corporations accounting systems. Interest expense is
allocated to each profit center according to its use of the Corporations
funding sources, which consist primarily of deposit liabilities, wholesale
borrowings, and equity. In general, all funding sources are allocated
proportionately to each profit center. However, in certain instances specific
funding sources may be matched against specific assets of profit centers. For
example, deposits from business customers are matched against the assets of the
business banking profit center. In addition, wholesale borrowings drawn to
originate or purchase specific assets are matched against the appropriate
profit center. The net cost of operating the Corporations support departments is
allocated to the Corporations profit centers and to the branch network using a
variety of methods deemed appropriate by management. In general, these net
costs are included in the non-interest expense of each profit center. In
addition, certain allocations of revenues and expenses are made between profit
centers when they perform services for each other. Such amounts, however, are
not generally material in nature. The Corporations branch network is considered a support department center
for segment reporting purposes. Community banking fees and revenues are
deducted from the non-interest expense of operating the network (to include an
allocation of net costs from the Corporations other support departments) to
arrive at net costs for the branch network. This net cost is then allocated to
each profit center based on its use of deposit liabilities to fund its
operations. This amount is reported as net cost to acquire and maintain
deposit liabilities and is included as an adjustment to the net interest
income of each profit center. Non-GAAP AdjustmentsFor segment reporting purposes, management makes
certain non-GAAP adjustments and reclassifications to the results of operations
and financial condition of the Corporation that, in managements judgment, more
fairly reflect the performance and/or financial condition of certain of the
Corporations profit centers. Segment Profit (Loss) Statements and Other InformationThe following
table summarizes the profit (loss) and average assets of each of the
Corporations reportable segments for the three and six month periods ended
June 30, 2004 and 2003. In addition to the after-tax performance of profit
centers, management of the Corporation closely monitors the net cost to acquire
and maintain deposit liabilities, which consists principally of the net costs
to operate the Corporations branch network, as previously described. The net
cost to acquire and maintain deposit liabilities was 1.17% and 1.23% of average
deposit liabilities outstanding during the three months ended June 30, 2004 and
2003, respectively. For the six month periods ended June 30, 2004 and 2003,
the net cost to acquire and maintain deposit liabilities was 1.32% and 1.31%,
respectively. 11




---



##### Table of Contents



Three Months Ended June 302004
    
    2003Profit Center
    
    Profit (Loss)
    
    Average Assets
    
    Profit (Loss)
    
    Average AssetsMortgage banking
    
    $
    2,678,633
    
    
    $
    94,238,446
    
    
    $
    4,981,595
    
    
    $
    120,416,498Residential loans
    
    
    1,993,769
    
    
    
    882,283,428
    
    
    
    832,135
    
    
    
    755,003,659Commercial real estate lending
    
    
    2,576,372
    
    
    
    569,180,776
    
    
    
    2,182,477
    
    
    
    527,943,370Consumer lending
    
    
    1,955,467
    
    
    
    553,067,675
    
    
    
    1,345,403
    
    
    
    483,499,330Education lending
    
    
    117,062
    
    
    
    214,709,962
    
    
    
    295,723
    
    
    
    207,836,005Business banking
    
    
    771,242
    
    
    
    537,131,092
    
    
    
    (59,698
    )
    
    
    200,360,697Investment and mortgage-related securities
    
    
    1,839,503
    
    
    
    800,221,113
    
    
    
    (96,070
    )
    
    
    748,981,139Other segments
    
    
    (1,378,904
    )
    
    
    2,037,813
    
    
    
    (166,049
    )
    
    
    1,378,713Subtotal
    
    
    10,553,143
    
    
    
    3,652,870,304
    
    
    
    9,315,515
    
    
    
    3,045,419,411Non-GAAP adjustments
    
    
    (144,895
    )
    
    
    64,129,939
    
    
    
    (544,887
    )
    
    
    33,352,746Net income/total average assets
    
    $
    10,408,248
    
    
    $
    3,717,000,243
    
    
    $
    8,770,628
    
    
    $
    3,078,772,157
 Six Months Ended June 302004
    
    2003Profit Center
    
    Profit (Loss)
    
    Average Assets
    
    Profit (Loss)
    
    Average AssetsMortgage banking
    
    $
    4,317,770
    
    
    $
    87,905,800
    
    
    $
    9,448,170
    
    
    $
    106,825,892Residential loans
    
    
    4,364,952
    
    
    
    884,346,449
    
    
    
    1,916,023
    
    
    
    800,238,436Commercial real estate lending
    
    
    4,537,117
    
    
    
    565,224,449
    
    
    
    4,826,532
    
    
    
    521,764,133Consumer lending
    
    
    3,797,344
    
    
    
    541,820,854
    
    
    
    2,752,848
    
    
    
    477,968,839Education lending
    
    
    175,181
    
    
    
    214,579,153
    
    
    
    584,828
    
    
    
    210,353,317Business banking
    
    
    1,106,357
    
    
    
    527,023,723
    
    
    
    (216,916
    )
    
    
    193,881,309Investment and mortgage-related securities
    
    
    3,201,273
    
    
    
    724,906,521
    
    
    
    (867,685
    )
    
    
    711,873,317Other segments
    
    
    (1,585,926
    )
    
    
    1,963,171
    
    
    
    (297,439
    )
    
    
    1,319,721Subtotal
    
    
    19,914,068
    
    
    
    3,547,770,119
    
    
    
    18,146,360
    
    
    
    3,024,224,963Non-GAAP adjustments
    
    
    (1,464,603
    )
    
    
    45,060,749
    
    
    
    (1,361,263
    )
    
    
    29,613,276Net income/total average assets
    
    $
    18,449,465
    
    
    $
    3,592,830,867
    
    
    $
    16,785,097
    
    
    $
    3,053,838,239
 Note 6Stock-Based Compensation As permitted by GAAP, the Corporation has not adopted the fair value
method of expense recognition for stock-based compensation awards. Rather,
the Corporation records expense relative to stock-based compensation using the
intrinsic value method. Since the intrinsic value of the Corporations stock
options is generally zero at the time of the award, no expense is recorded.
The following table provides pro forma disclosure of the effects of the
Corporations stock incentive plans using the fair value method. Three Months Ended June 30
    
    Six Months Ended June 302004
    
    2003
    
    2004
    
    2003Net income as reported
    
    $
    10,408,248
    
    
    $
    8,770,628
    
    
    $
    18,449,465
    
    
    $
    16,785,097Stock-based compensation, net of tax
    
    
    (183,507
    )
    
    
    (115,179
    )
    
    
    (215,899
    )
    
    
    (259,852
    )Pro forma net income
    
    $
    10,224,741
    
    
    $
    8,655,449
    
    
    $
    18,233,566
    
    
    $
    16,525,245Diluted earnings per share as reported
    
    $
    0.46
    
    
    $
    0.44
    
    
    $
    0.81
    
    
    $
    0.84Pro forma diluted earnings per share
    
    $
    0.45
    
    
    $
    0.43
    
    
    $
    0.80
    
    
    $
    0.82Basic earnings per share as reported
    
    $
    0.46
    
    
    $
    0.44
    
    
    $
    0.82
    
    
    $
    0.85Pro forma basic earnings per share
    
    $
    0.45
    
    
    $
    0.44
    
    
    $
    0.81
    
    
    $
    0.84
 With respect to restricted stock awards, the intrinsic value is generally
equal to the fair value of the Corporations common stock on the date of the
initial contingent award, adjusted retroactively for any changes in the value
of the stock between the initial award date and the final measurement date.
Such value is amortized as expense over the measurement period of the award. 12




---



##### Table of Contents



Note 7Subsequent Event On April 27, 2004, the Corporation entered into a definitive agreement to
be acquired by Associated Banc-Corp (Associated), headquartered in Green Bay,
Wisconsin. The stock and cash transaction is valued at $613 million, including
stock options, based on the closing Associated share price on April 27, 2004.
According to the terms of the agreement, the Corporation will merge into
Associated, with the Corporations shareholders exchanging each share of their
common stock for 0.9525 shares of Associateds common stock (adjusted to
reflect a 3-for-2 stock split effected by Associated and paid to shareholders
on May 12, 2004), an equivalent amount of cash, or a combination thereof. The
agreement provides, however, that the aggregate consideration paid by
Associated must be equal to ten percent (10%) cash and ninety percent (90%)
stock. The transfer will be tax-free to the Corporations shareholders to the
extent they receive Associated common stock. The acquisition has been approved by the boards of directors of each
company and is expected to close during the fourth quarter of 2004, subject to
shareholder approval, regulatory approvals, and various other conditions of
closing. 13




