SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 1998
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File No. 0-25700
QCF BANCORP, INC.
(Name of small business issuer in its charter)
Minnesota 41-1796789
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
501 Chestnut Street, Virginia, Minnesota 55792
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (218) 741-2040
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Check whether the issuer (1) has filed all reports required by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $11,935,000.
As of August 24, 1998, the aggregate market value of the 401,405 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $11,841,448 based on the closing sale price of
$29.50 per share of the registrant's Common Stock on August 28, 1998 as listed
on the National Association of Securities Dealers Automated Quotation National
Market System. For purposes of this calculation, it is assumed that directors,
officers and beneficial owners of more than 5% of the registrant's outstanding
voting stock are affiliates.
Number of shares of Common Stock outstanding as of August 24, 1998: 1,174,844.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of the
Form 10-KSB into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1998. (Parts I, II and IV)
2. Portions of Proxy Statement for 1998 Annual Meeting of Stockholders.
(Part III)
Transitional Small Business Disclosure Format (Check one): Yes No X
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PART I
Item 1. Description of Business
General
QCF Bancorp, Inc. QCF Bancorp, Inc. (the "Company") was incorporated under the
laws of the State of Minnesota in November 1994 at the direction of the Board of
Directors of Queen City Federal Savings Bank (the "Bank") for the purpose of
serving as the holding company of the Bank upon the acquisition of all of the
capital stock issued by the Bank upon its conversion from the mutual to the
stock form of ownership (the "Conversion"). Prior to the Conversion, the Company
did not engage in any material operations. Currently, the Company's principal
business is the business of the Bank. The Company has no significant assets
other than the outstanding capital stock of the Bank, $6.9 million of cash and
investment securities and a note receivable from the Company's Employee Stock
Ownership Plan (the "ESOP"). At June 30, 1998, the Company had total assets of
$150.5 million, deposits of $105.6 million and stockholders' equity of $26.3
million.
The Company's executive offices are located at 501 Chestnut Street, Virginia,
Minnesota 55792, and its main telephone number is (218) 741-2040.
Queen City Federal Savings Bank. The Bank is a federal savings bank operating
through three offices serving north central St. Louis County in Minnesota. The
Bank was chartered in 1960 under the name "Queen City Federal Savings and Loan
Association of Virginia." In February 1961, the Bank shortened its name to
"Queen City Federal Savings and Loan Association." In 1994, the Bank amended its
charter to become a federal mutual savings bank and adopted its current name. On
March 31, 1995, the Bank consummated its conversion to the stock form of
ownership as a wholly owned subsidiary of the Company. The Bank is a member of
the Federal Home Loan Bank ("FHLB") System, and its deposits are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC") under
the Savings Association Insurance Fund ("SAIF").
The Bank's principal business consists of attracting deposits from the general
public and investing those funds primarily in investment securities and loans
secured by first mortgages on owner-occupied, single-family residences in the
Bank's market area and consumer loans. The Bank also originates first mortgage
loans on multi-family and commercial real estate and commercial loans.
The Bank derives its income principally from interest earned on investments and
loans and, to a lesser extent, loan and deposit fees. The Bank's principal
expenses are interest expense on deposits and borrowings and noninterest expense
such as compensation and employee benefits, office occupancy expenses and other
miscellaneous expenses.
The Bank's executive offices are located at 501 Chestnut Street, Virginia,
Minnesota 55792, and its main telephone number is (218) 741-2040.
Market Area
The Bank currently conducts its business through three banking offices located
in Virginia and Ely, which are located in north central St. Louis County in
northeastern Minnesota. The Bank's primary lending area includes the communities
located within a 30-mile radius of the Bank's main office in Virginia.
The economy in the Bank's market area is dependent on the taconite mining
industry which experienced problems in the late 1970s and early 1980s due to
foreign competition. The Bank's market area experienced plant closings, layoffs
and extremely high levels of unemployment at that time. Since then, the taconite
mining industry has stabilized, and various processors and others continue to
operate taconite mines and plants in the area. However, any decline in that
industry could cause material losses to the Bank if local residents had to leave
the area to find employment and consequently defaulted on their debt
obligations. Due primarily to the economic factors discussed above, the Bank has
limited lending opportunities in its market area and does not anticipate that
lending opportunities will increase in the future because of the lack of growth
in the economy. As a result, the Bank has not been able to originate loans to
the extent desired and consequently has had to invest available funds in
investment securities. Investment securities typically earn lower yields than
single-family, residential mortgage loans, and the Bank's need to purchase
investment securities because of the lack of lending opportunities has caused
the Bank's interest rate spread to be below that of savings banks of comparable
size in more robust market areas.
According to the Virginia Bureau of Economic Development, the population of St.
Louis County, Minnesota has decreased gradually over the past several decades
from 232,000 for the 1960 Census to 198,000 for the 1990 Census, and the
population of Virginia has decreased from 14,000 for the 1960 Census to 9,000
for the 1990 Census.
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Lending Activities
General. The Bank's gross loan portfolio totaled $66.5 million at June 30, 1998,
representing 44.2% of total assets at that date. It is the Bank's policy to
concentrate its lending within its market area. At June 30, 1998, $33.2 million,
or 49.9% of the gross loan portfolio, consisted of single-family, residential
mortgage loans. The Bank also originates consumer loans, which primarily consist
of automobile loans, recreation loan and home equity loans. Consumer loans
amounted to $19.8 million, or 29.8% of the Bank's gross loan portfolio, at June
30, 1998. To a lesser extent, the Bank also originates loans secured by
multi-family and commercial properties and commercial loans. Included in
mortgage loans are loans which are insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veteran's Administration ("VA").
The Bank has not actively pursued the origination of loans secured by
multi-family or commercial properties. Such loans have generally been made to
small businesses within the Bank's market area and are secured by warehouses,
retail stores or other commercial property. At June 30, 1998, multi-family and
commercial real estate loans amounted to $2.1 million, or 3.2% of the Bank's
gross loan portfolio. The Bank also engages in commercial lending within its
market area. At June 30, 1998, commercial loans amounted to $11.4 million or
17.1% of the Bank's gross loan portfolio.
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of the Bank's loan portfolio by type of loan at the
dates indicated. At June 30, 1998, the Bank had no concentration of loans
exceeding 10% of total loans other than as disclosed below.
At June 30,
1998 1997
Amount % Amount %
(Dollars in thousands)
Type of Loan:
Real estate loans:
Single-family residential $ 33,175 49.92% $ 31,815 50.89%
Multi-family and commercial 2,097 3.15 2,343 3.75
Commercial business loans 11,369 17.10 10,067 16.10
Consumer loans:
Automobile 12,001 18.06 10,192 16.30
Recreational 1,525 2.29 1,455 2.33
Savings account 569 0.86 654 1.05
Second mortgage 3,051 4.59 2,948 4.71
Other 2,680 4.03 3,042 4.87
Total gross loans 66,467 100.00% 62,516 100.00%
Less:
Allowance for loan losses 1,273 1,314
Total $ 65,194 $ 61,202
The following table sets forth certain information at June 30, 1998 regarding
the dollar amount of loans maturing in the Bank's portfolio based on their
contractual terms to maturity, including scheduled repayments of principal.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. The table
below does not include any estimate of prepayments which significantly shorten
the average life of all mortgage loans and may cause the Bank's repayment
experience to differ from that shown below.
