To Our Shareholders, Customers and Friends:
The directors, officers and staff of QCF Bancorp, Inc. and Queen City Federal
Savings Bank proudly present our annual report to shareholders. This report
represents an exciting and a productive year at Queen City Federal and a
significant year in terms of earnings. We ended the year with a net income of
$2,011,000. This represents a return on average assets of 1.34%. We also ended
the year with record earnings per share of $1.57.
The significance of this years earnings lies in the fact that these results
include a "one time" special FDIC assessment of $686,000 pre-tax. Without the
special assessment, Queen City Federal would have enjoyed another record year in
terms of earnings. We encourage you to read the"Management's Discussion and
Analysis" section of this report for a more complete explanation of your
Company's financial performance.
In the ensuing year, Queen City Federal will continue to pursue its philosophy
of being our region's "local" financial institution. Although we will continue
providing traditional thrift services, we will move ahead with our plan to be
more "bank like". This trend is evidenced by a 12% increase in consumer loans
over the last year and a 40% increase in commercial business loans. We will
continue our commitment to the local community bank concept by promoting local
involvement in the community. I would also like to thank our employees for their
hard work and dedication in making this another successful year at Queen City
Federal.
The directors, officers and staff of Queen City Federal want to thank all of our
stockholders and customers for their confidence and support in our organization
as we endeavor to enhance shareholder value in the year to come.
Sincerely,
Kevin E. Pietrini
President and
Chief Executive officer
<PAGE>
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Data)
At or For the Year Ended
June 30, 1997
--------------------------
1997 1996
Operating Results
Net interest income $ 6,029 6,073
Non interest income 566 480
Non interest expense 3,276 2,687
Net Income 2,011 2,333
Per Share Data
Net income $ 1.57 1.44
Book value 19.23 18.47
Balance Sheet Data
Total assets $ 156,727 150,430
Investment Securities 83,098 89,183
Net loans 61,202 52,361
Deposits 103,681 88,832
Short-term borrowings 22,140 29,264
Stockholders' equity 27,423 29,685
Financial Ratios
Return on average assets 1.34% 1.56%
Return on average equity 7.44 8.06
Net interest margin 4.12 4.25
Average equity to average assets 18.03 19.33
Non-performing assets to total assets .17 .20
Total regulatory capital to risk-adjusted assets27.5838.51
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is provided to assist readers in their understanding of
the consolidated financial statements of QCF Bancorp, Inc. (QCF). This
discussion should be read in conjunction with the consolidated financial
statements and other financial information presented elsewhere in this report.
QCF is the unitary savings and loan holding company for Queen City Federal
Savings Bank (the Bank). The Bank converted from a federally chartered mutual
savings bank to a federally chartered stock savings bank on March 31, 1995.
1
<PAGE>
FIVE-YEAR SELECTED FINANCIAL SUMMARY(1)
(Dollars in Thousands, Year Ended June 30
Except per Share Data)
Operating Results
1997 1996 1995 1994 1993
Interest income $10,703 10,658 8,867 7,558 8,245
Interest expense 4,674 4,585 4,018 3,947 4,322
Net interest income 6,029 6,073 4,849 3,611 3,923
Provision for loan losses 0 0 0 60 240
Non-interest income 566 480 411 416 638
Non-interest expense 3,276 2,687 2,378 2,164 2,014
Income tax expense 1,308 1,533 1,166 734 953
Income before cumulative effect
of change in accounting principle2,0112,3331,715 1,069 1,354
Net income 2,011 2,333 1,715 1,588 1,354
Per Share Data
Net income (1995 - March 31-June 30)$ 1.57 1.44 0.35
Pro forma net income 1.04
Book value 19.23 18.47 17.17
Balance Sheet Data
Total Assets $156,727 150,430146,548 133,135 135,333
Investment securities 83,098 89,183 88,503 85,412 86,950
Net loans 61,202 52,361 45,964 40,810 39,699
Deposits 103,681 88,832113,544 113,091 104,197
Short-term borrowings 22,140 29,264 0 4,190 16,742
Stockholders' equity 27,423 29,685 30,602 13,991 12,404
Financial Ratios
Return on average assets 1.34% 1.56 1.27 0.80(2) 1.04
Return on average equity 7.44 8.06 10.09 8.02 11.54
Average equity to average assets18.03 19.33 12.62 9.94 9.04
(1) QCF Bancorp, Inc. (QCF) completed a public stock offering on March 31,
1995, which generated net proceeds of $17.0 million. QCF purchased all of the
stock of Queen City Federal Savings Bank (the Bank) with a portion of the
conversion proceeds. The information reflected above represents the financial
condition and the results of operations for the consolidated QCF for 1995
through 1997 and only the Bank for 1993 and 1994.
(2) Ratio is based on income before cumulative effect of change in
accounting principle. After including cumulative effect of change in accounting
principle, the return on average assets would be 1.18%.
Results of Operations
QCF's net income of $2.0 million, or $1.57 per share, in fiscal 1997 decreased
$322,000, or 13.8%, below fiscal 1996 net income. The decrease in net income for
fiscal 1997 was attributable to a special assessment by the FDIC of $416,000 net
of taxes offset by an increase is non-interest income.
Return on average assets was 1.34% for fiscal 1997 compared to 1.56% for fiscal
1996 and 1.27% for fiscal 1995.
Net Interest Income
QCF's net income is dependent primarily on its net interest income, which is the
difference between interest earned on securities, loans and other
interest-earning assets (interest income) and interest paid on deposits
2
<PAGE>
and short-term borrowings (interest expense). Net interest margin is calculated
by dividing net interest income by the average interest-earning assets and is
normally expressed as a percentage. Net interest income and net interest margin
are affected by changes in interest rates, the volume and the mix of
interest-earning assets and interest- bearing liabilities, and the level of
non-performing assets.
The following table presents the total dollar amount of interest income and
expense from average interest- earning assets and liabilities and the results
and yields.
<TABLE>
Year Ended June 30
1997 1996 1995
Average Rate/ Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield Balance Interest Yield
(Dollars in Thousands)
Interest-Earning Assets (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable, net (2) $57,087 5,144 9.01% $48,671 4,439 9.12% $ 43,091 3,840 8.91%
Investment securities 84,388 5,385 6.38 90,373 6,011 6.65 82,112 4,842 5.90
Other including cash equivalents 4,749 174 3.66 4,408 208 4.72 5,351 185 3.46
Total interest-earning assets $146,244 10,703 7.32 $142,909 10,658 7.4 130,554 8,867 6.79
Interest-Bearing Liabilities
NOW accounts $8,835 118 1.34 9,255 127 1.37 10,418 139 1.33
Passbooks 23,939 598 2.50 26,084 652 2.50 28,439 711 2.50
Money market accounts 8,765 224 2.55 9,228 235 2.55 10,629 271 2.55
Certificate accounts 52,008 2,925 5.62 52,208 2,900 5.55 55,464 2,624 4.73
Short-term borrowings 21,956 809 3.68 11,980 671 5.60 7,979 273 3.42
Total interest-bearing liabilities $ 115,503 4,674 4.05 108,755 4,585 4.22 112,929 4,018 3.56
Net Interest Income $ 6,029 $ 6,073 $ 4,849
Net Earning Assets $ 30,721 $ 34,154 $ 17,625
Net Yield on Interest-Earning Assets 4.12% 4.25% 3.71%
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities 126.60% 131.40% 115.61%
<FN>
(1) Tax exempt income was not significant; therefore, was not presented on a tax equivalent basis.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and allowance for loan losses.
Average balance includes non-performing loans.
</FN>
</TABLE>
Net interest income was $6.0 million for the fiscal year ended June 30, 1997,
down from $6.1 million in fiscal 1996. This represents a decrease of 0.7% from
fiscal 1996. The decrease in net interest income was due to a slight decrease in
the Bank's net interest margin and average net-earning assets.
The following schedule presents the dollar amount of change in interest income
and interest expense for major components of interest-earning assets and
interest- bearing liabilities. It distinguishes between the increase/decrease
related to higher outstanding balances and that due to the levels and volatility
of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) change in volume multiplied by old rate and (ii) change in rate (i.e.,
changes in rate multiplied by old volume) . The change in interest due to both
volume and rate has been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the change in each.