---



##### Table of Contents



Item 2Managements Discussion and Analysis of Financial Condition and Results
of Operations Forward-Looking Statements This report includes certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements
include words and phrases such as will likely result, are expected to,
will continue, is anticipated, is estimated, is projected, intends
to, or similar expressions. Forward-looking statements are based on
managements current expectations. Examples of factors which could cause
future results to differ from managements expectations include, but are not
limited to, the following: general economic and competitive conditions;
legislative and regulatory initiatives; monetary and fiscal policies of the
federal government; general market rates of interest; interest rates on
competing investments; interest rates on funding sources; consumer and business
demand for deposit and loan products and services; consumer and business demand
for other financial services; changes in accounting policies or guidelines; and
changes in the quality or composition of the Corporations loan and investment
portfolios. Readers are cautioned that forward-looking statements are not
guarantees of future performance and that actual results may differ materially
from managements current expectations. Furthermore, management of the
Corporation does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements. Application of Critical Accounting Policies Critical Judgments and EstimatesFor a summary of the Corporations
significant accounting policies, refer to Note 1 of the Corporations Audited
Consolidated Financial Statements included in Part II, Item 8, of its 2003 Form
10-K. Particular attention should be paid to two accounting areas that in
managements judgment, require significant judgments and/or estimates on the
part of management because of the inherent uncertainties surrounding these
areas and/or the subjective nature of the areas. These areas are itemized and
referenced as follows. Mortgage Servicing RightsFor a detailed discussion of the judgments and
estimates relating to the initial recording of and ongoing accounting for
mortgage servicing rights (MSRs), refer to the appropriate section in Note 1
of the Corporations Audited Consolidated Financial Statements, included in
Part II, Item 8, of its 2003 Form 10-K. Additional discussion is also
available in the 2003 Form 10-K Residential Lending section of Part I, Item
1, BusinessLending Activities. Finally, information on the impact mortgage
servicing rights have had on the Corporations financial condition and results
of operations for the three and six month periods ended June 30, 2004 and 2003,
can be found below, in the sections entitled Financial ConditionMortgage
Servicing Rights and Results of OperationsNon-Interest IncomeMortgage
Banking Revenue. Allowance for Losses on Loans and Real EstateFor a detailed discussion
of the judgments and estimates relating to allowances for losses on loans and
real estate, refer to the appropriate section in Note 1 of the Corporations
Audited Consolidated Financial Statements, included in Part II, Item 8, of its
2003 Form 10-K. Additional discussion is also available in the 2003 Form 10-K
Non-Performing and Other Classified Assets section and the Allowances for
Losses on Loans and Real Estate section of Part I, Item 1, BusinessLending
Activities. Finally, information on the impact loss allowances have had on
the Corporations financial condition and results of operations for the three
and six month periods ended June 30, 2004 and 2003, can be found below, in the
sections entitled Financial ConditionNon-Performing Assets and Results of
OperationsProvisions for Loan Losses. New Accounting Standards and PoliciesDuring the six months ended June
30, 2004 and 2003, the Corporation adopted no new accounting standards or
policies that, in managements judgment, had a material impact on its financial
condition or results of operations. However, three new accounting standards
issued during the first six months of 2004, were significant to the financial
services industry as a whole. These standards are itemized in the paragraphs
that follow. 14




---



##### Table of Contents



Staff Accounting Bulletin (SAB) 105, Loan Commitments Accounted for as
Derivative Instruments (SAB 105)During the first quarter of 2004, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
105, Loan Commitments Accounted for as Derivative Instruments. This SAB
addresses the accounting for loan commitments entered into after March 31,
2004, and certain disclosure requirements relevant in the context of mortgage
banking activities. The effects of SAB 105 are not expected to be material to
the operations of the Corporation or its financial position. Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
On March 31, 2004 the Financial Accounting Standards Board (FASB) ratified
the consensus reached by the Emerging Issues Task Force (EITF) in EITF Issue
No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments (Issue 03-1). Issue 03-1 provides guidance to
determine when an investment is considered impaired, whether the impairment is
other than temporary, and the measurement of an impaired loss. The guidance
also includes accounting considerations subsequent to recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. For debt securities that cannot be contractually prepaid or otherwise
settled in a manner in which the investor would not recover substantially all
of its cost, an impairment should be deemed other than temporary if (a) the
investor does not have the ability and intent to hold an investment until a
forecasted recovery of fair value up to the cost of the investment, which in
certain cases may be until maturity, or (b) it is probable that the investor
will be unable to collect all amounts due according to the contractual terms of
the debt security. For equity securities (including cost method investments)
and debt securities that can be contractually prepaid or otherwise settled in a
manner in which the investor would not recover substantially all of its cost,
an impairment should be deemed other than temporary unless (a) the investor has
the ability and intent to hold an investment for a reasonable period of time
sufficient for a forecasted recovery of fair value up to the cost of the
investment, and (b) evidence indicating the cost of the investment is
recoverable within a reasonable period of time and outweighs evidence to the
contrary. Although not presumptive, a pattern of selling investments prior to the
forecasted recovery of fair value may call into question the investors intent.
The guidance for evaluating whether an investment is other-than-temporarily
impaired should be applied in other-than-temporary impairment evaluations made
in reporting periods beginning after June 15, 2004. The disclosures are
effective in annual financial statements for fiscal years ending after December
15, 2003, for investments accounted for under FASB Statements No. 115 and No.
124. The effects of Issue No. 03-1 are not expected to be material to the
operations of the Corporation or its financial position. Financial Accounting Standards Board staff position (FSP) 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003.In May 2004, the FASB issued
FSP 106-2 providing guidance on the accounting effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The
Act, passed by Congress and signed into law on December 8, 2003, establishes a
voluntary prescription drug benefit for eligible participants beginning January
1, 2006, at which time the U.S. Government will also begin to pay a special
subsidy equal to 28% of a retirees covered prescription drug expenses between
$250 and $5,000 (adjusted annually for changes in Medicare per capita
prescription drug costs) to employers who sponsor equivalent plans. In
accordance with FSP 106-2 which prescribes accounting for the Act and is
effective for interim periods beginning after June 15, 2004, the Corporation
has elected to defer including the effects of the Act in any measures of
liabilities and expenses reflected in the Consolidated Financial Statements and
accompanying notes. Clarifying regulations related to the interpretation or
determination of actuarially equivalent plans are still pending. Therefore,
any such effects included in the Corporations financial statements would be
subject to change once final regulations have been issued. The Corporation
does not expect that the Act will have a significant impact on postretirement
liabilities and benefit costs. 15




---



##### Table of Contents



Other Matters On April 27, 2004, the Corporation entered into a definitive agreement to
be acquired by Associated Banc-Corp (Associated), headquartered in Green Bay,
Wisconsin. The stock and cash transaction is valued at $613 million, including
stock options, based on the closing Associated share price on April 27, 2004.
According to the terms of the agreement, the Corporation will merge into
Associated, with the Corporations shareholders exchanging each share of their
common stock for 0.9525 shares of Associateds common stock (adjusted to
reflect a 3-for-2 stock split effected by Associated and paid to shareholders
on May 12, 2004), an equivalent amount of cash, or a combination thereof. The
agreement provides, however, that the aggregate consideration paid by
Associated must be equal to ten percent (10%) cash and ninety percent (90%)
stock. The transfer will be tax-free to the Corporations shareholders to the
extent they receive Associated common stock. The acquisition has been approved by the boards of directors of each
company and is expected to close during the fourth quarter of 2004, subject to
shareholder approval, regulatory approvals, and various other conditions of
closing. Results of Operations Quarter OverviewThe Corporations net income for the three months ended
June 30, 2004, was $10.4 million or $0.46 per diluted share compared to $8.8
million or $0.44 in the same period last year. These amounts represented a
return on average assets of 1.12% and 1.14%, respectively, and a return on
average equity of 15.15% and 16.25%, respectively. The increase in net income from 2003 to 2004 was primarily attributable to
a $9.6 million increase in net interest income and a $1.3 million increase in
community banking revenue. These developments were offset partly by a $5.0
million increase in non-interest expense, a $2.2 million decrease in mortgage
banking revenue, a $670,000 increase in provision for loan losses, and a $1.6
million increase in income tax expense. Six Month OverviewThe Corporations net income for the six months ended
June 30, 2004, was $18.4 million or $0.81 per diluted share compared to $16.8
million or $0.84 in the same period last year. These amounts represented a
return on average assets of 1.03% and 1.10%, respectively, and a return on
average equity of 13.30% and 15.81%, respectively. The increase in net income from 2003 to 2004 was primarily attributable to
a $19.1 million increase in net interest income and a $2.8 million increase in
community banking revenue. These developments were offset in large part by an
$11.1 million increase in non-interest expense, a $6.1 million decrease in
mortgage banking revenue, a $1.9 million increase in provision for loan losses,
and a $1.3 million increase in income tax expense. The following paragraphs discuss the aforementioned changes in more detail
along with other changes in the components of net income during the three and
six month periods ended June 30, 2004 and 2003 . Net Interest IncomeNet interest income increased by $9.6 million or
nearly 52% and by $19.1 million or almost 52% during the three and six month
periods ended June 30, 2004, as compared to the same periods in the previous
year. The improvement was due in part to the fact that the Corporations
average interest-earning assets increased by $565 million or 19.9% and by $466
million or 16.5%, respectively, between these periods. The principal source of
this growth occurred in the Corporations commercial real estate loans,
mortgage-related securities, commercial business loans, consumer loans, and
single-family mortgage loans. This growth was largely funded by increases in
money market deposit accounts and Federal Home Loan Bank (FHLB) term
advances. Also contributing to the increase in net interest income in both the three
and six months ended June 30, 2004, was a significant improvement in interest
rate spread. The Corporations interest rate spread improved from 2.13% and
2.15% during the three and six month periods ended June 30, 2003, respectively,
to 3.05% and 3.15% during the same periods in 2004, respectively. These
improvements were caused primarily by the maturity of high- 16