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<TABLE>
One to Five to More than
One Year or Less Five Years Ten Years 10 years Total
(In thousands)
Single-family residential
<S> <C> <C> <C> <C> <C>
real estate $ 306 $ 2,641 $ 7,348 $ 22,880 $ 33,175
Multi-family and
commercial real estate 19 161 987 930 2,097
Consumer 1,868 14,495 1,894 1,569 19,826
Commercial business 1,890 3,101 2,260 4,118 11,369
Total $ 4,083 $ 20,398 $ 12,489 $ 29,497 $ 66,467
</TABLE>
The following table sets forth at June 30, 1998, the dollar amount of all loans
due one year or more after June 30, 1998 which have predetermined interest rates
and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates
(In thousands)
Single-family residential real estate $ 6,184 $ 26,685
Multi-family and
commercial real estate 1,757 321
Consumer 15,672 2,286
Commercial business 1,848 7,631
Total $ 25,461 $ 36,923
Scheduled contractual principal repayments of loans do not necessarily reflect
the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, due-on- sale clauses on loans generally give the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Bank's loan originations are
derived from a number of sources, including referrals by realtors, depositors
and borrowers, as well as walk-in customers. In addition, the Bank originates a
portion of its automobile loans on an indirect basis through various automobile
dealerships located in the Bank's market area. The Bank's solicitation programs
consist of advertisements in local media, in addition to occasional
participation in various community organizations and events. Real estate loans
are originated by the Bank's salaried loan officers. Loan applications are
accepted only at the Bank's main office and the Ely branch office, with the
exception of applications which are originated on an indirect basis through
various approved automobile dealerships in the Bank's market area. In all cases,
however, the Bank has final approval of the application.
In the early 1980's, the Bank adopted a policy of selling all fixed-rate,
conventional single-family mortgage loans in the secondary market to remove any
interest rate risk which would result from holding the loans in portfolio. Such
loans are sold with servicing released. Management intends to continue to
originate fixed-rate loans and to sell in the secondary market all such loans
with terms in excess of 15 years or which are insured by the FHA or guaranteed
by the VA in the secondary market.
Loan Underwriting Policies. The Bank's lending activities are subject to the
Bank's written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Bank's Board of Directors and its
management. Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. Property valuations, when required by the Bank, are performed by
appraisers approved by the Bank's Board of Directors. Individual officers of the
Bank have been granted authority by the Board of Directors to approve loans up
to varying specified dollar amounts, depending upon the type of loan. Loans in
excess of $250,000 must be approved by a committee of the Board of Directors.
Applications for fixed-rate, single-family real estate loans are underwritten
and closed in accordance with the standards of FHLMC and FNMA. Adjustable-rate
loans originated by the Bank for its portfolio are underwritten and closed based
on the Bank's own loan guidelines, which may exceed FHLMC and FNMA standards.
The Bank's loans are secured by a variety of properties in its market area.
Included in its portfolio are loans secured by properties in rural areas that
may not conform to secondary market standards and properties that serve as
second or vacation homes. Generally, the Bank compensates for the added risk of
these loans through its pricing mechanism.
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Under applicable law, with certain limited exceptions, loans and extensions of
credit by a savings institution to a person outstanding at one time shall not
exceed 15% of the association's unimpaired capital and surplus. Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus. Applicable law additionally
authorizes savings institutions to make loans to one borrower, for any purpose,
in an amount not to exceed $500,000 or in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is and
continues to be in compliance with its fully phased-in regulatory capital
requirements; (iii) the loans comply with applicable loan-to-value requirements;
(iv) the aggregate amount of loans made under this authority does not exceed
150% of unimpaired capital and surplus; and (v) the Director of OTS, by order,
permits the savings association to avail itself of this higher limit. Under
these limits, the Bank's loans to one borrower were limited to $2.9 million at
June 30, 1998. At that date, the Bank had no lending relationships in excess of
the OTS's loans-to-one-borrower limit. The Bank's five largest borrowers ranged
from $389,000 to $1.0 million. All of these loans were current as of June 30,
1998.
Interest rates charged by the Bank on mortgage loans are primarily determined by
competitive loan rates offered in its market area and the Bank's yield
objectives. Mortgage loan rates reflect factors such as prevailing market
interest rate levels, the supply of money available to the savings industry and
the demand for such loans. These factors are in turn affected by general
economic conditions, the monetary policies of the federal government, including
the Federal Reserve Board, the general supply of money in the economy, tax
policies and governmental budget matters.
Single-Family Residential Lending. The Bank historically has been and continues
to be an originator of loans secured by single-family residential properties
located in its market area. At June 30, 1998, approximately $33.2 million, or
49.9%, of the Bank's gross loan portfolio consisted of loans secured by
single-family residential properties.
Substantially all single-family mortgage loans originated by the Bank for
retention in the Bank's portfolio since 1982 have been adjustable-rate loans
with an initial fixed term of one or five years. After the initial term, the
rate adjustments on the Bank's adjustable- rate loans are indexed to the
Contract Interest Rate published by the Federal Housing Finance Board (the
"Contract Rate"). The interest rates on these mortgages are adjusted either once
a year or every five years, with a ceiling rate of 18.75%. The adjustable-rate
mortgage loans offered by the Bank do not provide for initial rates of interest
below the rates that would prevail when the index used for repricing is applied.
At June 30, 1998, the Bank's loan portfolio included $26.7 million in
adjustable-rate, single-family residential mortgage loans, which represented
40.1% of the Bank's gross loan portfolio.
The retention of adjustable-rate loans in the Bank's portfolio helps reduce the
Bank's exposure to increases in prevailing market interest rates. However, there
are unquantifiable credit risks resulting from potential increases in costs to
borrowers in the event of upward repricing of adjustable-rate loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate loans may increase due to increases in interest costs to
borrowers. Further, although adjustable-rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the initial fixed-rate period
before the first adjustment and the lifetime interest rate adjustment
limitations. Accordingly, there can be no assurance that yields on the Bank's
adjustable- rate loans will fully adjust to compensate for increases in the
Bank's cost of funds. Finally, adjustable-rate loans increase the Bank's
exposure to decreases in prevailing market interest rates, although decreases in
the Bank's cost of funds tend to offset this effect.
Multi-Family and Commercial Real Estate Lending. The Bank's multi-family
residential loan portfolio consists primarily of loans secured by small
apartment buildings with between five and 15 units, and the commercial real
estate loan portfolio includes loans to finance the acquisition of small office
buildings and warehouse space. Multi-family and commercial real estate loans
have terms of up to 20 years and are generally underwritten with loan-to-value
ratios of up to 80% of the lesser of the appraised value or the purchase price
of the property. Because of the inherently greater risk involved in this type of
lending, the Bank generally limits its multi-family and commercial real estate
lending to borrowers within its market area with which it has had substantial
experience. However, from time to time, the Bank reviews opportunities to
purchase multi-family and commercial real estate loans and occasionally
purchases such loans outside its market area.
Commercial Business Lending. The Bank's commercial lending activities are
directed to small Minnesota-based businesses. The Bank's commercial borrowers
consist primarily of manufacturing and distribution firms, retailers, and
professionals in health care, accounting and law. Generally, the Bank's
commercial business loans are secured by assets, which may include accounts
receivable, inventory, equipment and other business assets, and are guaranteed
by the principals of the borrowers. The Bank's commercial business loan
portfolio includes loans which may be at least partially secured by real estate
but for which the expected source of repayment for the loan is the cash flow
produced by the borrower's business. At June 30, 1998, the Bank's commercial
business loans totaled $11.4 million, or 17.1%, of the total loan portfolio.
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The Bank underwrites its commercial business loans on the basis of the
borrower's cash flow and ability to service the debt from earnings rather than
on the basis of underlying collateral value, and seeks to structure such loans
to have more than one source of repayment. The borrower is required to provide
the Bank with sufficient information to allow the Bank to make its lending
determination. In most instances, this information consists of at least three
years of financial statements, a statement of projected cash flows, current
financial information on any guarantor and any additional information on the
collateral. For loans with maturities exceeding one year, the Bank requires that
borrowers and guarantors provide updated financial information at least annually
throughout the term of the loan.