3
<PAGE>
Year Ended June 30
1997 vs 1996 1996 vs 1995
(Dollars in thousands) Increase(Decrease) Due to
Volume Rate Total Volume Rate Total
Interest-earning assets:
Loans receivable, net $ 760 (55) 705 507 92 599
Investment securities (388) (238) (626) 514 654 1168
Other including cash 15 (49) (34) (37) 60 23
equivalents
Total interest-earning assets $387 (342) 45 984 806 1,790
Interest-bearing liabilities:
NOW accounts $(6) (3) (9) (16) 4 (12)
Passbooks (54) 0 (54) (59) 0 (59)
Money market accounts (11) 0 (11) (36) 0 (36)
Certificate accounts (11) 36 25 (160) 436 276
Short-term borrowings 424 (286) 138 175 223 398
Total interest-bearing
liabilities $342 (253) 89 (96) 663 567
Change in net interest income$ 45 89 44 1,080 143 1,223
In fiscal 1997 the yield on average interest-earning assets decreased by 14
basis points which reduced interest income as compared to fiscal 1996. This was
offset in part by a $ 3.3 million increase in average interest- earning assets
between fiscal years 1997 and 1996. The combined impact (interest rate decrease
and volume increase) caused interest income for fiscal 1997 to increase $45,000
or 0.4%. Interest expense increased $89,000 from fiscal 1996 to 1997. The
increase was due to an increase in average interest-bearing liabilities of $6.7
million or 6.2%,offset by a 17 basis point decrease in interest rates. The
increase in average interest- bearing liabilities was due to a $10.0 million
increase in average short-term borrowings offset by a $3.2 million increase in
deposit accounts.
Provision for Loan Losses
The Bank made no provision for loan losses in fiscal 1997 or 1996. Provision for
loan losses are charged to earnings to maintain the total allowance for loan
losses at a level considered adequate by management to provide for probable loan
losses, based on prior loss experience, volume and type of lending conducted by
the Bank, past due loans in the Bank's loan portfolio and national, regional and
local economic conditions.
Non-interest Income
Non-interest income was $566,000 for fiscal 1997 compared to $480,000 for fiscal
1996. The following table presents major components of non-interest income.
Year Ended June 30
(Dollars in thousands) 1997 1996
Fees and service charges $ 489 438
Other 77 42
Total non-interest income 566 480
4
<PAGE>
The increase of $86,000 or 19.6% in total non-interest income between fiscal
year 1997 and 1996 was primarily due to increased checking and loan fees due to
increased volume in these two areas.
Non-interest Expense
Non-interest expense was $3.4 million for fiscal 1997 compared to $2.7 million
for fiscal 1996. The following table presents the major components of
non-interest expense.
Year Ended June 30
(Dollars in thousands) 1997 1996
Compensation and benefits $1,865 1,712
Occupancy 214 226
Federal deposit insurance premiums 675 240
Advertising 74 76
Other 448 433
Total non-interest expense $3,276 2,687
Total non-interest expense increased $589,000 or 21.9% from fiscal 1996 to
fiscal 1997. The primary cause of the increase was a $435,000 increase in
Federal deposit insurance premiums. Such increase was due to a special
assessment by the FDIC.
Income Taxes
QCF recorded income tax expense of $1.3 million in fiscal 1997 compared to $1.5
million in fiscal 1996. The decrease in income tax expense between 1996 and 1997
is primarily the result of changes in taxable income between the years.
Financial Condition
QCF's total assets at June 30, 1997 were $156.7 million compared to $150.4
million at June 30, 1996. The increase of $6.3 million from 1997 to 1996
reflects fluctuations in levels of deposits and short-term borrowings, which are
responsive to market conditions.
Investment Securities
Investment securities decreased by $6.1 million or 6.8% from fiscal 1996 to
fiscal 1997. The decrease was due to an increase in loan demand. During fiscal
1997, QCF purchased $23.8 million of investment securities and collected
principal from maturities or repayments of $30.5 million.
Cash and Cash Equivalents
Cash and cash equivalents increased by $3.0 million from $4.7 million at June
30, 1996 to $7.8 million at June 30, 1997. The Bank's cash and cash equivalents
fluctuate from period to period depending on liquidity needs and the timing of
purchases of investment securities.
Loans Receivable, Net
Net loans receivable, increased $8.8 million or 16.9% from $52.4 million at June
30, 1996 to $61.2 million at June 30, 1997. The increase reflected increased
mortgage demand, consumer demand for installment loans and business demand for
commercial loans.
5
<PAGE>
Allowance for Loan Losses
In originating loans, the Bank recognizes that credit losses will be experienced
and that the risk of loss will vary with, among other things, the type of loans
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain an adequate
allowance for loan losses based on, among other things, the Bank's historical
loan loss experience, evaluation of economic conditions, regular reviews of
delinquencies and loan portfolio quality. The Bank increases its allowance for
loan losses by charging provisions for loan losses against the Bank's income.
Management will continue to actively monitor the Bank's asset quality and
allowance for loan losses. Management will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowance for losses,
future adjustments may be necessary if economic conditions differ substantially
from the economic conditions in the assumptions used in making the initial
determinations.
Non-Performing Assets
Non-performing assets totaled $262,000 at June 30, 1997 compared to $303,000 at
June 30, 1996.
Non-performing assets are summarized in the following table.
June 30
(Dollars in thousands) 1997 1996 1995 1994 1993
Non-accrual loans $ 225 297 182 43 323
Foreclosed assets 38 6 0 4 44
Total non-performing assets $ 263 303 182 47 367
Non-performing assets to year-end assets .17% .20 .13 .04 .27
Non-performing loans to year-end loans .43 .58 .40 .11 .81
Allowance for loan losses to
Non-performing assets 501 439 755 2,955 358
The non-performing assets reflected above primarily consist of one-to-four
family mortgage loans or consumer loans.
Deposits and Short-term Borrowings
The Bank's deposits increased $14.8 million, or 16.7%, from $88.8 million at
June 30, 1996 to $103.7 million at June 30, 1997. Short-term borrowings, which
consist of sales of securities under agreements to repurchase identical
securities, decreased from $26.3 million at June 30, 1996 to $14.0 million at
June 30, 1997. These changes were primarily due to a switch in funding
liabilities from repurchase agreements to regular deposits.
Capital Adequacy
Stockholders' equity was $27.4 million at June 30, 1997 down from $29.7 million
at June 30, 1996. The decrease was due to the repurchase of stock for the
treasury of $2.8 million and for the stock option trust of $1.9 million offset
primarily by earnings of $2.0 million.
Federal savings institutions are required to satisfy their capital requirements:
(I) a requirement that "tangible capital" equal or exceed 1.5% of adjusted total
assets, (ii) a requirement that core capital" equal or exceed 3.0%
6
<PAGE>
of adjusted total assets, and (iii) a requirement that "risk-based capital"
equal or exceed 8.0% of risk-weighted assets. At June 30, 1997 and 1996, the
Bank met each of the three capital requirements.
Liquidity Management
The Bank is required to maintain average daily balances of liquid assets equal
to 5% of its net withdrawable savings deposits plus short-term borrowings. The
Bank must also maintain average daily balances of short-term liquid assets equal
to 1% of its net withdrawable savings deposits plus short-term borrowings. The
Bank has maintained an average daily liquidity ratio in excess of these
requirements.
The primary investing activities are the origination of loans and the purchase
of securities. During the year ended June 30, 1997, net loans increased $8.8
million while maturities and principal collected on investment securities, net
of purchases totaled $6.7 million.
The primary financing activity is the attraction of deposits and short-term
borrowings. During the year ended June 30, 1997, net deposits and short-term
borrowings increased $7.7 million.
QCF's most liquid assets are cash and cash equivalents, represented by cash and
interest-bearing deposits with banks. The level of these assets is dependent on
the operating, financing, and investing activities during any given period. Cash
and cash equivalents increased $3.0 million to $7.8 million during the year
ended June 30, 1997.