---



##### Table of Contents



cost certificates of deposit during the last half of 2003, as well as the
prepayment of high-cost FHLB advances late in the third quarter of 2003. These
advances were replaced with lower-cost advances drawn to fund the purchase of
CMOs during the first quarter of 2004. For additional discussion, refer to
Financial ConditionFHLB Advances. Management expects market interest rates to trend higher during the
remainder of 2004 as economic conditions improve but does not expect this
movement to be dramatic. As a result, management believes the Corporation will
be able to maintain its interest rate spread at or near the level experienced
in the most recent quarter. However, there can be no assurances. The following tables set forth information regarding the average balances
of the Corporations assets, liabilities, and equity, as well as the interest
earned or paid and the average yield or cost of each. The information is based
on daily average balances during the three and six month periods ended June 30,
2004 and 2003. Three Months Ended June 30, 2004
    
    Three Months Ended June 30, 2003Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Dollars in thousands
    
    Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    CostInterest-earning assets:Single-family mortgage loans
    
    $
    856,083
    
    
    $
    10,793
    
    
    
    5.04
    %
    
    $
    757,939
    
    
    $
    9,889
    
    
    
    5.22
    %Commercial real estate loans
    
    
    782,921
    
    
    
    11,588
    
    
    
    5.92
    
    
    
    562,753
    
    
    
    9,507
    
    
    
    6.76Consumer loans
    
    
    613,325
    
    
    
    9,321
    
    
    
    6.08
    
    
    
    515,841
    
    
    
    8,615
    
    
    
    6.68Education loans
    
    
    203,362
    
    
    
    1,699
    
    
    
    3.34
    
    
    
    197,798
    
    
    
    1,932
    
    
    
    3.91Commercial business loans
    
    
    174,923
    
    
    
    2,257
    
    
    
    5.16
    
    
    
    66,048
    
    
    
    849
    
    
    
    5.15Total loans
    
    
    2,630,614
    
    
    
    35,658
    
    
    
    5.42
    
    
    
    2,100,379
    
    
    
    30,792
    
    
    
    5.86Mortgage-backed and related securities
    
    
    702,864
    
    
    
    6,068
    
    
    
    3.45
    
    
    
    588,616
    
    
    
    4,619
    
    
    
    3.14Interest-bearing deposits with banks
    
    
    10,640
    
    
    
    35
    
    
    
    1.32
    
    
    
    94,713
    
    
    
    305
    
    
    
    1.29Other earning assets
    
    
    60,998
    
    
    
    892
    
    
    
    5.85
    
    
    
    56,325
    
    
    
    897
    
    
    
    6.37Total interest-earning assets
    
    
    3,405,116
    
    
    
    42,654
    
    
    
    5.01
    
    
    
    2,840,033
    
    
    
    36,612
    
    
    
    5.16Non-interest-earning assets:Office properties and equipment
    
    
    54,640
    
    
    
    
    
    
    
    
    
    
    
    37,776Other assets
    
    
    257,244
    
    
    
    
    
    
    
    
    
    
    
    200,963Total assets
    
    $
    3,717,000
    
    
    
    
    
    
    
    
    
    
    $
    3,078,772Interest-bearing liabilities:Regular savings accounts
    
    $
    249,933
    
    
    $
    155
    
    
    
    0.25
    %
    
    $
    179,583
    
    
    $
    112
    
    
    
    0.25
    %Checking accounts
    
    
    190,199
    
    
    
    274
    
    
    
    0.58
    
    
    
    139,991
    
    
    
    129
    
    
    
    0.37Money market accounts
    
    
    551,678
    
    
    
    1,752
    
    
    
    1.27
    
    
    
    242,016
    
    
    
    472
    
    
    
    0.78Certificates of deposit
    
    
    1,274,381
    
    
    
    8,316
    
    
    
    2.61
    
    
    
    1,430,761
    
    
    
    12,266
    
    
    
    3.43Total interest-bearing deposits
    
    
    2,266,192
    
    
    
    10,497
    
    
    
    1.85
    
    
    
    1,992,351
    
    
    
    12,977
    
    
    
    2.61FHLB advances
    
    
    642,052
    
    
    
    3,830
    
    
    
    2.39
    
    
    
    378,468
    
    
    
    5,059
    
    
    
    5.35Other borrowings
    
    
    55,008
    
    
    
    220
    
    
    
    1.60
    
    
    
    20,835
    
    
    
    79
    
    
    
    1.52Total interest-bearing liabilities
    
    
    2,963,252
    
    
    
    14,548
    
    
    
    1.96
    
    
    
    2,391,654
    
    
    
    18,114
    
    
    
    3.03Non-interest-bearing liabilities:Non-interest-bearing deposits
    
    
    436,203
    
    
    
    
    
    
    
    
    
    
    
    430,687Other liabilities
    
    
    42,750
    
    
    
    
    
    
    
    
    
    
    
    40,603Total liabilities
    
    
    3,442,204
    
    
    
    
    
    
    
    
    
    
    
    2,862,945Stockholders equity
    
    
    274,796
    
    
    
    
    
    
    
    
    
    
    
    215,828Total liabilities and stockholders equity
    
    $
    3,717,000
    
    
    
    
    
    
    
    
    
    
    $
    3,078,772Net interest income
    
    
    
    
    
    $
    28,106
    
    
    
    
    
    
    
    
    
    
    $
    18,499Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.05
    %
    
    
    
    
    
    
    
    
    
    
    2.13
    %Net interest income as a percent of average
earning assets
    
    
    
    
    
    
    
    
    
    
    3.30
    %
    
    
    
    
    
    
    
    
    
    
    2.61
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    114.91
    %
    
    
    
    
    
    
    
    
    
    
    118.75
    %
 17




---



##### Table of Contents



Six Months Ended June 30, 2004
    
    Six Months Ended June 30, 2003Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    CostDollars in thousandsInterest-earning assets:Single-family mortgage loans
    
    $
    850,472
    
    
    $
    21,994
    
    
    
    5.17
    %
    
    $
    787,433
    
    
    $
    20,543
    
    
    
    5.22
    %Commercial real estate loans
    
    
    778,192
    
    
    
    23,157
    
    
    
    5.95
    
    
    
    545,367
    
    
    
    19,683
    
    
    
    7.22Consumer loans
    
    
    599,590
    
    
    
    18,404
    
    
    
    6.14
    
    
    
    510,423
    
    
    
    17,276
    
    
    
    6.77Education loans
    
    
    204,401
    
    
    
    3,345
    
    
    
    3.27
    
    
    
    200,328
    
    
    
    3,919
    
    
    
    3.91Commercial business loans
    
    
    168,847
    
    
    
    4,306
    
    
    
    5.10
    
    
    
    70,316
    
    
    
    1,797
    
    
    
    5.11Total loans
    
    
    2,601,502
    
    
    
    71,205
    
    
    
    5.47
    
    
    
    2,113,868
    
    
    
    63,217
    
    
    
    5.98Mortgage-backed and related securities
    
    
    613,657
    
    
    
    10,989
    
    
    
    3.58
    
    
    
    507,201
    
    
    
    8,098
    
    
    
    3.19Interest-bearing deposits with banks
    
    
    10,311
    
    
    
    67
    
    
    
    1.30
    
    
    
    143,909
    
    
    
    867
    
    
    
    1.20Other earning assets
    
    
    61,355
    
    
    
    1,853
    
    
    
    6.04
    
    
    
    56,106
    
    
    
    1,588
    
    
    
    5.66Total interest-earning assets
    
    
    3,286,825
    
    
    
    84,115
    
    
    
    5.12
    
    
    
    2,821,083
    
    
    
    73,771
    
    
    
    5.23Non-interest-earning assets:Office properties and equipment
    
    
    55,525
    
    
    
    
    
    
    
    
    
    
    
    37,229Other assets
    
    
    250,481
    
    
    
    
    
    
    
    
    
    
    
    195,526Total assets
    
    $
    3,592,831
    
    
    
    
    
    
    
    
    
    
    $
    3,053,838Interest-bearing liabilities:Regular savings accounts
    
    $
    249,186
    
    
    $
    309
    
    
    
    0.25
    %
    
    $
    172,709
    
    
    $
    214
    
    
    