The Bank's commercial business loans may be structured as term loans or as lines
of credit. Commercial term loans are generally made to finance the purchase of
assets and have maturities of five years or less. Commercial lines of credit are
typically for the purpose of providing working capital and are usually approved
with a six month term. The Bank also offers both commercial and standby letters
of credit for its commercial borrowers. Commercial letters of credit are written
for a maximum term of one year. The terms of standby letters of credit generally
do not exceed one year. The Bank's commercial business loans generally have
interest rates which float at, or at some margin over, the Bank's reference
rate.
Consumer Lending. The consumer loans originated by the Bank primarily include
automobile loans, recreational loans, second mortgage loans and loans secured by
savings deposits. At June 30, 1998, the Bank's consumer loan balance totaled
$19.8 million, or 29.8% of its total loan portfolio.
The Bank's automobile loans are generally underwritten in amounts up to 80% of
the lesser of the purchase price or the retail value as published by the
National Automobile Dealers Association. The terms of the loan generally do not
exceed 60 months for new vehicles or 48 months for used vehicles. The Bank
requires that the vehicles be insured and the Bank be listed as loss payee on
the insurance policy. The Bank originates a portion of its automobile loans on
an indirect basis through various dealerships located in its market area. See "
- -- Originations, Purchases and Sales of Loans."
The Bank's recreational loans are loans to finance the purchase of boats,
snowmobiles, motorcycles and other recreational vehicles. The terms of such
loans generally do not exceed 60 months. At June 30, 1998, recreational loans
amounted to $1.5 million, or 2.3% of the Bank's total loan portfolio.
The Bank's second mortgage loans are made on the security of residential real
estate and generally do not exceed 80% of the estimated value of the property,
less the outstanding principal of the first mortgage, and have terms of up to 15
years. Second mortgage loans an adjustable-rate basis at a rate which generally
is equal to the Contract Rate plus a margin of between .5% and 1%. At June 30,
1998, second mortgage loans amounted to $3.0 million, or 4.0% of the Bank's
total loan portfolio.
Other consumer loans primarily consist of loans for consumer purposes.
Consumer loans generally entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as the Bank, and a borrower may be able to assert
against such assignee claims and defenses which it has against the seller of the
underlying collateral.
Nonperforming Loans and Other Problem Assets. It is management's policy to
continually monitor its loan portfolio to anticipate and address potential and
actual delinquencies. When a borrower fails to make a payment on a loan, the
Bank takes immediate steps to have the delinquency cured and the loan restored
to current status.
All loans generally are placed on nonaccrual status if the loan becomes past due
more than 90 days, or management concludes that payment in full is not likely.
At June 30, 1998, the Bank had no loans which were past due more than 90 days
and still on accrual status. Consumer loans are generally charged off, or any
expected loss is reserved for, after they become more than 120 days past due.
All other loans are charged off when management concludes that they are
uncollectible. See Note 2 of Notes to Consolidated Financial Statements.
Real estate acquired by the Bank as a result of foreclosure is classified as
real estate acquired through foreclosure until such time as it is sold. When
such property is acquired, it is recorded at the lower of cost or its fair value
less estimated selling costs. Any required write-down of the loan to its fair
value less estimated selling costs upon foreclosure is charged against the
allowance for loan losses. See Note 2 of Notes to Consolidated Financial
Statements.
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The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
At June 30,
1998 1997
(Dollars in thousands)
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential $ -- $ 171
Commercial -- --
Commercial business -- 20
Consumer 15 34
Total $ 15 $ 225
Percentage of total loans .02% .36%
Other nonperforming assets (2) $ 104 $ 38
____________
(1) Nonaccrual status denotes loans on which, in the opinion of management, the
collection of additional interest is unlikely. Payments received on a nonaccrual
loan are either applied to the outstanding principal balance or recorded as
interest income, depending on assessment of the collectibility of the loan.
(2) Other nonperforming assets represents property acquired by the Bank through
foreclosure or repossession or accounted for as a foreclosure in-substance. This
property is carried at the lower of its fair value less estimated selling costs
or the principal balance of the related loan, whichever is lower.
During the year ended June 30, 1998, gross interest income of $1,000 would have
been recorded on loans accounted for on a nonaccrual basis if the loans had been
current throughout the year. Interest on such loans included in income during
such year amounted to $1,000, for the year ended June 30, 1998. At June 30,
1998, the Bank had no restructured loans.
At June 30, 1998, nonaccrual loans consisted of one consumer loan.
June 30, 1998, the Bank had no loans modified in troubled debt restructurings,
and there were no loans which are not currently classified as nonaccrual, 90
days past due or restructured but where known information about possible credit
problems of borrowers caused management to have serious concerns as to the
ability of the borrowers to comply with present loan repayment terms and may
result in disclosure as nonaccrual, 90 days past due or restructured.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset meeting one of the classification
definitions set forth below may be classified and still be a performing loan. An
asset is classified as substandard if it is determined to be inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. An asset is classified as doubtful if full
collection is highly questionable or improbable. An asset is classified as loss
if it is considered uncollectible, even if a partial recovery could be expected
in the future. The regulations also provide for a special mention designation,
described as assets which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Such assets designated as special mention may include nonperforming loans
consistent with the above definition. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount. Federal examiners may
disagree with a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. The Bank regularly reviews its
assets to determine whether any assets require classification or
re-classification. At June 30, 1998, the Bank had no assets classified as loss
or doubtful and $79,000 of assets classified as substandard, none of which were
included in nonaccrual loans. The assets classified as substandard consisted of
one consumer loan, and two mortgage loans. At June 30, 1998, assets designated
as special mention totaled $356,000 and consisted of one commercial loan and
five consumer loans, one of which was included in nonaccrual loans.
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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 loan being made, the creditworthiness of the borrower over
the term of the loan, general economic conditions and, in the case of a secured
loan, the quality of the security for the loan. It is management's policy to
maintain an adequate allowance for loan losses based on, among other things, the
Bank's and the industry's historical loan loss experience, evaluation of
economic conditions, regular reviews of delinquencies and loan portfolio quality
and evolving standards imposed by federal bank examiners. The Bank increases its
allowance for loan losses by charging provisions for possible 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 allowances 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.
The Bank's methodology for establishing the allowance for losses takes into
consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of the Bank's assets and
evaluates the need to establish allowances on the basis of this review.
Allowances are established by the Board of Directors on a quarterly basis based
on an assessment of risk in the Bank's assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, loan concentrations, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and economic
conditions generally. Specific reserves will be provided for individual assets,
or portions of assets, when ultimate collection is considered improbable by
management based on the current payment status of the assets and the fair value
of the security. At the date of foreclosure or other repossession or at the date
the Bank determines a property is an "in-substance foreclosed" property, the
Bank would transfer the property to real estate acquired in settlement of loans
at the lower of cost or fair value less estimated selling costs. Any portion of
the outstanding loan balance in excess of fair value less estimated selling
costs would be charged off against the allowance for loan losses. If, upon
ultimate disposition of the property, net sales proceeds exceed the net carrying
value of the property, a gain on sale of real estate would be recorded.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
Year Ended June 30,
1998 1997
(Dollars in thousands)
Balance at beginning of year $ 1,314 $ 1,331
Consumer loan charge-offs 67 44
Consumer loan recoveries 26 27
Net loan charge-offs 41 17
Provision for loan losses -- --
Balance at end of year $ 1,273 $ 1,314
Ratio of net charge-offs to average loans
outstanding, net during the year .06% .03%
The following table allocates the allowance for loan losses by asset category at
the dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
8
<PAGE>
June30,
1998 1997
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
(Dollars in thousands)
Real estate 363 53.07% $ 360 54.69%
Commercial business 392 17.10 379 16.08
Consumer 518 29.83 575 29.23
Total allowance for loan losses 1,273 100.00% $ 1,314 100.00%
Investment Activities
The Bank is permitted under federal law to make certain investments, including
investments in securities issued by various federal agencies and state and
municipal governments, deposits at the FHLB of Des Moines, certificates of
deposit in federally insured institutions, certain bankers' acceptances and
federal funds. The Bank may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. Federal regulations require the Bank to
maintain an investment in FHLB of Des Moines stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. The Bank
is also permitted to invest in mortgage-related securities. From time to time,
the OTS adjusts the percentage of liquid assets which savings associations are
required to maintain. For additional information, see " -- Regulation --
Regulation of the Bank -- Liquidity Requirements."