Asset/Liability Management
Net interest income, the primary component of the Bank's net income, is derived
from the difference or "spread" between the yield on interest-earning assets and
the cost of interest-bearing liabilities. The Bank has sought to reduce its
exposure to changes in interest rate by matching more closely the effective
maturities or re-pricing characteristics of its interest-earning assets and
interest-bearing liabilities. The matching of the Bank's assets and liabilities
may be analyzed by examining the extent to which its assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest rate
changes on net portfolio value.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or re-price within that time period. If the Bank's assets
mature or re-price more quickly or to a greater extent than its liabilities, the
Bank's net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. If the Bank's assets mature or reprice more slowly or to a lesser extent
than its liabilities, the Bank's net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. The Bank's policy has been to mitigate
the interest rate risk inherent in the historical savings institution business
of originating long term loans funded by short term deposits by pursuing certain
strategies designed to decrease the vulnerability of its earnings to material
and prolonged changes in interest rates. The Bank has established an Asset and
Liability Management Committee which currently is comprised of the executive
officers of the Bank. This Committee reviews the maturities of the Bank's assets
and liabilities and establishes policies and strategies designed to regulate the
Bank's flow of funds and to coordinate the sources, uses and pricing of such
funds. The first priority in structuring and pricing the Bank a assets and
liabilities is to maintain an acceptable interest rate spread while reducing the
effects of changes in interest rates.
Management's principal strategy in managing the Bank's interest rate risk has
been to maintain short- and intermediate-term assets in its portfolio, including
locally originated adjustable rate mortgage loans. In addition, in managing its
portfolio of investment securities, the Bank seeks to purchase investment
securities that mature on a basis that approximates as closely as possible the
estimated maturities of the Bank's liabilities.
In addition to shortening the average re-pricing period of its assets, the Bank
has sought to lengthen the average maturities of its liabilities by adopting a
tiered pricing program for its certificates of deposits which provides higher
rates of interest on its longer term certificates in order to encourage
depositors to invest in them.
7
<PAGE>
Dividends
QCF has not paid any dividends to stockholders since its incorporation. The
Board of Directors may consider a policy of paying cash dividends to
stockholders in the future. The declaration of dividends are subject to among
other things, QCF's financial condition and earnings, tax considerations,
economic conditions, regulatory restrictions and other factors.
Effects of Inflation
Because QCF's asset and liabilities are, for the most part, liquid in nature,
they are not significantly affected by inflation. Interest rates have a more
significant impact on Queen City Federal's performance than the effect of
inflation. However, the rate of inflation affects operating expenses, such as
employee salaries and benefits, occupancy and equipment changes, and other
overhead expenses.
8
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
QCF Bancorp, Inc.
Virginia, Minnesota
We have audited the accompanying consolidated statement of financial condition
of QCF Bancorp, Inc. and subsidiary (the Company) as of June 30, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of QCF Bancorp, Inc. and subsidiary for the years ended June 30, 1996 and 1995
were audited by other auditors whose report, dated August 20, 1996, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. In our
opinion, the 1997 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QCF Bancorp, Inc.
and subsidiary as of June 30, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
MCGLADREY & PULLEN, LLP
Duluth, Minnesota
August 18, 1997
9
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
Assets June 30, 1997 June 30, 1996
Cash $ 747,733 379,098
Interest-bearing deposits with banks 7,026,683 4,355,895
Cash and cash equivalents 7,774,416 4,734,993
Securities available for sale
(amortized cost of $25,359,674 and
$33,283,046 at June 30, 1997 and 1996 respectively)24,985,627 32,221,800
Securities held to maturity
(estimated market value of $58,334,591 and
$56,811,210 at June 30, 1997 and 1996 respectively)58,112,799 56,961,040
Loans receivable, net 61,202,301 52,361,221
Federal Home Loan Bank stock, at cost 553,900 553,900
Accrued interest receivable 1,310,779 1,223,713
Premises and equipment 424,609 440,736
Deferred tax asset 519,300 731,396
Prepaid expenses and other assets 1,843,672 1,200,724
Total Assets $156,727,403 150,429,523
Liabilities and Stockholders' Equity
Deposits $103,681,490 88,832,424
Short-term borrowings 14,039,794 26,263,736
Federal Home Loan Bank advances 8,100,000 3,000,000
Accrued interest payable 1,071,313 1,013,368
Advance payments made by borrowers
for taxes and insurance 61,675 56,576
Accrued expenses and other liabilities 2,349,845 1,578,622
Total Liabilities 129,304,117 120,744,726
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock; authorized 1,000,000 shares;
issued and outstanding none 0 0
Common stock ($.01 par value): authorized
7,000,000 shares; issued 1,782,750; outstanding
1,426,200 shares in 1997 17,828 17,828
and 1,606,906 in 1996.
Additional paid-in capital 16,665,625 17,003,711
Retained earnings, subject to certain restrictions 20,051,443 18,040,190
Net unrealized loss on securities available for sale (222,745) (636,750)
Unearned employee stock ownership plan shares (1,080,710) (1,183,330)
Unearned management recognition plan shares (746,292) (944,177)
Shares in stock option trust, at exercise price (1,872,071) 0
Treasury stock, at cost, 356,550 shares in 1997
and 175,844 at June 30, 1996 (5,389,792) (2,612,675)
Total Stockholders' Equity 27,423,286 29,684,797
Total Liabilities and Stockholders' Equity $156,727,403 150,429,523
See accompanying notes to consolidated financial statements.
10
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Year Ended June 30
1997 1996 1995
Interest income:
Loans $5,143,815 4,438,865 3,839,927
Securities 5,558,735 6,218,603 5,027,075
Total interest income 10,702,550 10,657,468 8,867,002
Interest expense:
Deposits 3,864,147 3,914,016 3,744,536
Short-term borrowings 809,248 670,600 273,451
Total interest expense 4,673,395 4,584,616 4,017,987
Net interest income 6,029,155 6,072,852 4,849,015
Provision for loan losses 0 0 0
Net interest income after provision
for loan losses 6,029,155 6,072,852 4,849,015
Non-interest income:
Fees and service charges 489,517 437,961 348,887
Other 76,584 42,352 61,646
Total non-interest income 566,101 480,313 410,533
Non-interest expense:
Compensation and benefits 1,865,372 1,711,540 1,423,142
Occupancy 213,910 225,752 224,329
Federal deposit insurance premiums 675,361 240,000 267,537
Advertising 73,683 76,118 60,955
Other 447,676 433,092 402,438
Total non-interest expense 3,276,002 2,686,502 2,378,401
Income before income tax expense and
cumulative effect of change
in accounting principle 3,319,254 3,866,663 2,881,147
Income tax expense 1,308,000 1,533,000 1,166,000
Net income $2,011,254 2,333,663 1,715,147
Earnings per common share $1.57 1.44 0.35
Pro forma earnings per common share 1.04
Weighted average number of shares 1,284,263 1,617,885 1,646,170
See accompanying notes to consolidated financial statements.