    0.25
    %Checking accounts
    
    
    186,247
    
    
    
    488
    
    
    
    0.52
    
    
    
    136,605
    
    
    
    211
    
    
    
    0.31Money market accounts
    
    
    521,034
    
    
    
    3,234
    
    
    
    1.24
    
    
    
    240,650
    
    
    
    992
    
    
    
    0.82Certificates of deposit
    
    
    1,283,796
    
    
    
    16,837
    
    
    
    2.62
    
    
    
    1,446,947
    
    
    
    25,217
    
    
    
    3.49Total interest-bearing deposits
    
    
    2,240,262
    
    
    
    20,868
    
    
    
    1.86
    
    
    
    1,996,911
    
    
    
    26,634
    
    
    
    2.67FHLB advances
    
    
    572,076
    
    
    
    6,902
    
    
    
    2.41
    
    
    
    383,609
    
    
    
    10,187
    
    
    
    5.31Other borrowings
    
    
    61,221
    
    
    
    487
    
    
    
    1.59
    
    
    
    19,230
    
    
    
    169
    
    
    
    1.76Total interest-bearing liabilities
    
    
    2,873,560
    
    
    
    28,257
    
    
    
    1.97
    
    
    
    2,399,750
    
    
    
    36,990
    
    
    
    3.08Non-interest-bearing liabilities:Non-interest-bearing deposits
    
    
    401,826
    
    
    
    
    
    
    
    
    
    
    
    397,445Other liabilities
    
    
    40,108
    
    
    
    
    
    
    
    
    
    
    
    44,284Total liabilities
    
    
    3,315,494
    
    
    
    
    
    
    
    
    
    
    
    2,841,479Stockholders equity
    
    
    277,338
    
    
    
    
    
    
    
    
    
    
    
    212,359Total liabilities and stockholders equity
    
    $
    3,592,831
    
    
    
    
    
    
    
    
    
    
    $
    3,053,838Net interest income
    
    
    
    
    
    $
    55,858
    
    
    
    
    
    
    
    
    
    
    $
    36,780Interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.15
    %
    
    
    
    
    
    
    
    
    
    
    2.15
    %Net interest income as a percent of average
earning assets
    
    
    
    
    
    
    
    
    
    
    3.40
    %
    
    
    
    
    
    
    
    
    
    
    2.61
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    114.38
    %
    
    
    
    
    
    
    
    
    
    
    117.56
    %
 Provision for Loan LossesProvision for loan losses was $809,000 and
$139,000 during the three months ended June 30, 2004 and 2003, respectively.
It was $2.4 million and $518,000 during the six month periods ended as of the
same dates, respectively. During the first quarter of 2004, the Corporation
charged-off $642,000 related to a $2.6 million loan on a hotel property located
in the Minneapolis-St. Paul area, as well as a $385,000 loan to another
financial institution, which was deemed insolvent during the period. During the second quarter of 2004, the Corporation recorded $330,000 in
provisions over-and-above its actual charge-off activity. These additional
provisions were recorded to maintain the Corporations allowance for loan
losses at a level deemed appropriate by management, and were considered prudent
in light of significant growth in the Corporations loans held for investment
in recent periods, including an increased mix of higher-risk consumer loans,
commercial real estate loans, and commercial business loans. On an annualized
basis, net charge-offs were 0.08% and 0.16% of average loans outstanding during
the three and six month periods in 2004, respectively. These amounts compared
to 0.12% and 0.11% during the same periods in 2003. As of June 30, 2004 and December 31, 2003, the Corporations allowance for
loan losses was $14.2 million and $13.9 million, respectively, or 0.54% and
0.55% of loans held for investment, respectively. The allowance for loan
losses was 158% and 145% of non-accrual loans as of the same dates,
respectively. Although management believes that the Corporations present
level of allowance for loan losses is adequate, there can be no assurance that
future adjustments to the allowance will not be necessary, which could
adversely affect the Corporations results of operations. For additional
discussion, refer to Financial ConditionNon-Performing Assets. 18




---



##### Table of Contents



Non-Interest IncomeNon-interest income for the three month period ended
June 30, 2004 and 2003, was $19.7 million and $20.5 million, respectively.
These amounts represented 41% and 53% of the Corporations total revenue during
such periods. Non-interest income for the six month periods ending as of the
same dates were $35.3 million and $38.4 million, respectively, or 39% and 51%
of total revenue, respectively. The following paragraphs discuss the principal
components of non-interest income and the primary reasons for their changes
from 2003 to 2004. Community Banking RevenueCommunity banking revenue increased by $1.3
million or 13.2% and by $2.8 million or 14.9% during the three and six months
ended June 30, 2004, respectively, as compared to the same periods in the
previous year. The following table shows the Corporations community banking
revenue for the three and six month periods ended June 30, 2004 and 2003. Three Months Ended June 30
    
    Six Months Ended June 30Dollars in thousands
    
    2004
    
    2003
    
    2004
    
    2003Overdraft fees
    
    $
    5,780
    
    
    $
    5,050
    
    
    $
    10,897
    
    
    $
    9,433ATM and debit card fees
    
    
    3,518
    
    
    
    2,924
    
    
    
    6,544
    
    
    
    5,471Account service charges
    
    
    712
    
    
    
    587
    
    
    
    1,444
    
    
    
    1,208Other fee income
    
    
    452
    
    
    
    416
    
    
    
    889
    
    
    
    825Total deposit account revenue
    
    
    10,462
    
    
    
    8,977
    
    
    
    19,774
    
    
    
    16,937Consumer loan insurance premiums and commissions
    
    
    42
    
    
    
    287
    
    
    
    186
    
    
    
    457Other consumer loan fees
    
    
    124
    
    
    
    79
    
    
    
    223
    
    
    
    185Total consumer loan revenue
    
    
    166
    
    
    
    366
    
    
    
    409
    
    
    
    642Tax-deferred annuity commissions
    
    
    183
    
    
    
    330
    
    
    
    450
    
    
    
    671Retail brokerage commissions
    
    
    565
    
    
    
    375
    
    
    
    1,056
    
    
    
    627Total investment services revenue
    
    
    748
    
    
    
    705
    
    
    
    1,506
    
    
    
    1,298Total community banking revenue
    
    $
    11,376
    
    
    $
    10,048
    
    
    $
    21,690
    
    
    $
    18,876
 Deposit account revenue increased by $1.5 million or 16.5% during the
three months ended            June 30, 2004, as compared to the same period in the
previous year. This increase was due in part to a $730,000 or 14.5% increase
in overdraft fees, a $594,000 or 20.3% increase in ATM and debit card fees, and
a $125,000 or 21.3% increase in account service charges. These increases were
due in part to an 8.8% growth in the number of checking accounts serviced by
the Corporation. Also contributing was an increase in per-item charges,
changes in charging routines for certain services, and the impact of the
Liberty Bancshares, Inc. (LBI) acquisition during the fourth quarter of 2003. Consumer loan revenue declined by $200,000 or 55% during the three months
ended June 30, 2004, as compared to the same period in the previous year. The
Corporations principal sources of consumer loan revenue consist of sales of
credit life and disability insurance policies to consumer loan customers. The
decline in consumer loan revenue during the three months ended June 30, 2004,
was due in part to an adjustment related to a payable account for consumer
insurance premiums and commissions. Also contributing was increased losses on
insurance claims. The Banks wholly-owned reinsurance subsidiary, FRI,
assumes the first level of risk on these credit life and disability policies. Investment services revenue increased by $43,000 or 6.1% during the three
months ended June 30, 2004, as compared to the same period in the previous
year. The Corporations principal sources of investment services revenue
consist of commissions from sales of tax-deferred annuities, mutual funds, and
other debt and equity securities. The increase in investment services revenue
was due primarily to higher commissions from sales of mutual funds and other
equity investments caused in part by an increase in the number of registered
representatives in the Corporations offices. Also contributing was an
improved equity market in 2003 and 2004. The combination of these events
contributed to an increase in investor confidence and in their preference for
these product offerings. This development was partially offset by a decline in
commissions from sales of tax-deferred annuities, caused primarily by a general
decline in market interest rates that made tax-deferred annuities less
attractive to the Corporations customers. The explanations for the changes in community banking revenue for the six
month periods ended June 30, 2004 and 2003, were substantially the same as
those given in previous paragraphs. 19




---



##### Table of Contents



Mortgage Banking RevenueMortgage banking revenue decreased by $2.2
million or 22.5% and by $6.1 million or over 30% during the three and six
months ended June 30, 2004, respectively, as compared to the same periods in
the previous year. The following table shows the Corporations mortgage
banking revenue for the three and six month periods ended June 30, 2004 and
2003. Three Months Ended June 30
    
    Six Months Ended June 30Dollars in thousands
    
    2004
    
    2003
    
    2004
    
    2003Gross servicing fees
    
    $
    2,836
    
    
    $
    2,631
    
    
    $
    5,741
    
    
    $
    5,155Mortgage servicing rights amortization
    
    
    (2,566
    )
    