The Bank makes investments in order to maintain the levels of liquid assets
required by regulatory authorities and manage cash flow, diversify its assets,
obtain yield and to satisfy certain requirements for favorable tax treatment.
The investment activities of the Bank consist primarily of investments in
mortgage-backed and related securities and other investment securities,
consisting primarily of securities issued or guaranteed by the U.S. government
or agencies thereof. Typical investments include federally sponsored agency
mortgage pass-through and federally sponsored agency and mortgage-related
securities. Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in the Bank's investment
policy. The Bank performs analyses on mortgage related securities prior to
purchase and on an ongoing basis to determine the impact on earnings and market
value under various interest rate and prepayment conditions. Under the Bank's
current investment policy, securities purchases must be approved by the Bank's
Treasurer. The Board of Directors reviews all securities purchased on a monthly
basis.
Securities designated as "held to maturity" are those assets which the Bank has
the ability and intent to hold to maturity. Upon acquisition, securities are
classified as to the Bank's intent and a sale would only be effected due to
deteriorating investment quality. The investment portfolio is not used for
speculative purposes and is carried at amortized cost. In the event the Bank
sells securities from this portfolio for other than credit quality reasons, all
securities within the investment portfolio with matching characteristics may be
reclassified as assets available for sale. Securities designated as "available
for sale" are those assets which the Bank may not hold to maturity and thus are
carried at market value with unrealized gains or losses, net of tax effect,
recognized in stockholders equity. During 1998, available for sale securities
with an amortized cost and a fair value of $17,352,203 were transferred to the
held to maturity classification. The transfer was made at amortized cost which
approximated fair value.
The following table sets forth the carrying value of the Bank s investment
portfolio at the dates indicated.
At June 30,
1998 1997
(Dollars in thousands)
Securities available for sale:
U.S. Government and agency securities... $ 0 7,916
Corporate obligations... 0 2,431
Collateralized mortgage obligations.. 0 14,638
Securities held to maturity:
U.S. government and agency securities. 27,193 26,414
Corporate obligations. . . . . . . . . . 2,423 1,960
Collateralized mortgage obligations . . . 38,972 26,140
Mortgage-backed securities. . . . . . 9,524 3,599
Total investment securities . . . . . . . . $78,112 $83,098
9
<PAGE>
The Bank invests in various types of liquid assets that are permissible
investments for federally chartered savings banks, including U.S. Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions and federal funds. Subject to
various restrictions applicable to all federally chartered savings banks, the
Bank also invests its assets in investment grade corporate debt securities.
Mortgage-Related Securities. CMOs and REMICs are typically issued by a special
purpose entity, which may be organized in a variety of legal forms, such as a
trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities, which are used to collateralize the mortgage-related
securities. Once combined, the cash flows can be divided into "tranches" or
"classes" of individual securities, thereby creating more predictable average
lives for each security than the underlying pass-through pools. Accordingly,
under this security structure, all principal pay downs from the various mortgage
pools are allocated to a mortgage-related securities' class or classes
structured to have priority until it has been paid off. These securities
generally have fixed interest rates, and, as a result, changes in interest rates
generally would affect the market value and possibly the prepayment rates of
such securities.
Some mortgage-related securities instruments are like traditional debt
instruments due to their stated principal amounts and traditionally defined
interest rate terms. Purchasers of certain other mortgage-related securities
instruments are entitled to the excess, if any, of the issuer's cash inflows.
These mortgage-related securities instruments may include instruments designated
as residual interest and are riskier in that they could result in the loss of a
portion of the original investment. Cash flows from residual interests are very
sensitive to prepayments and, thus, contain a high degree of interest rate risk.
The Bank does not purchase residual interests in mortgage-related securities.
At June 30, 1998, the Bank had $39.0 million in CMOs, which amounted to 25.9% of
total assets. As of June 30, 1998, the securities in the Bank's private
mortgage-backed securities portfolio were rated AAA by at least one nationally
recognized investment rating service.
Prepayments in the Bank's mortgage-related securities portfolio may be affected
by declining and rising interest rate environments. In a low and falling
interest rate environment, prepayments would be expected to increase. In such an
event, the Bank's fixed-rate CMO/REMICs purchased at a premium price could
result in actual yields to the Bank that are lower than anticipated yields. The
Bank's floating rate CMO/REMICs would be expected to generate lower yields as a
result of the effect of falling interest rates on the indexes for determining
payment of interest. Additionally, the increased principal payments received may
be subject to reinvestment at lower rates. Conversely, in a period of rising
rates, prepayments would be expected to decrease, which would make less
principal available for reinvestment at higher rates. In a rising rate
environment, floating rate instruments would generate higher yields to the
extent that the indexes for determining payment of interest did not exceed the
life-time interest rate caps. Such prepayment may subject the Bank's CMO/REMICs
to yield and price volatility.
Mortgage-Backed Securities. Mortgage-backed securities represent a participation
interest in a pool of single- family or multi-family mortgages, the principal
and interest payments on which are passed from the mortgage originators through
intermediaries that pool and repackage the participation interest in the form of
securities to investors such as the Bank. Such intermediaries may include
quasi-governmental agencies such as FHLMC, FNMA and GNMA which guarantee the
payment of principal and interest to investors. Mortgage-backed securities
generally increase the quality of the Bank's assets by virtue of the guarantees
that back them, are more liquid than individual mortgage loans and may be used
to collateralize borrowings or other obligations of the Bank.
Mortgage-backed securities typically are issued with stated principal amounts
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities generally are
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on when the
mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accredited over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.
10
<PAGE>
The Bank's mortgage-backed securities portfolio consists primarily of seasoned
fixed-rate and adjustable rate mortgage-backed and mortgage-related securities.
At June 30, 1998, the Bank had $9.5 million in mortgage-backed securities (6.3%
of total assets) insured or guaranteed by FNMA, FHLMC or GNMA.
The following table sets forth information regarding the expected maturities,
market value and weighted average yields for the Bank's investment securities at
June 30, 1998.
<TABLE>
One Year or Less One to Five Years Five to Ten Years Total Investment Portfolio
Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Value Yield
(Dollars in thousands)
Securities held to maturity:
U.S. government and agency
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
securities $5,953 6.22 $18,240 6.49 $ 3,000 6.25 $27,193 27,300 6.40
Corporate obligations 2,422 7.49 -- --- 2,422 2,462 7.49
Collateralized mortgage
obligations 8,535 6.26 30,437 6.62 -- 38,972 39,061 6.53
Mortgage-backed
securities 643 7.63 8,080 6.44 802 8.09 9,525 9,561 6.26
Total $ 17,553 $56,757 $ 3,802 $78,112 78,384
</TABLE>
For additional information, see Notes 3 and 4 of Notes to Consolidated Financial
Statements.