11
<PAGE>
<TABLE>
QCF BANCORP, INC. AND SUBDIDIARY
Consolidated Statement of Stockholders' Equity
Unearned
Net Unrealized Employee Unearned
Gain(loss) on Stock Management
Additional Securities Ownership Recognition Stock Total
Common Paid-in Retained Available Plan Plan Option Treasury Stockholders'
Stock Capital Earnings for Sale Shares Shares Trust Stock Equity
--------------------------------------------------------------------------------------
Balance, June 30, 1994 13,991,380 13,991,380
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative effect of change in accounting
for securities available for sale at July 1, 1994 (1,332,311) (1,332,311)
Net Income 1,715,147 1,715,147
Change in net unrealized loss on
securities available for sale 523,922 523,922
Sale of common stock 17,828 16,980,172 16,998,000
Adoption of employee stock ownership plan (1,426,200) (1,426,200)
Earned employee stock ownership plan shares 12,009 120,080 132,089
--------------------------------------------------------------------------------------
Balance, June 30, 1995 17,828 16,992,181 15,706,527 (808,389)(1,306,120) 30,602,027
Net income 2,333,663 2,333,663
Purchase of treasury stock (3,746,557)(3,746,557)
Adoption of management recognition plan (41,291) (1,092,591) 1,133,882 0
Amortization of management recognition plan 148,414 148,414
Change in net unrealized loss on securities available for sale 171,639 171,639
Earned employee stock ownership plan shares 52,821 122,790 175,611
--------------------------------------------------------------------------------------
Balance, June 30, 1996 17,828 17,003,711 18,040,190 (636,750)(1,183,330)(944,177) (2,612,675) 29,684,797
Net income 2,011,253 2,011,253
Purchase of treasury stock (2,777,117)(2,777,117)
Purchase of stock for stock option trust (366,969) (1,872,071) (2,239,040)
Amortization of management recognition plan 197,885 197,885
Change in net unrealized loss on securities available for sale 414,005 414,005
Earned employee stock ownership plan shares 28,883 102,620 131,503
--------------------------------------------------------------------------------------
Balance, June 30, 1997 $17,828 16,665,625 20,051,443 (222,745)(1,080,710)(746,292)(1,872,071)(5,389,792)27,423,286
See accompanying notes to consolidated financial statements
</TABLE>
12
<PAGE>
<TABLE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year ended June 30
1997 1996 1995
Operating activities:
<S> <C> <C> <C>
Net income $ 2,011,254 2,333,663 1,715,147
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 91,524 95,931 110,081
Federal Home Loan Bank stock dividend 0 (10,900) 0
Amortization of net premiums on securities 52,777 16,572 281,039
(Increase)decrease in accrued interest receivable (87,066) 36,187 (347,377)
Increase in accrued interest payable 57,945 119,501 153,985
Increase(decrease) in accrued expenses and other liabilities 229,422 (205,767) (221,470)
(Decrease)increase in deferred income taxes (105,100) 23,300 15,500
Amortization of unearned ESOP shares 175,503 175,611 132,089
Amortization of MRP 197,885 148,414 0
( Increase)decrease in other assets (68,842) (105,376 673,610
Net cash provided by operating activities 2,555,302 2,627,136 2,512,604
Investing activities:
Proceeds from maturities and principal collected
on securities held to maturity 22,597,122 51,083,659 34,800,123
Proceeds from maturities and principal collected
on securities available for sale 7,873,050 3,784,710 2,900,813
Purchases of securities held to maturity (23,751,337 (55,272,070) (41,138,736)
Purchases of securities available for sale 0 0 (1,287,717)
Net increase in loans (8,841,080) (6,396,974) (5,153,856)
Net (increase)decrease in real estate owned (32,302) (6,085) 4,112
Purchases of premises and equipment (75,397 (40,131) (31,701)
Net cash used in investing activities (2,229,944) (6,846,891) (9,906,962)
Financing activities:
Net increase (decrease)in deposits 14,849,066 (24,711,547) 453,424
Net (decrease)increase in short-term borrowings (12,223,942) 26,263,736 (4,189,819)
Net increase in Federal Home Loan Bank advances 5,100,000 3,000,000 0
Adoption of ESOP 0 0 (1,426,200)
Proceeds from sale of common stock 0 0 16,998,000
Purchase of treasury stock (2,777,117) (3,746,557) 0
Adoption of stock option trust (2,239,040) 0 0
Increase (decrease)in advance payments made by
borrowers for taxes and insurance 5,098 (4,606) (5,405)
Net cash provided by financing activities 2,714,065 801,026 11,830,000
Increase(decrease) in cash and cash equivalents 3,039,423 (3,418,729 4,435,642
Cash and cash equivalent at beginning of year 4,734,993 8,153,722 3,718,080
Cash and cash equivalents at end of year $7,774,416 4,734,993 8,153,722
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $1,311,807 1,678,667 985,000
Interest 4,615,450 4,465,115 3,864,002
Supplemental schedule of non-cash investing activities:
Securities transferred to securities available for sale 0 0 38,702,799
See accompanying notes to consolidated financial statements.
</TABLE>
13
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Description of the Business
QCF Bancorp, Inc. (the Company) was incorporated under the laws of the State of
Minnesota for the purpose of becoming the savings and loan holding company of
Queen City Federal Savings Bank (the Bank) in connection with the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank. The Company commenced on February 10, 1995, a
Subscription and Community Offering of its stock in connection with the
conversion of the Bank (the Offering). The Offering was closed on March 17, 1995
and the conversion was consummated on March 31, 1995.
The consolidated financial statements included herein are for the Company, the
Bank and the Bank's wholly- owned subsidiary, Queen City Service Corporation.
All significant inter-company accounts and transactions have been eliminated in
consolidation. All financial information prior to March 31, 1995 contained
herein relates solely to the Bank and its subsidiary.
(2) Significant Accounting Policies
The accounting and reporting policies of the Company and its subsidiary conform
to generally accepted accounting principles and to general practice within the
savings and loan industry. The following is a description of the more
significant of those policies which the Company follows in preparing and
presenting its consolidated financial statements.
Material Estimates
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. A material estimate
that is particularly susceptible to significant change in the near-term relates
to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management used available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require additions to the allowance based on their judgment
about information available to them at the time of their examination. Securities
Securities available for sale are carried at market value at June 30, 1997 and
1996. Net unrealized gains and losses, net of tax effect, are credited or
charged to stockholders equity. Securities held to maturity are carried at
amortized cost. Gains and losses on sales of securities are recognized at the
time of sale and are calculated based on the specific identification method.
Premiums and discounts are amortized using the interest method over the term of
the securities.
Loans Receivable
Loans are considered long-term investments and, accordingly, are carried at
historical cost.
Discounts on loans originated or purchased are amortized to income using the
interest method over the estimated average loan life.
The allowance for loan losses is maintained at an amount considered adequate to
provide for probable losses. The allowance for loan losses is based on periodic
analysis of the loan portfolio by management. In this analysis management
considers factors including, but not limited to, specific occurrences, general
economic conditions, loan portfolio composition and historical experience. Loans
are charged off to the extent they are deemed to be uncollectible.
14
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Loan origination and commitment fees are recorded as income when received and
loan origination costs are expensed as incurred. The Bank has not adapted SFAS
No. 91, "Accounting for Non-refundable Fees and Costs Associated with
originating or Acquiring Loans and Initial Direct costs of Leases", because the
effect of adoption is not material to the consolidated financial statements.
The Company defines a loan as impaired when it is probable the Company will be
unable to collect principal and interest payments due in accordance with the
terms of the loan agreement. Imp' loans that have been separately identified for
evaluation be measured based on the present value of expected future cash flows
or, alternatively, the observable market price of the loans or the fair' value
of the collateral. However, for those loans that are collateral dependent (that
is, if repayment of those loans is expected to be provided solely by the
underlying collateral) and for which management has determined foreclosure is
probable, the measure of impairment of those loans is to be based on the fair
value of the collateral.
Interest on loans is recognized over the terms of the loans arid is calculated
using the simple interest method on principal amounts outstanding. Accrual of
interest is generally stopped when a loan is greater than three months past due.
Interest on these loans is recognized only when actually paid by the borrower if
collection of the principal is likely to occur. Accrual of interest is generally
resumed when the customer is current on all principal and interest payments and
has been paying on a timely basis for a period of time.
Foreclosed Real Estate
Real estate acquired in the settlement of loans is carried at the lower of the
unpaid loan balance plus settlement costs or estimated fair market value less
selling cost. The carrying value of individual properties is periodically
evaluated and reduced to the extent cost exceeds estimated fair value less
selling costs. Costs of developing and improving such properties are
capitalized. Expenses related to holding such real estate, net of rental and
other income, are charged against income as incurred.
Premises and Equipment
Land is carried at cost. Office buildings, improvements, furniture, and
equipment are carried at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of 7 to 33 years for office buildings and improvements, and 5 to 7 years
for furniture and equipment.
Cash Equivalents and Cash Flows
Cash equivalents primarily represent amounts on deposit at other financial
institutions and highly liquid financial instruments with original maturities at
the date of purchase of three months or less. Cash flows from loans, deposits,
short term borrowings and FHLB advances are reported net.
Earnings per Share
Earnings per share are based upon the weighted average number of common shares
and common stock equivalents, if dilutive, outstanding during the period. The
only common stock equivalents are stock options. The weighted average number of
common stock equivalents is calculated using the treasury stock method.