    
    (10,739
    )
    
    
    (4,356
    )
    
    
    (19,434
    )Mortgage servicing rights valuation (loss) recovery
    
    
    631
    
    
    
    (1,000
    )
    
    
    
    
    
    
    (2,800
    )Total loan servicing fees, net
    
    
    901
    
    
    
    (9,108
    )
    
    
    1,385
    
    
    
    (17,080
    )Gains on sales of mortgage loans
    
    
    6,025
    
    
    
    18,393
    
    
    
    9,784
    
    
    
    34,503Other mortgage-related income
    
    
    724
    
    
    
    582
    
    
    
    1,155
    
    
    
    957Total mortgage banking revenue
    
    $
    7,650
    
    
    $
    9,867
    
    
    $
    12,324
    
    
    $
    18,380
 Gross servicing fees increased by $205,000 or 7.8% during the three months
ended June 30, 2004, as compared to the same period in the previous year. This
increase was due primarily to $338 million or 10.9% growth in average loans
serviced for others, compared to the year-ago period. This growth was caused
primarily by an increase in conversions by borrowers of adjustable-rate
mortgage loans into fixed-rate loans. Upon conversion, such loans are
generally sold in the secondary market and the Corporation retains the
servicing. Also contributing to the growth during the first quarter of 2004,
the Corporation purchased mortgage servicing rights (MSRs) related to $150
million in mortgage loans. Such loans consisted principally of fixed-rate,
residential mortgage loans on properties located in Iowa. Amortization of mortgage servicing rights was $2.6 million and $10.7
million during the three months ended June 30, 2004 and 2003, respectively.
The decline in the most recent period was attributed principally to a decrease
in prepayment activity that coincided with a decline in loan refinance activity
relative to the same period in the previous year. Furthermore, with market
interest rates at historically low levels in 2003, loan prepayment activity was
dramatically higher during the three months ended June 30, 2003, as borrowers
refinanced older, higher-rate residential mortgage loans, into lower-rate
loans. If interest rates remain where they are or rise, the Corporation will
most likely continue to experience lower levels of amortization on its MSRs as
a result of reduced levels of loan prepayment activity. Such amortization,
however, will most likely be offset by lower levels of gains on sales of
mortgage loans, as described in a subsequent paragraph. During the three months ended June 30, 2004, the Corporation recaptured
$631,000 in its valuation allowance for mortgage servicing rights. This
allowance had been established in previous periods as a result of declining
mortgage rates. The recapture was principally the result of recent increases
in mortgage rates, which lowered market expectations for future prepayment
activity. The balance in the valuation allowance was zero at June 30, 2004.
It should be noted, however, if market interest rates decline in the future the
Corporation may be exposed to unfavorable valuation adjustments against its
portfolio of MSRsprimarily because of increases in market expectations for
future prepayments. Although management believes that most of the
Corporations loans that prepay are replaced by a new loan to the same customer
or even a different customer (thus preserving the future servicing cash flow),
generally accepted accounting principles (GAAP) requires allowances for
impairment based on fair value which reflects losses resulting from increases
in market expectations for future prepayments to be recorded in the current
period. However, the offsetting gain on the sale of the new loan, if any,
cannot be recorded until the customer actually prepays the old loan and the new
loan is sold in the secondary market. At June 30, 2004 and 2003, loans serviced for others were $3.5 billion and
$3.2 billion, respectively. As of the same dates, mortgage servicing rights
were $40.8 million and $26.2 million, net of the valuation allowance, if any. Gains on sales of mortgage loans decreased by $12.4 million, from $18.4
million during the three months ended June 30, 2003, to $6.0 million during the
same period in 2004. This decrease was principally the result of a decline in
loan originations and sales in the most recent quarter, due to a more favorable
interest rate environment for loan refinance activity in the second quarter of
2003. Loan sales declined from $865 million in the second quarter of 2003 to
$296 million in the second quarter of 2004. In addition, the average gain on
sales of loans 20




---



##### Table of Contents



was 2.13% during the second quarter of 2003 as compared to 2.04% in the
most recent quarter. This decline was caused principally by a narrower spread
between the primary and secondary market for mortgage loans. Market interest rates have increased in recent months. If this trend
continues, management expects the Corporations gains on sales of mortgage
loans to be substantially lower in the near future than they were in the
year-ago periods. The decline in gains, however, may be offset to some degree
by decreased amortization of MSRs, as more fully described in a previous
paragraph. Other mortgage-related income increased by $142,000 or 24.4% during the
three months ended June 30, 2004, as compared to the same period in the
previous year. This increase was due principally to timing of payments to
third-party vendors for loan-closing services. The explanations for the changes in the components of mortgage banking
revenue for the six month periods ended June 30, 2004 and 2003, are
substantially the same as those given in previous paragraphs. Other Non-Interest IncomeOther non-interest income increased by $130,000
or 23.4% and by $167,000 or 14.4% during the three and six month periods ended
June 30, 2004, respectively, as compared to the same periods in the previous
year. The increase in both periods was primarily due to an increase in
earnings on the Corporations bank-owned life insurance policies that were
assumed in the LBI acquisition. Non-Interest ExpenseExcluding the merger-related expenses connected with
the proposed merger with Associated, the Corporation, non-interest expense for
the three months ended June 30, 2004 and 2003, was $28.7 million and $24.8
million, respectively, which was 3.09% and 3.23% of average assets during such
periods, respectively. Non-interest expense for the six months ended June 30,
2004 and 2003 was $57.9 million and $48.0 million, respectively, which was
3.22% and 3.15% of average assets during such periods, respectively (again,
excluding the merger-related expenses). The following paragraphs discuss the
principal components of non-interest expense and the primary reasons for their
changes from 2003 to 2004. Compensation and Employee BenefitsCompensation and employee
benefits increased by $3.3
million or 22.1% during the three months ended June 30, 2004, as compared to
the same period in the previous year. In general, the increase was due to
normal annual merit increases, as well as growth in the number of banking
facilities operated by the Corporation and the resulting increase in the number
of employees. Furthermore, 85 full-time equivalent employees were added during
the fourth quarter of 2003 with the completion of the LBI acquisition. Since
December 31, 2002, the Corporation has increased the number of its banking
facilities from 89 to 95. As of June 30, 2004, the Corporation had 1,400
full-time equivalent employees. This compared to 1,362 and 1,269 as of
December 31, 2003, and June 30, 2003, respectively. Also contributing to the increase in compensation and employee
benefits in 2004 were increased
salaries to employees hired over the past year to support the implementation of
the Corporations business banking product line. During the first quarter of
2003, the Corporation began offering business banking products in its Oshkosh,
Wisconsin, market. In addition, the Corporation began offering business
banking products in the Appleton, Wisconsin, market and Madison, Wisconsin,
market during the six month period ended June 30, 2004. Also contributing was a $1.0 million increase in expenditures for employee
health care, 401(k) savings plan, and employee stock ownership plan (ESOP).
The increase in ESOP costs was primarily attributable to a change in the
Corporations contribution amount under this benefit from 1% of pay to 2.5% of
pay for certain employees which went into effect January 1, 2004. The reasons
for the increases in health care and 401(k) savings plan expenses were similar
to those described in earlier paragraphs. The developments described in the previous paragraphs were partially
offset by a decline in salary expenditures in the Corporations mortgage
banking operations. This event was due primarily to a decline in commission
pay to certain personnel due principally to a decline in originations of
mortgage loan products. Also, restricted stock expense declined $470,000 and
other post employee benefits (OPEB) expense decreased $226,000. The decline
in restricted stock expense was caused by the reversal of the 2004 expense due
to the 21