The Bank is required to maintain average daily balances of liquid assets (cash,
deposits maintained pursuant to Federal Reserve Board requirements, time and
savings deposits in certain institutions, obligations of state and political
subdivisions thereof, shares in mutual funds with certain restricted investment
policies, highly rated corporate debt, and mortgage loans and mortgage-backed
securities with less than one year to maturity or subject to repurchase within
one year) equal to a monthly average of not less than a specified percentage
(currently 4%) of its net withdrawable savings deposits plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. The Bank was in compliance with all liquidity requirements
throughout the year.
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending and
other investment activities and general operational purposes. In addition to
deposits, the Bank derives funds from loan principal repayments, maturities of
investment securities and interest payments. Loan repayments and interest
payments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by prevailing market interest rates and
money market conditions. Borrowings may be used to supplement the Bank's
available funds. The Bank obtains short-term borrowings through the sale of
securities under agreement to repurchase. In addition, the Bank has access to
borrow from the FHLB of Des Moines and the Federal Reserve Bank of Minneapolis.
Deposits. The Bank attracts deposits principally from within its market area by
offering a variety of deposit instruments, including checking accounts, savings
accounts, money market accounts, retirement savings accounts and certificates of
deposit which range in term from three to 120 months. Deposit terms vary
principally on the basis of the minimum balance required, the length of time the
funds must remain on deposit and the interest rate. Maturities, terms, service
fees and withdrawal penalties for its deposit accounts are established by the
Bank on a periodic basis. The Bank reviews its deposit mix and pricing on an
ongoing basis. In determining the characteristics of its deposit accounts, the
Bank considers the rates offered by competing institutions, funds acquisition
and liquidity requirements, growth goals, and federal regulations The Bank does
not accept brokered deposits.
The following table sets forth the average balances and interest rates based on
month-end balances for interest- bearing demand deposits and time deposits as of
the dates indicated.
11
<PAGE>
Year Ended June 30,
1998 1997
Interest- Interest-
Bearing Bearing
Demand Time Demand Time
Deposits Deposits Deposits Deposits
(Dollars in thousands)
Average balance $ 43,432 $ 55,749 $ 41,539 $ 52,008
Average rate 2.25% 5.34% 2.26% 5.62%
The following table shows maturities for certificates of deposit of $100,000 or
more at June 30, 1998.
Three months or less $ 204,838
Over three months to six months 132,000
Over six months to twelve months 115,572
Over twelve months 1,927,906
$ 2,380,316
In the unlikely event the Bank is liquidated, depositors will be entitled to
full payment of their deposit accounts prior to any payment being made to the
stockholder of the Bank, which is the Company.
Borrowings. Savings deposits historically have been the primary source of funds
for the Bank's lending, investment and general operating activities. The Bank is
authorized, however, to use advances from the FHLB of Des Moines to supplement
its supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB of Des Moines functions as a central reserve bank providing credit for
savings institutions and certain other member financial institutions. As a
member of the FHLB system, the Bank is required to own stock in the FHLB of Des
Moines and is authorized to apply for advances. Advances are made pursuant to
several different programs, each of which has its own interest rate and range of
maturities. The Bank is also eligible to borrow from the Federal Reserve Bank of
Minneapolis. The Bank had $2.0 million in outstanding borrowings from either the
FHLB of Des Moines at June 30, 1998 and no outstanding borrowings from the
Federal Reserve.
From time to time the Bank borrows utilizing repurchase agreements issued to
high balance customers. The form of repurchase agreement used by the Bank
involves the sale of securities owned by the Bank with a commitment to
repurchase the same or substantially the same securities at a predetermined
price at a future date. The Bank utilizes the funds it receives from the
repurchase agreements to purchase investment securities with the same maturity
date as the repurchase agreements.
The following table sets forth certain information regarding the Bank's
short-term borrowings at the dates and for the periods indicated:
At or for the
Year Ended June 30,
1998 1997
(Dollars in thousands)
Amounts outstanding at end of period $ 16,081 $ 22,140
Maximum amount of borrowings outstanding
at any month end 31,444 22,140
Approximate average short-term borrowings outstanding (1) 19,528 21,956
Average cost of borrowings 4.19% 3.68%
(1) Based on month-end balances.
Subsidiary Activities
The Bank has one wholly owned subsidiary: Queen City Service Corporation ("Queen
City Service"). Queen City Service, a Minnesota corporation, currently owns part
of a commercial condominium building located in Ely, Minnesota that houses the
Bank's Ely branch. A portion of the property is also leased to three tenants.
Queen City Service is also engaged in the sale of tax deferred annuity contracts
and credit life and disability insurance. At June 30, 1998 the Bank's total
investment in Queen City Service was $70,000.
12
<PAGE>
Competition
The Bank faces strong competition both in originating real estate and other
loans and in attracting deposits. The Bank competes for real estate and other
loans principally on the basis of interest rates and the loan fees it charges,
the types of loans it originates and the quality of services it provides to
borrowers. Its competition in originating real estate loans comes primarily from
other savings institutions, commercial banks and mortgage bankers making loans
secured by real estate located in the Bank's market area. Commercial banks,
credit unions and finance companies provide vigorous competition in consumer
lending. Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
The Bank attracts all its deposits through its branch offices primarily from the
communities in which those offices are located. Consequently, competition for
deposits is principally from other savings institutions, commercial banks,
credit unions and brokers in these communities. The Bank competes for deposits
and loans by offering a variety of deposit accounts at competitive rates, a wide
array of loan products, convenient business hours and branch locations, a
commitment to outstanding customer service and a well-trained staff. In
addition, the Bank believes it has developed strong relationships with local
businesses, realtors, and the public in general.
Employees
As of June 30, 1998, the Bank had 25 full-time and 10 part-time employees, none
of whom was represented by a collective bargaining agreement.
Regulation
General. As a federally chartered savings bank, the Bank is subject to extensive
regulation by the OTS. The lending activities and other investments of the Bank
must comply with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations.
The Bank must file reports with OTS describing its activities and financial
condition and is also subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is intended primarily for
the protection of depositors. Certain of these regulatory requirements are
referred to below or appear elsewhere herein.
Regulation of the Bank
Federal Home Loan Bank System. The Bank is a member of the FHLB System, which
consists of 12 district Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan
Banks provide a central credit facility primarily for member institutions. As a
member of the FHLB of Des Moines, the Bank is required to acquire and hold
shares of capital stock in the FHLB of Des Moines in an amount at least equal to
1% of the aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the end of each year, or 1/20 of its
advances (borrowings) from the FHLB of Des Moines, whichever is greater. The
Bank was in compliance with this requirement with an investment in FHLB of Des
Moines stock at June 30, 1998 of $425,200.
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (I) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
A savings institution must maintain its status as a QTL on a monthly basis in
nine out of every 12 months. A savings institution that fails to maintain
Qualified Thrift Lender status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB System. At June 30, 1998, the Bank
qualified as a QTL.
13
<PAGE>
Regulatory Capital Requirements. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and a combination of
core and "supplementary" capital equal to 8% of "risk-weighted" assets. In
addition, the OTS has adopted regulations which impose certain restrictions on
savings associations that have a total risk-based capital ratio that is less
than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a
ratio of Tier 1 capital to adjusted total assets of less than 4% (or 3% if the
institution is rated Composite 1 under the OTS examination rating system). See
"-- Prompt Corrective Regulatory Action." The Bank is in compliance with all
currently applicable capital requirements.
In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution. The OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the OTS to submit and adhere to a plan for increasing capital. Such
an order may be enforced in the same manner as an order issued by the FDIC.