The earnings per share for 1995 were computed by dividing net income ($571,604)
from the date of conversion, March 31, 1995, to the end of the year, June 30,
1995, by the weighted average common stock shares outstanding (1,646,170) for
the period. Pro forma earnings per common share were computed by dividing net
income ($1,715,147) for the year ended June 30, 1995, by the weighted average
common stock shares outstanding (1,646,170) for the period. This computation
does not reflect the pro forma effects of the investment income that would have
been received had the net proceeds from the stock offering been received at the
beginning of the year.
15
<PAGE>
Income taxes
Deferred taxes are provided on an asset and liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss or tax credit carry forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the amounts of assets and liabilities recorded for income tax and
financial reporting purposes. Deferred tax assets are reduced by a valuation
allowance when management determines that it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Impact on Recently Issued Statements of Financial Accounting Standards
The Financial Accounting Standards Board (FASB) has issued SFAS No.
125."Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" and SFAS No. 127 "Deferral of the Effective Date
of Certain Provisions of Statement No. 125. "SFAS No. 123 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities based on control of the underlying financial
assets. The provisions of SFAS No. 125 including those applicable to the
servicing of financial assets were effective as of January 1, 1997. The impact
of these provisions on the consolidated financial statements was not material.
Other provisions of SFAS No. 125, including those applicable to transfers of
financial assets and extinguishment of liabilities, are effective as of January
1, 1999. The impact of these provisions on the consolidated financial statements
is not expected to be material.
SFAS No. 128, "Earnings per Share", was issued in February 1997. Effective for
QCF Bancorp, Inc. as of December 31, 1997, SFAS No. 128 replaces the primary
earnings per share ("EPS") disclosures with basic and diluted EPS disclosures to
simplify the calculation and improve international comparability. Statement No.
128 requires the presentation of earnings per share by all entities that have
common stock or potential common stock, such as options, warrants and
convertible securities, outstanding that trade in a public market. Those
entities that have only common stock outstanding are required to present basic
EPS amounts. All other entities are required to present basic and diluted EPS
amounts. Diluted EPS amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a loss or
increase the income per common share from continuing operations. All entities
required to present per-share amounts must initially apply Statement No. 128 for
annual and interim periods ending after December 15, 1997. Earlier application
is not permitted. The adoption of the is standard is not expected to effect the
historical trends in reported earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130") SFAS No. 130 requires
that all items that are components of comprehensive income (defined as "the
change in equity {net assets} of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners", be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Companies will be required to (a) classify items of other
comprehensive income by this nature in a financial statement and (b)display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 13, 1997. and requires reclassification of prior periods presented. As
the requirements of SFAS No. 130 are disclosure-related, its implementation will
have no impact on the Company's financial condition or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information. "
("SFAS No. 131") requires that enterprises report certain financial and
descriptive information about operating segments in complete sets of financial
statements of the Company and in condensed financial statements of interim
periods issued to shareholders. It also requires that a Company report certain
information about their products and services, geographic areas in which they
operate, and their major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. As the requirements of SFAS No. 131 are
disclosure related, its implementation will have no impact on the Company's
financial condition or results of operations.
16
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
(3) Securities Available for Sale
Securities available for sale at June 30, 1997 and June 30, 1996 are summarized
as follows:
June 30, 1997
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
------------------------------------------------
Collateralized mortgage
obligations $14,969,882 11,397 (343,326) 14,637,953
U.S. government and
agency securities 8,000,000 0 (83,700) 7,916,300
Corporate bonds and
notes 1,152,410 2,365 (6,526) 1,148,249
Preferred stocks 1,237,382 46,993 (1,250) 1,283,125
$25, 359,674 60,755 (434,802) 24,985,627
June 30, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
cost gains losses value
------------------------------------------------
Collateralized mortgage
obligations $17,279,701 1,791 (815,297) 16,466,201
U.S. government and
agency securities 13,000,000 0 (208,375) 12,791,625
Corporate bonds and
notes 1,727,476 0 (31,002) 1,696,474
Preferred stocks 1,275,863 518 (8,881) 1,267,500
$ 33,283,046 2,309 (1,063,555) 32,221,800
Collateralized mortgage obligations presented in the table above aggregating to
$992,361 and $1,194,356(cost) at June 30, 1997 and 1996, respectively have been
issued by private issuers and are not guaranteed or insured by the U.S.
government.
17
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The amortized cost and fair value of securities available for sale at June 30,
1997, by maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. The allocation of
Collateralized mortgage obligations is based upon the anticipated average lives
of the securities using estimated mortgage prepayment speeds.
June 30, 1997
Amortized
cost Fair value
(in thousands)
Due within one year $ 12,965 12,747
Due after one year
through five years 11,158 10,956
Due after five years
through ten years 0 0
No stated maturity 1,237 1,283
$25,360 24,986
There were no sales of securities available for sale during the three years
ended June 30, 1997.
Accrued interest receivable on securities available for sale aggregated to
$201,005 and $261,084 at June 30, 1997 and 1996, respectively.
(4) Securities Held to Maturity
Securities held to maturity at June 30, 1997 and June 30, 1996 are summarized
as follows:
June 30, 1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------------------------------------------
Mortgage-backed
securities $3,598,753 27,836 (16,054) 3,610,535
Collateralized mortgage
obligations 26,139,503 195,842 (66,947) 26,268,389
U.S. government and
agency obligations 26,413,704 91,188 (56,733) 26,448,159
Corporate bonds
and notes 1,960,839 46,669 (0) 2,007,508
$58,112,799 361,535 (139,743) 58,334,591
18
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
June 30, 1996
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------------------------------------
Mortgage-backed
securities $4,164,043 34,733 (35,106) 4,163,669
Collateralized mortgage
obligations 29,308,904 128,105 (210,009) 29,227,000
U.S. government and
agency obligations 21,314,009 72,445 (170,093) 21,216,362
Corporate bonds
and notes 2,174,084 33,951 (3,856) 2,204,179
$56,961,040 269,234 (419,064) 56,811,210
Collateralized mortgage obligations presented in the tables above aggregating ot
$2,022,092 and $2,385,994 (cost) at June 30, 1997 and 1996 respectively have
been issued by private issuers and are not guaranteed or insured by the U.S.
government.
The carrying amount and fair value of securities held to maturity at June 30,
1997, by maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. The allocation of
mortgage-backed securities and collateralized mortgage obligations is based upon
the anticipated average lives of the securities using estimated mortgage
prepayment speeds.
June 30, 1997
Amortized Fair
cost value
(in thousands)
Due within one year $10, 027 10,042
Due after one year through
five years 44,274 44,471
Due after five years
through ten years 3,812 3,822
Due after ten years 0 0
$58,113 58,335
There were no sales of securities held to maturity during the three years ended
June 30, 1997.
Accrued interest receivable on securities held to maturity aggregated $661,685
and $574,785 at June 30, 1997 and 1996, respectively.
19
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Loans Receivable
Loans receivable at June 30, 1997 and 1996 are summarized as follows:
June 30
1997 1996
Residential one-to-four family
mortgage loans $31,888,499 28,207,901
Multifamily mortgage loans 895,364 1,157,815
Commercial real estate loans 1,447,834 896,630
Consumer loans 18,291,160 16,304,510
Commercial loans 10,066,789 7,183,197
62,589,646 53,750,053
Less:
Allowance for losses (1,314,174) (1,331,352)
Loans in process (73,171) (57,480)
$61,202,301 52,361,221
The weighted average annual contractual interest rate for all loans was 8.82%
and 8.80% at June 30, 1997 and 1996, respectively.
Non-accrual loans totaled $224,842 and $297,268 at June 30, 1997 and 1996,
respectively. There were no restructured loans at June 30, 1997 and 1996.
Non-accrual loans are the only loans that are considered to be impaired under
the criteria established by SFAS No. 114 and SFAS No. 118. The related allowance
for credit losses as of June 30, 1997 was $30,621. The average investment in
impaired loans during fiscal 1997 was $281,500.
The effect of impaired loans on interest income for the years ended June 30,
1997, 1996 and 1995 were:
There are no material commitments to lend additional funds to customers whose
loans were classified as non- accrual.
The aggregate amount of loans to directors and executive officers of the Bank
were $50,329 and $32,433 at June 30, 1997 and 1996, respectively. Such loans
were made in the ordinary course of business on normal credit terms, including
interest rate and collateralization and do not represent more than normal risk
of collection.