---



##### Table of Contents



cancellation of the 2004 award (resulting from the proposed Associated
merger), while the decline in OPEB expense was principally caused by an
adjustment to agree benefit payments under the plan to actuary records. Compensation and employee benefits increased by $7.8 million or over 25%
during the six months ended June 30, 2004, as compared to the same period in
the previous year. The explanations for the change between these periods were
substantially the same as those given in previous paragraphs. Occupancy and EquipmentOccupancy and equipment expense increased by
$365,000 or 11.1% and by $819,000 or 12.7% during the three and six months
ended June 30, 2004, as compared to the same periods in the previous year.
These increases were primarily attributable to growth in the number of banking
facilities operated by the Corporation, as well as increases in the number of
full-time equivalent employees and in the number of customers served by the
Corporation. Communications, Postage, and Office SuppliesCommunications, postage,
and office supplies expense increased by $108,000 or 6.4% and by $13,000 or
less than 1% during the three and six months ended June 30, 2004, as compared
to the same periods in the previous year. The increase during the three months
ended June 30, 2004, was caused principally by higher postage and telephone
costs. ATM and Debit Card Transaction CostsATM and debit card transaction costs
increased by $154,000 or 13.1% and by $414,000 or 18.3% during the three and
six months ended June 30, 2004, as compared to the same periods in the
previous year. These increases can be attributed to increased use by the
Corporations customers of ATM and debit card networks, as well as an increase
in the number of ATMs operated by the Corporation. The Corporation currently
operates nearly 140 ATMs in communities located throughout Wisconsin, northern
Illinois, and Minnesota. Advertising and MarketingAdvertising and marketing costs declined
modestly during the most
recent quarter and increased by $92,000 or 5.5% during the six months ended
June 30, 2004, as compared to the same period in the previous year. The
increase during the six month period can be attributed principally to growth in
the number of banking facilities operated by the Corporation, as previously
described, as well as an increase in the number of market areas served by the
Corporation. Amortization of IntangiblesAmortization of intangible assets, which
consists primarily of deposit-based intangibles, increased by $288,000 or over
140% and by $628,000 or over 160% during the three and six months ended June
30, 2004, as compared to the same periods in the previous year. These
increases were attributed to increased amortization of the deposit-based
intangibles recorded in connection with the Corporations acquisition of LBI in
the fourth quarter of 2003. Merger-related expensesMerger-related expenses at the Corporation were
$1.2 million during the three and six months ended June 30, 2004. These
expenditures included investment banking fees, legal fees, accounting fees, and
other professional fees related to proposed Associated merger. There were no
merger-related expenses at the Corporation during the three and six months
ended June 30, 2003. Other Non-Interest ExpenseOther non-interest expense decreased by
$363,000 or 13.2% and increased by $174,000 or 3.5% during the three and six
months ended June 30, 2004, as compared to the same periods in the previous
year. The decline in the three month period was caused by a variety of
factors, the most significant of which was decreased costs related to servicing
of loans for Fannie Mae and FHLB, which declined by $659,000 or almost 60% in
2004. Under the terms of its servicing agreements with these investors, the
Corporation is required to forward a full months interest to the investors
when certain loans are repaid, regardless of the actual date of the loan
payoff. A higher interest rate environment during the second quarter of 2004
decreased prepayment activity in 2004 and resulted in lower prepayment and
refinance activity. This resulted in the amount of loan pay-off interest
remitted to Fannie Mae and FHLB during the second quarter of 2004 to be lower
than the second quarter of 2003. Also contributing was a decline in provision
for customer losses related to customer overdrafts and fraudulent transactions. 22




---



##### Table of Contents



The increase in the six month period comparison was caused by a variety of
factors, the most significant of which was increased costs related to the
disposition of various residential and consumer properties, an increase in bank
insurance costs, and an increase in various professional fees. These
developments were partially offset by a decline in costs related to servicing
of loans for Fannie Mae and FHLB, the reasons for which were similar to those
previously described. Income Tax ExpenseIncome tax expense for the three months ended June 30,
2004 and 2003, was $6.8 million and $5.2 million, respectively, or 39.5% and
37.3% of pretax income, respectively. Income tax expense for the six months
ended June 30, 2004 and 2003, was $11.2 million and $9.9 million, respectively,
or 37.8% and 37.1% of pretax income, respectively. The Corporations effective
tax rate has increased in recent periods due principally to a higher mix of
taxable earnings in the States of Wisconsin, Minnesota, and Illinois, relative
to the State of Nevada, where the Corporation has established a wholly-owned
investment subsidiary, FCHI, and which has no corporate state income tax. Also
contributing was the payment of certain non-deductible merger-related costs
related to the proposed Associated merger. Refer to Note 4 of the
Corporations Unaudited Consolidated Financial Statements, included herein
under Part I, Item I, Financial Statements, for additional discussion
relating to the Corporations tax situation. Segment InformationThe following paragraphs contain a discussion of the
financial performance of each of the Corporations reportable segments
(hereafter referred to as profit centers) for the three and six month periods
ended June 30, 2004 and 2003. Refer to the table in Note 5 of the
Corporations Unaudited Consolidated Financial Statements, included herein
under Part I, Item I, Financial Statements, for a summary of the after-tax
profit (loss) of each of the Corporations profit centers. Mortgage BankingProfits from the Corporations mortgage banking
activities were $2.7 million in the second quarter of 2004 compared to $5.0
million in the same period last year. Year-to-date, profits were $4.3 million
in 2004 compared to $9.4 million in 2003. Loan origination volumes and loan
servicing fees are the primary drivers of performance in this profit center.
In the first six months of 2004, the Corporations mortgage banking operation
originated $759 million in single-family residential loans compared to $1.7
billion in the same period of the previous year. However, these decreases were
partially offset by substantial declines in amortization of MSRs due to a
decline in prepayments in the loan servicing portfolio. Refer to Results of
OperationsNon-Interest Income for additional discussion. Residential LoansProfits from the Corporations residential loan
portfolio increased by $1.2 million or 140% and $2.4 million or 128% during the
three and six month periods ended June 30, 2004, respectively, compared to the
same periods in the previous year. These increases were primarily due to
increases in the interest rate spread. This profit center is funded by a mix
of deposit liabilities and wholesale borrowings. The Corporations average
cost of interest-bearing liabilities declined by 111 basis points between the
six-month period in 2004 and the same period in 2003. In contrast, the yield
on the profit centers single-family residential loans declined by only 5 basis
points between the same periods. During the three months ended June 30, 2004, the average assets assigned
to this profit center were $882 million, a $127 million or 16.9% increase from
the same period in 2003. During the six months ended June 30, 2004, the
average assets assigned to this profit center were $884 million, an $84 million
or 10.5% increase over the same period last year. Refer to Financial
ConditionLoans Held For Investment for additional discussion. Commercial Real Estate LendingProfits from commercial real estate
lending increased by $394,000 or 18.0% over the three months ended June 30,
2004, as compared to the same period in 2003. This improvement was principally
the result of an increase in the profit centers interest rate spread and an
increase in average assets in 2004 compared to 2003. This profit center is
primarily funded by deposit liabilities and, to a lesser extent, by wholesale
borrowings. The Corporations average cost of interest-bearing deposits and
wholesale borrowings declined by 76 basis points and 282 basis points,
respectively, in 2004 compared to 2003. The yield on commercial real estate
loans, however, declined by only 84 basis points between these years. The
decrease in the 23




---



##### Table of Contents



average cost of wholesale borrowings is due in part to the prepayment of
high cost wholesale borrowings during the third quarter of 2003. During the six month period ended June 30, 2004, profits declined by
$289,000 compared to the same period in 2003. This decrease was due in part to
a $642,000 increase in net charge-offs in 2004 compared to the same period in
2003. Average assets increased by $43 million or 8.3% between these same
periods. Consumer LendingProfits from the Corporations consumer lending
activities increased by $610,000 or 45% and $1.0 million or 38% during the
three and six month periods ended June 30, 2004, respectively, as compared to
the same periods in the previous year. These increases were attributable to
increases in the profit centers interest rate spread in the most recent year,
compared to the same timeframe in 2003. This profit center is principally
funded by deposit liabilities and, to a lesser extent, by wholesale borrowings.
The Corporations average cost of interest-bearing deposits and wholesale
borrowings declined by 81 basis points and 281 basis points, respectively, in
the first six months of 2004 compared to the previous year. The yield on
consumer loans, however, declined by only 63 basis points between these same
periods. During the six months ended June 30, 2004, the average assets
assigned to this profit center were $542 million, a $64 million or 13.4%
increase over the same period in the previous year. Education LendingProfits from education lending declined by $179,000 or
60% and $410,000 or 70% during the three and six month periods ended June 30,
2004, respectively, as compared to the same periods in the previous year.
These declines were primarily due to a decrease in this profit centers
interest rate spread in 2004 compared to 2003. During 2004, the average yield
on education loans declined more than the average cost of the funding sources
for the profit center, which consist primarily of money market demand accounts.
Education loans have variable rates. As such, their yield responds quickly to
changes in market interest rates. During the six months ended June 30, 2004, the average assets assigned to
this profit center were $215 million, a $4.2 million or 2.0% increase from the
same period last year. Year-to-date, this profit center has originated $29.1
million in loans in 2004 compared to $27.1 million in 2003. Business BankingProfits from the Corporations business banking
operations increased by $831,000 and $1.3 million for the three month and six
month periods ended June 30, 2004, respectively, as compared to the same period
in the previous year. These increases were largely due to an increase in
average assets. During the six month period ended June 30, 2004, average
assets assigned to this profit center were $527 million, compared to $194
million in same period in 2003. The increase in average assets was primarily
due to the LBI acquisition. Increases in interest rate spread in 2004 compared
to the same periods in 2003 also contributed to the increases in profits. The
results of this profit center include costs associated with the development of
business banking services and the expansion of business banking into additional
geographic markets. Investment and Mortgage-Related SecuritiesProfits from the Corporations
investment securities portfolio were $1.8 million during the three month period
ended June 30, 2004, compared to a loss of $96,000 in the same period in 2003.
On a year-to-date basis, profits were $3.2 million in 2004 compared to a loss
of $868,000 in 2003. These increases were primarily due to an increase in the
profit centers interest rate spread in 2004 compared to 2003. This profit
center is principally funded by deposit liabilities and, to a lesser extent, by
wholesale borrowings. The Corporations average cost of interest-bearing
deposits and wholesale borrowings declined by 81 basis points and 281 basis
points, respectively, in the first six months of 2004 compared to the same
period in the previous year. The yield on investment securities increased by
79 basis points between these same periods due largely to a decline in premium
amortization on collateralized mortgage obligations and a reduction in
overnight investments. During the six months ended June 30, 2004, the average
assets assigned to this profit center were $725 million, a $13 million or 1.8%
increase from the same period last year. Other SegmentsThis segment consists of the parent holding company and
certain of the Banks wholly-owned subsidiaries. The increases in losses for
this segment for the three and six month periods ended June 30, 2004, as
compared to the same periods in the previous year are largely due to $1.2
million in merger-related 24