The table below provides information with respect to the Bank s compliance with
its regulatory capital requirements at June 30, 1998.
Percent of
Amount Assets (1)
(Dollars in thousands)
Tangible capital . . . . . . . . . . . . . . . . $19,169 13.4%
Tangible capital requirement . . . . . . . . .. 2,141 1.5
Excess (deficit) . . . . . . . . . . . . . . .$17,028 11.9%
Core capital (2) . . . . . . . . . . . . . . . . .19,169 13.4$
Core capital requirement . . . . . . . . . . . . 4,281 3.0
Excess (deficit) . . . . . . . . . . . . . . . . $14,888 10.4$
Risk-based capital . . . . . . . . . . . $20,442 29.9%
Risk-based capital requirement . . . . . . . 5,469 8.0
Excess(deficit) . . . . . . . . . . . . . . . . .$14,973 21.9%
(1) Based on adjusted total assets for purposes of the tangible capital and core
capital requirements and risk-weighted assets for purpose of the risk-based
capital requirement.
(2) Reflects the capital requirement which the Bank must satisfy to avoid
regulatory restrictions that may be imposed pursuant to prompt corrective action
regulations.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries.
14
<PAGE>
The federal banking regulators will generally measure a depository institution's
capital adequacy on the basis of the institution's total risk-based capital
ratio (the ratio of its total capital to risk-weighted assets), Tier 1
risk-based capital ratio (the ratio of its core capital to risk-weighted assets)
and leverage ratio (the ratio of its core capital to adjusted total assets).
Under the regulations, a savings institution that is not subject to an order or
written directive to meet or maintain a specific capital level will be deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater. An "adequately capitalized" savings
institution is a savings institution that does not meet the definition of well
capitalized and has: (I) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
composite 1 CAMELS rating). An "undercapitalized institution" is a savings
institution that has (I) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMELS
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (I) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of "tangible equity" to total
assets of less than 2.0%. Tangible equity is defined as core capital plus
cumulative perpetual preferred stock (and related surplus) less all intangibles
other than qualifying supervisory goodwill and certain purchased mortgage
servicing rights. Tier 1 capital is defined as the sum of common stockholders
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. The OTS
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically under- capitalized) if the OTS determines, after
notice and an opportunity for a hearing, that the savings institution is in an
unsafe or unsound condition or that the institution has received and not
corrected a less-than-satisfactory rating for any CAMELS rating category. The
Bank is classified as "well capitalized" under these regulations.
Deposit Insurance. The Bank is required to pay assessments based on a percent of
its insured deposits to the FDIC for insurance of its deposits by the SAIF. The
SAIF assessment rate will be a rate determined by the FDIC to be appropriate to
maintain the reserve ratio of the SAIF to 1.25% of insured deposits or such
higher percentage as the FDIC determines to be appropriate.
Under the FDIC's risk-based deposit insurance assessment system, the assessment
rate for an insured depository institution depends on the assessment risk
classification assigned to the institution by the FDIC, which is determined by
the institution's capital level and supervisory evaluations. Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual assessment period institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. The
assessment rate currently ranges from 0.061% of deposits for well capitalized
institutions in Subgroup A to 0.331% of deposits for undercapitalized
institutions in Subgroup C. Until December 31, 1999, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be assessed
for these obligations at the rate of 1.3 basis points. After December 31, 1999,
both BIF and SAIF members will be assessed at the same rate for FICO payments.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital to total assets of less than 2% will
be deemed to be operating in an unsafe or unsound condition, which would
constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Insured depository institutions with Tier 1 capital equal to or
greater than 2% of total assets may also be deemed to be operating in an unsafe
or unsound condition notwithstanding such capital level. The regulation further
provides that in considering applications that must be submitted to it by
savings associations, the FDIC will take into account whether the savings
association is meeting with the Tier 1 capital requirement for state non- member
banks of 4% of total assets for all but the most highly rated state non-member
banks.
Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, a
thrift institution must maintain average daily reserves equal to 3% on the first
$49.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non
interest-bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1998, the Bank met its reserve requirements.
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Dividend Restrictions. Under OTS regulations, the Bank may not pay dividends on
its capital stock if its regulatory capital would thereby be reduced below the
amount then required for the liquidation account established for the benefit of
certain depositors of the Bank at the time of the Conversion. In addition,
savings institution subsidiaries of savings and loan holding companies are
required to give the OTS 30 days' prior notice of any proposed declaration of
dividends to the holding company.
Federal regulations impose additional limitations on the payment of dividends
and other capital distributions (including stock repurchases and cash mergers)
by the Bank. Under these regulations, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its capital requirements (a "Tier 1 Association")
is generally permitted, without OTS approval, to make capital distributions
during a calendar year in the amount equal to the greater of: (I) 75% of its net
income for the previous four quarters; or (ii) up to 100% of its net income to
date during the calendar year plus an amount that would reduce by one-half the
amount by which its capital-to-assets ratio exceeded regulatory requirements at
the beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital ratio requirements (a "Tier 2 Association") is
permitted to make capital distributions without OTS approval of up to 75% of its
net income for the previous four quarters, less dividends already paid for such
period. A savings institution that fails to meet current minimum capital
requirements (a "Tier 3 Association") is prohibited from making any capital
distributions without the prior approval of the OTS. A Tier 1 Association that
has been notified by the OTS that its is in need of more than normal supervision
will be treated as either a Tier 2 or Tier 3 Association. The Bank is a Tier 1
Association. Under the OTS' prompt corrective action regulations, the Bank is
also prohibited from making any capital distributions if after making the
distribution, the Bank would have: (I) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition. See "-- Prompt Corrective
Regulatory Action."
Furthermore, earnings of the Bank appropriated to bad debt reserves for federal
income tax purposes are not available for payment of cash dividends or other
distributions to the Company without payment of taxes at the then current tax
rate by the Bank on the amount of earnings removed from the reserves for such
distributions. See " -- Taxation." The Company intends to make full use of this
favorable tax treatment afforded to the Bank and the Company and does not
contemplate use of any post-Conversion earnings of the Bank in a manner which
would limit either institution's bad debt deduction or create federal tax
liabilities.
Transactions with Related Parties. Transactions between savings institutions and
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.
An affiliate of a savings institution is any company or entity which controls,
is controlled by or is under common control with the savings institution. In a
holding company context, the parent holding company of a savings institution
(such as the Company) and any companies which are controlled by such parent
holding company are affiliates of the savings institution. Generally, Sections
23A and 23B (I) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (I)
make a loan or otherwise extend credit to an affiliate, except for any affiliate
which engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or
similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
Savings institutions are also subject to the restrictions contained in Section
22(h) of the Federal Reserve Act on loans to executive officers, directors and
principal stockholders. Under Section 22(h), loans to a director, executive
officer and to a greater than 10% stockholder of a savings institution and
certain affiliated interests of such persons, may not exceed, together with all
other outstanding loans to such person and affiliated interests, the
institution's loans-to-one- borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus) and all loans to such persons may
not exceed the institution's unimpaired capital and unimpaired surplus. Section
22(h) also prohibits loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater than 10%
stockholders of a savings institution, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
institution with any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person) as to which such prior board of director
approval is required as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
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Savings institutions are also subject to the requirements and restrictions of
Section 22(g) of the Federal Reserve Act on loans to executive officers and the
restrictions of 12 U.S.C. 1972 on certain tying arrangements and extensions of
credit by correspondent banks. Section 22(g) of the Federal Reserve Act requires
that loans to executive officers of depository institutions not be made on terms
more favorable than those afforded to other borrowers, requires approval by the
board of directors of a depository institution for extension of credit to
executive officers of the institution, and imposes reporting requirements for
and additional restrictions on the type, amount and terms of credits to such
officers. Section 1972 (I) prohibits a depository institution from extending
credit to or offering any other services, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or certain of its affiliates
or not obtain services of a competitor of the institution, subject to certain
exceptions, and (ii) prohibits extensions of credit to executive officers,
directors, and greater than 10% stockholders of a depository institution by any
other institution which has a correspondent banking relationship with the
institution, unless such extension of credit is on substantially the same terms
as those prevailing at the time for comparable transactions with other persons
and does not involve more than the normal risk of repayment or present other
unfavorable features.