Accrued interest receivable on loans receivable at June 30, 1997 and 1996 was
$448,089 and $387,844, respectively.
The Bank grants loans to customers who live primarily in northeastern Minnesota.
Although the Bank has a diversified loan portfolio a substantial portion of its
debtors' ability to honor their contracts is dependent upon local economy which
is concentrated in the iron mining and wood products industries.
20
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At June 30, 1997 and 1996 Bank was servicing loans for others with aggregate
unpaid principal balances of approximately $2,899,003 and $166,458 respectively.
(6) Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows:
Balance at June 30, 1994 $1,389,474
Provision for losses 0
Charge-offs (18,446)
Recoveries 3,931
Balance at June 30, 1995 1,374,959
Provision for losses 0
Charge-offs (53,562)
Recoveries 9,955
Balance at June 30, 1996 1,331,352
Provision for losses 0
Charge-offs (44,013)
Recoveries 26,835
Balance at June 30, 1997 $1,314,174
(7) Foreclosed Real Estate
Foreclosed real estate, included in other assets, consisted of the following:
June 30
1997 1996
Real estate in judgment $38,387 6,085
Less allowance for losses 0 0
$38,387 6,085
(8) Premises and Equipment
A summary of premises and equipment at June 30, 1997 and 1996 is as follows:
June 30
1997 1996
Land $90,800 0,800
Office buildings and improvements 1,085,715 1,088,090
Furniture and equipment 873,724 822,530
2,050,239 2,001,420
Less accumulated depreciation (1,625,630) (1,560,684)
$ 424,609 440,736
21
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Deposits
Deposits and weighted-average interest rates at June 30, 1997 and 1996 are
summarized as follows (dollar amounts in thousands)
June 30
1997 1996
Weighted Weighted
Average Average
Amount Rate Amount Rate
Passbook $25,317 2.50% 23,562 2.50%
Demand deposits 13,506 0.61 11,908 0.63
Money market 9,320 2.55 8,066 2.55
Certificates 55,538 5.28 45,296 5.25
$103,681 $ 88,832
At June 30, 1997 and 1996, the Bank had $5,023,000 and $0, respectively, of
deposit accounts with balances of $100,000 or more. Deposit balances greater
than $100,000 are not insured. The Bank did not have any brokered deposits at
June 30, 1997 or 1996.
Interest expense on deposits is summarized as follows:
Year ended June 30
1997 1996 1995
Passbook $598,475 652,217 710,492
Demand deposits 117,637 126,888 139,000
Money market 223,508 235,323 271,000
Certificates 2,924,527 2,899,588 2,624,044
$3,864,147 3,914,016 3,744,536
Certificates had the following remaining maturities (dollar amounts in
thousands)
June 30, 1997
Weighted
Average
Amount rate
Less than 3 months $10,433 4.12%
3-12 months 16,383 4.78
13-36 months 22,380 6.01
Over 36 months 6,342 5.91
$55,538 5.28
At June 30, 1997 and 1996 no securities were pledged as collateral for deposits.
22
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Short-term Borrowings
Short-term borrowings consist of sales of securities under agreements to
repurchase the identical securities. The agreements generally mature within 180
days and bear a weighted average interest rate of 3.56% at June 30, 1997.
The agreements are treated as financings with the obligations to repurchase
securities reflected as a liability and the dollar amount of the securities
collateralizing the agreements remaining in the asset accounts. The securities
collateralizing the agreements are in safekeeping at the Federal Home Loan Bank
of Des Moines in the Bank's account. At June 30, 1997, the agreements were
collateralized by securities with a carrying value of $15,631,513 and an
approximate market value of $15,670,527. At June 30, 1996 the agreements were
collateralized by securities with a carrying value of $29,332,063 and an
approximate market value of $28,977,122.
Federal Home Loan Bank advances totaled $8,100,000 and $3,000,000 at June 30,
1997 and 1996, respectively. The advances have an average maturity of 14 months
and 5 months and an average rate of 5.81% and 5.80% at June 30,1997 and 1996,
respectively. The advances are collateralized by the Bank's Federal Home Loan
Bank stock, mortgage loans and government agency securities.
(11) Income Taxes
Federal and state income tax expense is as follows:
Year ended June 30
1997 1996 1995
Current:
Federal $1,075,100 1,149,400 878,022
State 338,000 360,300 272,478
Total current 1,413,100 1,509,700 1,150,500
Deferred:
Federal (78,900) 17,400 11,820
State (26,200) 5,900 3,680
Total deferred (105,100) 23,300 15,500
$1,308,000 1,533,000 1,166,000
The actual income tax expense differs from the "expected" income tax expense
computed by applying the U.S. federal corporate tax rate to income before taxes
as follows:
23
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Year Ended June 30
1997 1996 1995
Federal "expected" income tax expense $1,128,546 1,314,665 979,590
Items affecting federal income tax:
Preferred stock dividends (22,696) (24,317) 0
State income taxes, net of federal
income tax benefit 206,010 241,692 182,258
Other, net (3,860) 960 4,152
$1,308,000 1,533,000 1,166,000
Effective income tax rate 39.4% 39.6 40.5
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at June 30, 1997 and 1996 are as follows:
Year Ended June, 30
1997 1996
Deferred tax assets:
Allowance for unrealized losses on securities
available for sale $ 151,191 $424,496
Allowance for loan losses 86,793 98,246
Deferred compensation 205,985 189,748
Supplemental executive retirement plan 183,172 104,326
Other 0 32,114
$ 627,141 $848,930
Deferred tax liabilities:
Federal Home Loan Bank stock $ 76,225 70,815
Premises and equipment 18,847 19,879
Other 12,769 26,840
107,841 117,534
Net deferred tax asset $ 519,300 731,396
No valuation allowance was required for deferred tax assets at June 30, 1997 or
1996.
Retained earnings at June 30, 1997 includes approximately $2,270,000 for which
no provision for federal income tax has been made. This amount represents
allocations of income to bad debt deductions for tax purposes. Reduction of the
amount so allocated for purposes other than to absorb losses will create income
for tax purposes, which will be subject to the then- current corporate income
tax rate.
(12) Commitments and Contingencies
The Bank is a party to financial instruments with off balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve. to varying degrees, elements of credit,
interest rate and liquidity risk in excess of the amount recognized in the
accompanying statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
24
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Commitments to extend credit are agreements to lend to a customer provided there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since certain of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customers' creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on the loan type and on management's
evaluation of the borrower. Collateral consists primarily of residential real
estate and personal property. The Bank had outstanding commitments to extend
credit of $2,113,765 and $136,250 at June 30, 1997 and 1996, respectively.
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. The standby letters
of credit are primarily issued to support private borrowing arrangements, and
expire within the next fiscal year. The credit risk involved in issuing standby
letters of credit is essentially the same as that involved in making loans to
customers. The amount of collateral the Bank obtains to support standby letters
of credit is based on management's credit evaluation of the borrower. Since the
conditions under which the Bank is required to fund standby letters of credit
may not materialize, the cash requirements are expected to be less than the
total outstanding commitments. The Bank had outstanding standby letters of
credit of $247,000 and $157,400 at June 30, 1997 and 1996, respectively.
(13) Regulatory Capital Requirements
The Bank as a member of the Federal Home Loan Bank System is required to hold a
specified number of shares of capital stock, which is carried at cost, in the
Federal Home Loan Bank of Des Moines. In addition, the Bank is required to
maintain cash and liquid assets in an amount equal to 5% of its deposit accounts
and other obligations due within one year. The Bank has met these requirements.
Federal savings institutions are required to satisfy three capital requirements:
(i) a requirement that "tangible capital" equal or exceed 1.5% of adjusted total
assets, (ii) a requirement that "core-capital" equal or exceed 3% of adjusted
total assets, and (iii) a risk-based capital standard of 8% of "risk-adjusted
assets". Failure to meet these requirements can initiate mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material affect on the Bank's financial statements. The Bank's capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk weighting, and other factors. As of June 30,
1997, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Bank's category.
The following table sets forth the Bank's calculation of tangible, core and
risk-based capital and applicable percentages of adjusted assets at June 30,
1997 together with the excess over the minimum capital requirements.