---



##### Table of Contents



expenses related to the
proposed Associated merger as
discussed in Financial Statements, Note 7Subsequent Events. Non-GAAP AdjustmentsNon-GAAP adjustments were ($145,000) in the second
quarter of 2004 compared to ($545,000) in the second quarter of 2003. This
change was largely due to a reduction in MSR loss provision in 2004, compared
to the same period in 2003. MSR loss provision is included under GAAP, but
ignored in the product profitability model. This development was partially
offset by an increase in the difference between actual net charge-offs used by
the product profitability model and loan loss provision recorded under GAAP. For the six months ended June 30, 2004, these adjustments were ($1.5)
million in 2004 compared to ($1.4) million in 2003. This change was due in
part to higher amortization of goodwill and intangible assets, a decrease in
mortgage loan production, and an increase in the difference between actual net
charge-offs used by the product profitability model and loan loss provision
recorded under GAAP. These developments were partially offset by a reduction
in MSR loss provision, which is included under GAAP, but excluded in the
product profitability model. Net Cost to Acquire and Maintain Deposit LiabilitiesIn addition to the
after-tax performance of the aforementioned profit centers, management of the
Corporation closely monitors the net cost to acquire and maintain deposit
liabilities. The Corporations profit centers are allocated a share of the net
cost to acquire and maintain deposit liabilities according to their
proportionate use of such deposits as a funding source. As such, changes in
the net cost to acquire and maintain deposit liabilities will impact most of
the Corporations profit centers. The net cost to acquire and maintain deposit liabilities was 1.17% and
1.23% of average deposit liabilities outstanding during the three months ended
June 30, 2004 and 2003, respectively. On a year-to-date basis, the net cost
was 1.32% and 1.31%, respectively. Financial Condition OverviewThe Corporations total assets increased by $376 million or
11.4% during the six months ended June 30, 2004. This increase was due
primarily to increases in mortgage-related securities and loans held for
investment. These increases were primarily funded by increases in FHLB
advances and deposit liabilities. Mortgage-Backed and Related SecuritiesThe Corporations aggregate
investment in its mortgage-backed and related securities portfolios increased
by $250 million or almost 65% during the six months ended June 30, 2004.
During this period, the Corporation purchased $305 million in medium-term
collateralized mortgage obligations (CMOs), and $102 million in shorter-term
CMOs. This development was offset in part by the repayment of $145 million in
mortgage-backed and related securities. Loans Held for InvestmentThe Corporations loans held for investment
increased by $113 million or 4.5% during the six months ended June 30, 2004.
During the six months ended June 30, 2004, the Corporation originated $247
million in adjustable-rate single-family mortgage loans, $206 million in
consumer loans (consisting mostly of second mortgages, home equity lines of
credit, and automobile loans), $72.0 million in commercial real estate loans,
$20.1 million in business loans, and $29.1 million in education loans. As a
result of these factors, the Corporation has experienced growth in its loans
held for investment during the six months ended June 30, 2004. Mortgage Servicing RightsThe Corporations mortgage servicing rights,
net of valuation allowances (if any), were $40.8 million and $36.3 million as
of June 30, 2004, and December 31, 2003, respectively. These amounts were
1.18% and 1.10% of the outstanding principal of loans serviced for others for
both periods, respectively, which amounted to $3.5 billion and $3.3 billion at
June 30, 2004, and December 31, 2003, respectively. The valuation allowance
for MSR losses was zero at June 30, 2004, and December 31, 2003. 25




---



##### Table of Contents



Deposit LiabilitiesThe Corporations deposit liabilities increased by
$137 million or 5.4% during the six months ended June 30, 2004. This growth
was predominantly caused by a $120 million or 25% increase in the Corporations
money market accounts. During late 2003, the Corporation introduced a new
money market product with a guaranteed rate of 2% through the end of the year.
Effective January 1, 2004, these accounts were converted to a money market
product with a minimum rate indexed to money fund performance. The rate paid
on these accounts at conversion was 1.50%. Customer balances in money market
accounts was $589 million and $469 million at June 30, 2004, and December 31,
2003, respectively. The Corporations deposit liabilities were also impacted by a $33.4
million or over 75% increase in custodial deposit accounts during the six
months ended June 30, 2004. The Corporation maintains borrowers principal and
interest payments in such accounts on a temporary basis pending their
remittance to the third-party owners of the loans. FHLB AdvancesThe Corporations FHLB advances increased by $270 million
or over 70% during the six months ended June 30, 2004. Additional FHLB
advances were drawn during the first quarter of 2004 to fund the purchase of
$407 million in CMOs, as previously described. Non-Performing AssetsThe Corporations non-performing assets (consisting
of non-accrual loans, real estate acquired through foreclosure or deed-in-lieu
thereof, and real estate in judgment) amounted to $12.2 million or 0.33% of
total assets at June 30, 2004, compared to $13.6 million or 0.41% of total
assets at December 31, 2003. The Corporations allowance for loan and real
estate losses was 118% and 103% of total non-performing assets as of the same
dates, respectively. In addition to non-performing assets, at June 30, 2004, management was
closely monitoring $25.8 million in assets, which it had classified as doubtful
or substandard, but which were performing in accordance with their terms. This
compares to $22.6 million in such assets at December 31, 2003. The increase
from 2003 was due primarily to the classification of four commercial real
estate loans totaling $2.1 million as substandard. Although the loans
classified at June 30, 2004 were performing in accordance with their terms,
management of the Corporation deemed their classification prudent after
consideration of factors such as declines in the valuation of associated
collateral, reductions in occupancy rates, and economic conditions. Management
continues to closely monitor a $2.6 million loan secured by an apartment
complex located in Indiana. Although the borrower is performing in accordance
with the loans original terms, the property has suffered from low occupancy
for an extended period of time. Although management believes it is possible
the Corporation may incur a loss on the future resolution of this problem loan,
such loss is not yet probable nor is it estimable at this time. Liquidity and Capital Resources The Corporations primary sources of funds are deposits obtained through
its branch office network, borrowings from the FHLB and other sources,
amortization, maturity, and prepayment of outstanding loans and investments,
and sales of loans and other assets. During the first six months of 2004, the
Corporation used these sources of funds to fund loan commitments, purchase
mortgage-related securities, cover maturing liabilities and deposit
withdrawals, and pay shareholder dividends. Management believes that the
Corporation has adequate resources to fund all of its obligations or
commitments, that all of its obligations or commitments will be funded by the
required date, and that the Corporation can adjust the rates it offers on
certificates of deposit to retain such deposits in changing interest rate
environments. The Corporations stockholders equity ratio as of June 30, 2004, was
7.72% of total assets. The Corporations long-term goal is to maintain its
stockholders equity ratio at approximately 7.0%, which is consistent with the
Corporations long-term objectives for return on equity of at least 15% per
year and return on assets of at least 1% per year. The Corporations tangible
stockholders equity ratio was 5.40% as of June 30, 2004. The Bank is also required to maintain specified amounts of capital
pursuant to regulations promulgated by the OTS and the FDIC. The Banks
objective is to maintain its regulatory capital in an amount sufficient to be 26