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "CDRI Act"), each
Federal banking agency is required to establish safety and soundness standards
for institutions under its authority. On July 10, 1995, the Federal banking
agencies, including the OTS, released Interagency Guidelines Establishing
Standards for Safety and Soundness and published a final rule establishing
deadlines for submission and review of safety and soundness compliance plans.
The final rule and the guidelines go into effect on August 9, 1995. The
guidelines require savings institutions to maintain internal controls and
information systems and internal audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings institutions should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the OTS determines that a
savings institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A savings institution must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
institution to regulatory sanctions. Management believes that the Bank already
meets substantially all the standards adopted in the interagency guidelines, and
therefore does not believe that implementation of these regulatory standards
will materially affect the Bank's operations.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.
Regulation of the Company
General. The Company is a savings and loan holding company as defined by the
HOLA. As such, the Company is registered with the OTS and is subject to OTS
regulation, examination, supervision and reporting requirements. As a subsidiary
of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Company and affiliates thereof.
Activities Restrictions. The Board of Directors of the Company presently intends
to operate the Company as a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
holding company. However, if the Director of the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings institution, the Director of
the OTS may impose such restrictions as deemed necessary to address such risk
including limiting: (I) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, register
as, and become subject to, the restrictions applicable to a bank holding
company. See " -- Regulation of the Bank -- Qualified Thrift Lender Test."
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If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
the activities of the Company and any of its subsidiaries (other than the Bank
or other subsidiary savings institutions) would thereafter be subject to further
restrictions. Among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by, the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies;
or (vii) unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities authorized
by the Federal Reserve Board as permissible for bank holding companies. Those
activities described in (vii) above must also be approved by the Director of the
OTS prior to being engaged in by a multiple holding company.
Restrictions on Acquisitions. Savings and loan holding companies are prohibited
from acquiring, without prior approval of the Director of OTS, (i) control of
any other savings institution or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings institution or holding company thereof which is not a subsidiary.
Under certain circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting shares of an under-capitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings institution, and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquirer is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, bank holding companies are
specifically authorized to acquire control of any savings association. Pursuant
to rules promulgated by the Federal Reserve Board, owning, controlling or
operating a savings institution is a permissible activity for bank holding
companies, if the savings institution engages only in deposit-taking activities
and lending and other activities that are permissible for bank holding
companies. A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
Taxation
General. The Company and its subsidiaries will file a consolidated federal
income tax return on a June 30 fiscal year basis. Consolidated returns have the
effect of eliminating intercompany distributions, including dividends, from the
computation of taxable income for the taxable year in which the distributions
occur.
Federal Income Taxation. Thrift institutions are subject to the provisions of
the Internal Revenue Code of 1986, as amended (the "Code") in the same general
manner as other corporations.
The Bank's federal corporate income tax returns have not been audited in the
last five years.
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State Income Taxation. The State of Minnesota imposes a corporate franchise tax
at the rate of 9.8% on income which is considered Minnesota taxable income.
Taxable income for the State of Minnesota is substantially the same as federal
taxable income.
For additional information regarding taxation, see Note 11 of Notes to
Consolidated Financial Statements.
Item 2. Description of Properties
The following table sets forth information regarding the Company's offices at
June 30, 1998.
Year Owned or Book Value at Approx Deposits at
Opened Leased June 30, 1998 Sq Ft June 30, 1998
(Deposits in thousands)
Main Office:
501 Chestnut Street 1969 Owned $ 255,507 12,600 $ 97,398
Virginia, Minnesota 55792
Branch Offices:
Thunderbird Mall Office 1976 Leased N/A 500 -- (1)
Virginia, Minnesota 55792
102 E. Sheridan Street 1974 Owned 57,334 9,900 8,168
Ely, Minnesota 55731
The Bank does not separately track deposits at the Thunderbird Mall office.
Deposits received at this facility are included in deposits of the main office.
The book value of the Bank's investment in premises and equipment totaled
$480,000 at June 30, 1998. See Note 8 of Notes to Consolidated Financial
Statements.
Item 3. Legal Proceedings.
From time to time, the Bank is a party to various legal proceedings incident to
its business. At June 30, 1998, there were no legal proceedings to which the
Company or the Bank was a party, or to which any of their property was subject,
which were expected by management to result in a material loss to the Company or
the Bank. In addition, there were no pending regulatory proceedings to which the
Company or the Bank was a party, or to which any of their property was subject,
which were expected by management to result in a material loss to the Company or
the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information contained under the sections captioned "Stockholders'
Information" in the Company's Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1998 (the "Annual Report") filed as Exhibit 13 hereto is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Plan of Operation
The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 2 through 13
in the Annual Report is incorporated herein by reference.
19
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Item 7. Financial Statements
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, Independent Auditors' Report contained on pages 14 through 39 in the
Annual Report, which are listed under Item 13 herein, are incorporated herein by
reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
For information concerning the Board of Directors and executive officers of the
Company, the information contained under the section captioned "Proposal I --
Election of Directors" in the Company's definitive proxy statement for the
Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
Item 10. Executive Compensation
The information contained under the sections captioned "Proposal I -- Election
of Directors -- Executive Compensation" " -- Director Compensation," " --
Employment Agreements" and " -- Supplemental Executive Retirement Agreement" in
the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the
section captioned "Voting Securities and Principal Holders Thereof" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the
sections captioned "Voting Securities and Principal Holders Thereof" and
"Proposal I -- Election of Directors" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change in control of the registrant.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I -- Election of Directors -- Transactions with
Management" in the Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K.
(a) List of Documents Filed as Part of this Report
(1) Financial Statements. The following consolidated financial statements are
incorporated by reference from Item 7 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition - June 30, 1998 and 1997
Consolidated Statements of Income - Years ended June 30, 1998 and 1997
20
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Consolidated Statements of Stockholders' Equity - Years ended June 30, 1998, and
1997
Consolidated Statements of Cash Flows - Years ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange Commission
are omitted because of the absence of conditions under which they are required
or because the required information is included in the consolidated financial
statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this Annual
Report on Form 10-KSB and is also the Exhibit Index.
No. Description
3.1 Articles of Incorporation *
3.2 Bylaws *
4 Form of Common Stock Certificate of QCF Bancorp, Inc. **
10.1 QCF Bancorp, Inc. 1995 Stock Option and Incentive Plan * +
10.2 QCF Bancorp, Inc. 1995 Management Recognition Plan * +
10.3(a) Employment Agreement between QCF Bancorp, Inc.
and Kevin E. Pietrini * +
10.3(b) Employment Agreement between Queen City Federal Savings
Bank and Kevin E. Pietrini * +
10.4(a) Severance Agreements between QCF Bancorp, Inc.
and Daniel F. Schultz, Gerald D. McKenna, Judith K.