Actual Required Excess
(Dollars in thousands) ---------------------------------------------------
Amount Percent Amount Percent Amount Percent
Tangible capital $16,917 11.68% $ 2,172 1.50% $14,745 10.18%
Core capital 16,917 11.68 4,345 3.00 12,572 8.68
Plus allowed portion of general
allowance for loan losses ---------------------------------------------------
810
Risk-based capital $17,727 27.58 5,142 8.00 12,585 19.58
---------------------------------------------------
25
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) Employee Benefits
During fiscal 1995 the Company adopted an Employee Stock Ownership Plan (the
ESOP) which met the requirements of Section 4975(e)(7) of the Internal Revenue
Code and Section 407(d)(6) of the Employee Retirement Income Security Act of
1974, as amended (ERISA), and as such the ESOP was empowered to borrow in order
to finance purchases of the common stock of the Company. The ESOP borrowed
$1,426,200 from the Company to purchase 142,620 shares of common stock of the
Company on the date of the conversion. The Bank has committed to make annual
contributions to the ESOP necessary to repay the loan including interest. The
Bank contributed $224,961, $302,957 and $167,744 to the ESOP for the years ended
June 30, 1997 and 1996 respectively.
As the debt is repaid, ESOP shares which were initially pledged as collateral
for its debt, are released from collateral and allocated to active employees,
based on the proportion of debt service paid in the year. The Company accounts
for its ESOP in accordance with Statement of Position 93-6, "Employers
Accounting for Employee Stock Ownership Plans". Accordingly, the shares pledged
as collateral are reported as unearned ESOP shares in stockholders' equity. As
shares are determined to be ratably released from collateral, the Company
reports compensation expense equal to the current market price of the shares,
and the shares become outstanding for earnings per share computations. ESOP
compensation benefit expense for 1997, 1996 and 1995 was $175,503, $175,611 and
$132,089, respectively.
All employees of the Bank are eligible to participate in the ESOP after they
attain age 21 and complete one year of service during which they worked at least
1,000 hours. In 1997, the company committed to release 10,262 shares of common
stock which were allocated to eligible participants subject to the restrictions
of the ESOP.
Shares released and allocated 34,549
Unreleased shares 108,071
Total ESOP shares 142,620
Fair value of unreleased shares at June 30, 1997 $2,296,508
On January 6, 1994, the Bank adopted a defined contribution retirement savings
plan covering all employees with at least one year of service. The Bank's
portion of the retirement savings plan contribution was $15,156 for the year
ended June 30, 1995. The plan was suspended on December 31, 1994 and no future
contributions are expected to be made to it until the ESOP loan has been paid in
full.
The Bank has individual deferred compensation and supplemental retirement
agreements with certain directors and officers. The cost of such individual
agreements is being accrued over the period of actual service from the date of
the respective agreement. The cost of such agreements was $205,047, $178,574,
and $176,218 for the years ended June 30, 1997, 1996, and 1995, respectively.
The agreements are funded through a grantor trust with assets which match the
investment options selected by the directors and officers. Increases(decreases)
in the value of the trust assets are recorded as increases(decreases) in the
related liability accounts. The assets of the trust are included under "prepaid
expenses and other assets" and the corresponding liabilities are included under
"accrued expenses and other liabilities" on the consolidated statement of
financial condition.
The Company established the Management Recognition Plan (MRP) for directors and
key officers during the year ended June 30, 1995. Following shareholder approval
of the MRP on October 11, 1995, the Bank purchased 78,441 shares of the
Company's common stock in the open market at $14.46 per share, of which 71,310
were granted to directors and officers in accordance with the provisions of the
MRP The cost of the shares awarded under the plan is recorded as unearned
compensation, a contra equity account, and are recognized as an expense in
accordance with the vesting requirements under the plan. For the fiscal year
ended June 30, 1997 and 1996, the amount included in compensation expense was
$197,885 and $148,414 respectively.
The Company established a stock option plan for directors, officers and
employees. The stock option plan was approved by shareholders on October 11,
1995, and in accordance with the terms of the plan, the exercise
26
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
price was established at the fair market price on the date of shareholder
approval of $13.875 per share. Awards made under the plan may be incentive stock
options as defined by Section 422 of the Internal Revenue Code of 1986 or
options that do not qualify. Under the plan 178,275 options were available for
grant and 160,448 options were granted in 1995. 32,091 options were eligible to
be exercised as of June 30, 1997. No options had been exercised as of June 30,
1997. All options expire on October 11, 2005.
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretaions. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the
(fair)(minimum) value method prescribed in the FASB Statement No. 123, reported
net income (and earnings per share) would have been reduced to:
Year ended June 30 Net income Per share
1997 $1,888,854 1.47
1996 2,211,263 1.37
1995 1,715,147 1.04
In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the (minimum)(fair) value method prescribed in Statement
No. 123, with the following weighted-average assumptions for grants in 1995: No
dividends; risk-free interest rate of 6.0%, expected life of 10 years, (and
expected price volatility of 14.57%).
(15) Stockholders' Equity
The Company was incorporated for the purpose of becoming the savings and loan
holding company of the Bank in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank, pursuant to a Plan of Conversion adopted on October 25, 1994.
The Company commenced on February 10, 1995, a Subscription and Community
Offering of its shares in connection with the conversion of the Bank (the
Offering). The Offering was closed on March 17, 1995 and the conversion was
consummated on March 31, 1995, with the issuance of 1,782,750 shares of the
Company's common stock at a price of $10 per share. Total proceeds from the
conversion of $16,998,000 net of costs relating to the conversion of $829,500,
have been recorded as common stock and additional paid-in capital. The Company
purchased all of the capital stock of the Bank in exchange for 50% of the net
proceeds of the conversion.
The Company's articles of incorporation authorized the issuance of up to
1,000,000 shares of preferred stock but to date no shares have been issued.
In order to grant a priority to eligible account holders in the event of future
liquidation, the Bank, at the time of conversion established a liquidation
account equal to its regulatory capital as of December 31, 1994. In the event of
future liquidation of the Bank, an eligible account holder who continues to
maintain their deposit account shall be entitled to receive a distribution from
the liquidation account. The total amount of the liquidation account will be
decreased as the balance of eligible account holders are reduced subsequent to
the conversion, based on an annual determination of such balance.
The Bank may not declare or pay a cash dividend to the Company in excess of 100%
of its net income to date during the current calendar year plus the amount that
would reduce by one-half the Bank's surplus capital ratio at the beginning of
the calendar year without prior notice to the Office of Thrift Supervision
(OTS). Additional limitations on dividends declared or paid on, or repurchases
of, the Bank's capital stock are tied to the Bank's level of compliance with its
regulatory capital requirements.
27
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," requires
disclosures of estimated fair values of the Bank's financial instruments,
including assets, liabilities and off- balance sheet items for which it is
practicable to estimate fair value. The fair value estimates are made as of June
30, 1997 and 1996 based upon relevant market information, if available, and upon
the characteristics of the financial instruments themselves. Because no market
exists for a significant portion of the Bank's financial instruments, fair value
estimates are based upon judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. The estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based only on existing financial instruments without
attempting to estimate the value of anticipated future business or the value of
assets and liabilities that are not considered financial instruments. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on the fair value estimates and
have not been considered in any of the estimates.
The estimated fair value of the Bank's financial instruments are shown below.
Following the table, there is an explanation of the methods and assumptions used
to estimate the fair value of each class of financial instruments.
June 30
1997 1996
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
Financial assets:
Cash and cash equivalents $7,774 7,774 4,735 4,735
Securities available
for sale 24,986 24,986 32,222 32,222
Securities held to maturity 58,113 58,335 56,961 56,811
Loans receivable, net 61,202 45,583 52,361 52,275
Federal Home Loan
Bank Stock 554 554 554 554
Accrued accounts receivable 1,311 1,311 1,224 1,224
Financial liabilities:
Deposits 103,681 114,022 88,832 88,742
Short-term borrowings 22,140 22,076 29,264 29,998
Accrued interest payable 1,071 1,071 1,013 1,013
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates their fair value.
Securities Available for Sale and Securities Held to Maturity
The fair value of securities are based upon quoted market prices.