---



##### Table of Contents



classified in the highest regulatory capital category (i.e., as a well
capitalized institution). At June 30, 2004, the Banks regulatory capital
exceeded all regulatory minimum requirements as well as the amount required to
be classified as a well capitalized institution. The Corporation paid cash dividends of $6.5 million and $5.3 million
during the three months ended June 30, 2004 and 2003, respectively.
These amounts equated to dividend payout ratios of 35.3% and 31.8% of the net
income in such periods, respectively. It is the Corporations objective to
maintain its dividend payout ratio in a range of 25% to 35% of net income,
which is consistent with the Corporations long-term earnings and asset growth
rate objectives of 10% per year and a return on equity objective of 15% per
year. However, the Corporations dividend policy and/or dividend payout ratio
will be impacted by considerations such as the level of stockholders equity in
relation to the Corporations stated goal, as previously described, regulatory
capital requirements for the Bank, as previously described, and certain
dividend restrictions in effect for the Bank. Furthermore, unanticipated or
non-recurring fluctuations in earnings may impact the Corporations ability to
pay dividends and/or maintain a given dividend payout ratio. On July 27, 2004, the Corporations Board of Directors declared a regular
quarterly dividend of $0.15 per share payable on September 9, 2004, to
shareholders of record on August 19, 2004. During the six months ended June 30, 2004, the Corporation repurchased
14,352 shares of common stock under its 2000 stock repurchase plan (the 2000
Plan) at a cost of approximately $323,000. As of June 30, 2004, 150,566
shares were still eligible for repurchase under the 2000 plan. In April 2002,
the Corporations Board of Directors adopted another stock repurchase plan (the
2002 Plan) that authorizes the repurchase of additional shares of the
Corporations outstanding common stock. As of June 30, 2004, 1,001,678 shares
were still eligible for repurchase under the 2002 plan. In April 2004, the
Corporations Board of Directors extended the 2000 and 2002 Plans for another
twelve months each. Both the 2000 and 2002 Plans authorize the Corporation to
repurchase shares from time-to-time in open-market transactions as, in the
opinion of management, market conditions warrant. The repurchased shares are
held as treasury stock and will be available for general corporate purposes. During the six month period ended June 30, 2004, the Corporation reissued
15,352 shares of common stock out of its inventory of treasury stock with a
cost basis of approximately $344,000. In general, these shares were issued
upon the exercise of stock options by employees and directors of the
Corporation. 27




---



##### Table of Contents



Item 3Quantitative and Qualitative Disclosures about Market Risk The Corporation manages the exposure of its operations to changes in
interest rates (interest rate risk or market risk) by monitoring its ratios
of interest-earning assets to interest-bearing liabilities within one- and
three-year maturities and/or repricing dates (i.e., its one- and three-year
gaps). Management has sought to control the Corporations one- and
three-year gaps, thereby limiting the affects of changes in interest rates on
its future earnings, by selling substantially all of its long-term, fixed-rate,
single-family mortgage loan production, investing in adjustable-rate
single-family mortgage loans, investing in consumer, education, and commercial
business loans, which generally have shorter terms to maturity and/or floating
rates of interest, and investing in commercial real estate loans, which also
tend to have shorter terms to maturity and/or floating rates of interest. The
Corporation also invests from time-to-time in adjustable-rate and short- and
medium-term fixed-rate CMOs and MBSs. As a result of this strategy, the
Corporations exposure to interest rate risk is significantly impacted by its
funding of the aforementioned asset groups with deposit liabilities and FHLB
advances that tend to have average terms to maturity of less than one year or
carry floating rates of interest. In general, it is managements long-term goal to maintain the
Corporations one-year gap in a range of +/- 30% and its three-year gap in a
range of +/- 10%, although typically the Corporations one- and three-year gaps
will be negative. Management believes this strategy takes advantage of the
fact that market yield curves tend to be upward sloping, which increases the
spread between the Corporations earning assets and interest-bearing
liabilities. Furthermore, management of the Corporation does not believe that
this strategy exposes the Corporation to unacceptable levels of interest rate
risk as evidenced by the fact that the Corporations three-year gap is
generally maintained in a narrow band around zero, which implies that the
Corporation is exposed to little interest rate risk over a three-year horizon.
In addition, it should be noted that for purposes of its gap analysis, the
Corporation classifies its interest-bearing checking, savings, and money market
deposits in the shortest category, due to their potential to reprice. However,
it is the Corporations experience that these deposits do not reprice as
quickly or to the same extent as other financial instruments, especially in a
rising rate environment. In addition, the Corporation classifies certain FHLB
advances that are redeemable prior to maturity (at the option of the FHLB)
according to their redemption dates, which are earlier than their maturity
dates. Although management believes that its asset/liability management
strategies reduce the potential effects of changes in interest rates on the
Corporations operations, material and prolonged increases in interest rates
may adversely affect the Corporations operations because the Corporations
interest-bearing liabilities which mature or reprice within one year are
greater than the Corporations interest-earning assets which mature or reprice
within the same period. Alternatively, material and prolonged decreases in
interest rates may benefit the Corporations operations. The Corporation is also required by the OTS to estimate the sensitivity of
its net portfolio value of equity (NPV) to immediate and sustained changes in
interest rates and to measure such sensitivity on at least a quarterly basis.
NPV is defined as the estimated net present value of an institutions existing
assets, liabilities, and off-balance sheet instruments at a given level of
market interest rates. In general, it is managements goal to limit estimated
changes in the Corporations NPV under specified interest rate scenarios such
that the Corporation will continue to be classified by the OTS as an
institution with minimal exposure to interest rate risk. As of June 30, 2004, the Corporation was in compliance with its management
polices with respect to exposure to interest rate risk. Furthermore, there was
no material change in its interest rate risk exposure since December 31, 2003. 28




---



##### Table of Contents



Item 4Controls and Procedures An evaluation of the Corporations disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the Act) was carried out under the supervision and with the
participation of the Corporations Chief Executive Officer, Acting Chief
Financial Officer, Controller, and several other members of the Corporations
senior management within the 40-day period preceding the filing date of this
quarterly report. The Corporations Chief Executive Officer, Acting Chief
Financial Officer, and Controller concluded that the Corporations disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Corporation in the reports it
files or submits under the Act is (i) accumulated and communicated to the
Corporations management (including the Chief Executive Officer,
Acting Chief
Financial Officer, and Controller) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. In the three and six month periods ended June 30, 2004,
the Corporation did not make any significant changes in, nor take any
corrective actions regarding, its internal controls or other factors that could
significantly affect these controls. 29




---



##### Table of Contents



Part IIOther Information 
 Item 1Legal Proceedings Refer to Note 4 of the Corporations Consolidated Financial Statements. 
 Item 2Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities  (a)
    
    Not applicable(b)
    
    Not applicable(c)
    
    Not applicable(d)
    
    Not applicable(e)
    
    None 
 Item 3Defaults Upon Senior Securities Not applicable. 
 Item 4Submission of Matters to Vote of Security Holders The Corporation held its Annual Meeting of Shareholders on April 21, 2004.
The following matters were voted upon at that meeting: 1. The election of one nominee for the Board of Directors, who will serve
for a three-year term, was voted upon by the Corporations shareholders. The
nominee, whom was elected, is set forth in the table below. The Inspector of
Election certified the following vote tabulations: Nominee
    
    Votes For
    
    Votes WithheldJack C. Rusch
    
    
    20,533,522
    
    
    
    422,046
 2. Approval of the Corporations 2004 Equity Incentive Plan: Votes For
    
    Votes Against
    
    Abstain
    
    Broker Non-Votes13,110,035
    
    
    1,654,650
    
    
    
    554,570
    
    
    
    5,636,313
 
 Item 5Other Information None. 
 Item 6Exhibits and Reports on Form 8-K  a)
    
    Exhibits. Exhibit Number
    
    Description32.1
    
    
    Certification of President
and Chief Executive Officer of First Federal Capital Corp32.2
    
    
    Certification of Senior Vice
President and Acting Chief Financial Officer of First Federal Capital Corp
 30




---



##### Table of Contents



Exhibit Number
    
    Description32.3
    
    
    Certification of Vice
President and Controller of First Federal Capital Corp34.1
    
    
    Section 1350 Certification
signed by President and Chief Executive Officer of First Federal Capital
Corp34.2
    
    
    Section 1350 Certification
signed by Senior Vice President and Acting Chief Financial Officer of
First Federal Capital Corp34.3
    
    
    Section 1350 Certification
signed by Vice President and Controller of First Federal Capital Corp
  b)
    
    Reports on Form 8-K.During the period covered by this report, the Corporation filed the
following report on Form 8-K:Report filed April 21, 2004. The report included a press release
announcing earnings for First Federal Capital Corp for the three months
ended March 31, 2004.Report filed April 21, 2004. The report included a press release
announcing the declaration of an increase in First Federal Capital Corps
regular quarterly cash dividend.Report filed April 21, 2004. The report included a press release
announcing the activation of Michael W. Dosland, Chief Financial Officer,
Treasurer and Senior Vice President for military service.Report filed April 28, 2004. The report included a press release
announcing that First Federal Capital Corp entered into an Agreement and
Plan of Merger with Associated Banc-Corp.Report filed May 12, 2004, 2004. The report included a press release
announcing the appointment of David J. Reinke to Acting Chief Financial
Officer and Senior Vice President. 31




---



##### Table of Contents



Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. FIRST FEDERAL CAPITAL CORP  /s/ Jack C. Rusch
Jack C. Rusch
President and Chief Executive Officer
(duly authorized officer)
    
    August 9, 2004/s/ David J. Reinke
David J. Reinke
Senior Vice President and Acting
Chief Financial Officer
    
    August 9, 2004/s/ Kenneth C. Osowski
Kenneth C. Osowski
Vice President and Controller
    
    August 9, 2004
 32