Loans Receivable
The fair value of loans receivable were estimated for groups of loans with
similar characteristics. The fair value of the loan portfolio, was calculated by
discounting the scheduled cash flows through the estimated maturity using
anticipated prepayment speeds and using discount rates that reflect the credit
and interest rate risk inherent in each loan portfolio. The fair value of the
adjustable loan portfolio was estimated by grouping the loans with similar
characteristics and comparing the characteristics of each group to the prices
quoted for similar types of loans in the secondary market.
28
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Federal Home Loan Bank Stock
The carrying amount at FHLB stock approximates its fair value.
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair value
since it is short-term in nature and does not present unanticipated credit
concerns.
Deposits
The fair value of deposits with no stated maturity such as checking, savings and
money market accounts, is equal to the amount payable on demand. The fair value
of certificates of deposit is based on the discounted value of contractual cash
flows using as discount rates the rates that were offered by the Bank as of June
30, 1997 and 1996 for deposits with maturities similar to the remaining
maturities of the existing certificates of deposit.
The fair value estimate for deposits does not include the benefit that results
from the low cost funding provided by the Bank's existing deposits and long-term
customer relationships compared to the cost of obtaining different sources of
funding. This benefit is commonly referred to as the core deposit intangible.
Short-term Borrowings
The fair value of short-term borrowings due on demand, is equal to the amount
payable on demand. The fair value of other short-term borrowings is based on the
discounted value of contractual cash flows using as discount rates the rates
that were available to the Bank as of June 30, 1997 and 1996 for short-term
borrowings with maturities similar to the remaining maturities of the existing
short-term borrowings.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair value
since it is short-term in nature.
(17) QCF Bancorp, Inc. Financial Information (Parent Company Only)
The parent company's principal assets are its investment in the Bank and its
savings deposits at the Bank. The following are the condensed financial
statements for the parent company only as of June 30, 1997 and 1996.
June 30
Condensed Balance Sheets 1997 1996
Assets:
Cash and cash equivalents $1,826,158 0
Securities available for sale 8,484,571 9,250,806
Investment in subsidiary 16,783,814 20,942,550
Other assets 372,743 437,109
Total assets $27,467,286 30,630,465
Liabilities:
Cash overdraft 0 945,668
Stockholders' equity: 27,467,286 29,684,792
Total liabilities and
stockholders' equity 27,467,286 30,630,465
29
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Year Ended June 30
1997 1996 1995
Condensed Statements of Income
Interest income $ 722,139 739,706 94,939
Equity in earnings of subsidiary 1,610,787 2,358,885 1,661,741
Other (140,672) (779,929) (5,532)
Income before income tax expense 2,192,254 2,318,662 1,751,147
Income tax expense (benefit) 181,000 (15,000) 36,000
Net income $2,011,254 2,333,662 1,715,147
Condensed Statements of Cash Flows
Operating activities:
Net income $2,011,254 2,333,662 1,715,147
Equity in earnings of subsidiary (1,610,787) (2,358,885)(1,661,741)
Distributions of earnings of subsidiary 6,000,000 0 5,000,000
Amortization of Unearned ESOP shares 175,503 175,611 132,089
Amortization of MRP 197,885 148,414 0
(Decrease)increase in liabilities (945,668) 945,668 0
Decrease in other assets (56,914) (327,326) (109,783)
Net cash provided by operating activities 5,771,273 917,144 5,075,712
Investing activities:
Purchase of securities available for sale 0 (10,006,363) 0
Principal collected from securities
available for sale 1,071,042 687,264 0
Net cash provided by (used in)
investing activities 1,071,042 (9,319,099) 0
Financing activities:
Proceeds from sale of common stock 0 0 16,998,000
Increase in unearned ESOP shares 0 0 (1,426,200)
Purchase of Bank stock 0 0 (8,499,000)
Increase in stock option trust (2,239,040) 0 0
Purchase of treasury stock (2,777,117) (3,746,557) 0
Net cash provided by (used in)
financing activities (5,016,157) (3,746,557) 7,072,800
Increase(decrease) in cash and
cash equivalents 1,826,158 (12,148,512)12,148,512
Cash and cash equivalents, beginning
of period 0 12,148,512 0
Cash and cash equivalents, end
of period $1,826,158 0 12,148,512
30
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(18) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data (in thousands of dollars except for per
share amounts) for fiscal 1997 and 1996 are as follows:
Three Months Ended
Selected Operations Data ------------------------------------------
6/30/97 3/31/97 12/31/96 9/30/96
Interest income $ 2,726 2,627 2,692 2,657
Interest expense 1,196 1,137 1,175 1,165
Net interest income 1,530 1,490 1,517 1,492
Non-interest income 169 128 134 135
Non-interest expense 678 674 544 1,381
Income tax expense 402 370 436 100
Net income $ 619 574 671 147
Earnings per common share $ .49 .45 .55 .11
High stock price 20.25 19.75 18.25 15.75
Low stock price 20.38 18.75 16.25 15.00
6/30/96 3/31/96 12/31/95 9/30/95
------------------------------------------
Interest income $ 2,620 2,646 2,742 2,649
Interest expense 1,106 1,141 1,223 1,107
Net interest income 1,514 1,497 1,519 1,542
Non-interest income 147 115 101 117
Non-interest expense 663 693 676 654
Income tax expense 382 371 374 406
Net income 615 548 571 600
Earnings per common share $.40 .33 .34 .36
High stock price 15.25 14.88 15.00 14.50
Low stock price 14.00 14.38 14.25 13.00
Selected Financial Condition Data 6/30/97 3/31/97 12/31/96 9/30/96
------------------------------------------
Total assets $ 156,727 149,637 146,922 148,321
Investment securities 83,098 81,889 80,493 87,278
Net loans 61,202 58,465 57,665 55,744
Deposits 103,681 104,946 102,84 81,794
Short-term borrowings 20,140 15,850 15,746 37,905
Stockholders' equity 27,423 27,070 26,760 26,161
6/30/96 3/31/96 12/31/95 9/30/95
------------------------------------------
Total assets $ 150,430 145,608 161,23 153,695
Investment securities 89,183 89,787 105,236 99,726
Net loans 52,361 49,938 48,357 47,118
Deposits 88,832 105,083 103,71 105,037
Short-term borrowings 29,264 7,04 24,292 15,019
Stockholders' equity 29,685 31,760 31,465 31,474
<PAGE>
STOCKHOLDERS' INFORMATION
Annual Meeting Stock Listing
The annual meeting of shareholders QCF's common stock is listed on
will be held on Wednesday, the NASDAQ National Market System with
October 8, 1997 at 9:00 A. M. at a ticker symbol of QCFB.
the executive office of the Company. Stockholders of record: 360
Executive Office Form lO-KSB
QCF Bancorp, Inc. QCF's Form lOKSB is filled with the
501 Chestnut Street Securities and Exchange Commission and
Virginia, MN 55792-1147 is available without charge upon request
(218) 741-2O4O from: QCF Bancorp, Inc.
Attn: Investor Relations
Independent Auditors P.O. Box 1147
McGladrey & Pullen Virginia, MN 55792
227 West First Street
Duluth, MN 55802
Transfer Agent & Registrar
Investor Information Inquiries regarding change of address,
QCF Bancorp, Inc. transfer requirements, lost certificates
Investor Relations should he directed to the transfer agent:
P.O. Box 1147 Registrar and Transfer Company
Virginia, MN 55802 10 Commerce Drive
Cranford, New Jersey 07016
1-800-368-5948
Directors and Officers:
Directors: Executive Officers:
Philip K. Schumacher Kevin C. Pietrini
Chairman of the Board President
President of Arrowhead Health
Care Center
Kevin V. Pietrini Daniel P. Schultz
President and Chief Vice President and Treasurer
Executive Officer
Robert A. Muhich Linda M. Myklebust
Computer Consultant Vice President
Culbert Realty & Appraisal Service
John A. Trenti Gerald D. Mckenna
Attorney at the Trenti Law Firm Vice President
Peter J. Johnson Branch Offices:
President of Hoover Construction Thunderbird Mall
Virginia, MN 55792
Craig W. Nordling
Line Department Manager 102 East Sheridan Street
Lake Country Power Ely, MN 55731
John C. Pearsall
Partner with Mesabi Dental Service
<PAGE>