Kauchick and Linda Myklebust * +
10.4(b) Severance Agreements between Queen City Federal
Savings Bank and Daniel F. Schultz, Gerald D. McKenna,
Judith K. Kauchick and Linda Myklebust * +
10.5 Queen City Federal Savings Bank Deferred
Compensation Plan * +
10.6 Queen City Federal Savings Bank Supplemental
Executive Retirement Agreements with Kevin E. Pietrini
and Daniel F. Schultz * +
10.7 Queen City Federal Savings Bank Grantor Trust Agreement
Relating to Employment Agreements, Severance Agreements,
Supplemental Executive Retirement Agreements and Deferred * +
Compensation Plan
10.8 QCF Bancorp, Inc. 1998 Stock Option and Incentive Plan +
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Mc Gladrey & Pullen, LLP
27 Financial Data Schedule
(*) Incorporated herein by reference from Registration Statement on Form S-1
filed December 6, 1994 (File No. 33- 87044).
(**) Incorporated herein by reference from Registration Statement on Form 8-A
filed March 15, 1995 (File No. 0- 25700).
(+) Management contract or compensatory plan arrangement.
(b) Reports on Form 8-K. During the quarter ended June 30, 1998, the Registrant
did not file any Current Reports on Form 8-K.
(c) Exhibits. The exhibits required by Item 601 of Regulation S-K are either
filed as part of this Annual Report on Form 10-KSB or incorporated by reference
herein.
(d) Financial Statements and Schedules Excluded from Annual Report. There are no
other financial statements and financial statement schedules which were excluded
from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which are
required to be included herein.
21
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QCF BANCORP, INC.
September 25, 1998
By:/s/Kevin E. Pietrini
Kevin E.Pietrini
Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Kevin E. Pietrini September 25, 1998
Kevin E. Pietrini
Chairman of the Board,
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/Daniel F. Schultz September 25, 1998
Daniel F. Schultz
Vice President, Treasurer and Director
(Principal Financial and Accounting Officer)
/s/Peter J. Johnson September 25, 1998
Peter J. Johnson
Director
/s/Craig W. Nordling September 25, 1998
Craig W. Nordling
Director
/s/Robert L. Muhich September 25, 1998
Robert L. Muhich
Director
/s/John C. Pearsall September 25, 1998
John C. Pearsall
Director
/s/John A. Trenti September 25, 1998
John A. Trenti
Director
22
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Exhibit 10.8
24
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QCF BANCORP, INC.
1998 Stock Option Plan
1. Purpose of the Plan.
The purpose of this Plan is to advance the interests of the Company through
providing select key Employees and Directors of the Bank, the Company, and their
Affiliates with the opportunity to acquire Shares. By encouraging such stock
ownership, the Company seeks to attract, retain and motivate the best available
personnel for positions of substantial responsibility and to provide additional
incentives to Directors and key Employees of the Company or any Affiliate to
promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
"Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of
the Company, as such terms are defined in Section 424(e) and (f), respectively,
of the Code.
"Agreement" shall mean a written agreement entered into in accordance with
Paragraph 5(c).
"Bank" shall mean Queen City Federal Savings Bank.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean any one of the following events: (1) the
acquisition of ownership, holding or power to vote more than 25% of the Bank's
or the Company's voting stock, (2) the acquisition of the ability to control the
election of a majority of the Bank's or the Company's directors, (3) the
acquisition of a controlling influence over the management or policies of the
Bank or the Company by any person or by persons acting as a "group" (within the
meaning of Section 13(d) of the Securities Exchange Act of 1934), (except in the
case of (1), (2), and (3) hereof, ownership or control of the Bank by the
Company itself shall not constitute a "Change in Control"), or (4) during any
period of two consecutive years, individuals (the "Continuing Directors") who at
the beginning of such period constitute the Board of Directors of the Company or
the Bank (the "Existing Board") cease for any reason to constitute at least
two-thirds thereof, provided that any individual whose election or nomination
for election as a member of the Existing Board was approved by a vote of at
least two-thirds of the Continuing Directors then in office shall be considered
a Continuing Director. For purposes of this subparagraph only, the term "person"
refers to an individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated organization or
any other form of entity not specifically listed herein. The decision of the
Committee as to whether a change in control has occurred shall be conclusive and
binding.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Stock Option Committee appointed by the Board in
accordance with Paragraph 5(a) hereof.
"Common Stock" shall mean the common stock of the Company.
"Company" shall mean QCF Bancorp, Inc.
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"Continuous Service" shall mean the absence of any interruption or termination
of service as an Employee or Director of the Company or an Affiliate. Continuous
Service shall not be considered interrupted in the case of sick leave, military
leave or any other leave of absence approved by the Company, in the case of a
Director's performance of services in an emeritus or advisory capacity.
"Director" shall mean any member of the Board, and any member of the board of
directors of any Affiliate that the Board has by resolution designated as being
eligible for participation in this Plan.
"Disability" shall mean a physical or mental condition, which in the sole and
absolute discretion of the Committee, is reasonably expected to be of indefinite
duration and to substantially prevent a Participant from fulfilling his or her
duties or responsibilities to the Company or an Affiliate.
"Effective Date" shall mean the date specified in Paragraph 12 hereof.
"Employee" shall mean any person employed by the Company, the Bank, or an
Affiliate.
"Exercise Price" shall mean the price per Optioned Share at which an Option may
be exercised.
"ISO" means an option to purchase Common Stock which meets the requirements set
forth in the Plan, and which is intended to be and is identified as an "stock
option" within the meaning of Section 422 of the Code.
"Market Value" shall mean the fair market value of the Common Stock, as
determined under Paragraph 7(b) hereof.
"Non-Employee Director" shall have the meaning provided in Rule 16b-3.
"Non-ISO" means an option to purchase Common Stock which meets the requirements
set forth in the Plan but which is not intended to be and is not identified as
an ISO.
"Option" means an ISO and/or a Non-ISO.
"Optioned Shares" shall mean Shares subject to an Option granted pursuant to
this Plan.
"Participant" shall mean any person who receives an Option pursuant to the Plan.
"Plan" shall mean this QCF Bancorp, Inc. 1998 Stock Option Plan.
"Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
"Share" shall mean one share of Common Stock.
"Year of Service" shall mean a full twelve-month period, measured from the grant
date of an Option and each annual anniversary of that date, during which a
Participant has not terminated Continuous Service for any reason.
3. Term of the Plan and Options.
Term of the Plan. The Plan shall continue in effect for a term of ten years from
the Effective Date, unless sooner terminated pursuant to Paragraph 14 hereof. No
Option shall be granted under the Plan after ten years from the Effective Date.
2
<PAGE>
Term of Options. The term of each Option granted under the Plan shall be
established by the Committee, but shall not exceed 10 years; provided, however,
that in the case of an Employee who owns Shares representing more than 10% of
the outstanding Common Stock at the time an ISO is granted, the term of such ISO
shall not exceed five years.
4. Shares Subject to the Plan.
Except as otherwise required under Paragraph 19, the aggregate number of Shares
deliverable pursuant to Options shall not exceed 110,000 Shares. Such Shares may
either be authorized but unissued Shares, Shares held in treasury, or Shares
held in a grantor trust created by the Company. If any Options should expire,
become unexercisable, or be forfeited for any reason without having been
exercised, the Optioned Shares shall, unless the Plan shall have been
terminated, be available for the grant of additional Options under the Plan.
5. Administration of the Plan.
Composition of the Committee. The Plan shall be administered by the Committee,
which shall consist of at least two Non-Employee Directors appointed by the
Board. Members of the Committee shall serve at the pleasure of the Board. In the
absence of any time of a duly appointed Committee, the Plan shall be
administered by those members of the Board who are Non-Employee Directors.
Powers of the Committee. Except as limited by the express provisions of the Plan
or by resolutions adopted by the Board, the Committee shall have sole and
complete authority and discretion (i) to select Participants and grant Options,
(ii) to determine the form and content of Options to be issued in the form of
Agreements under the Plan, (iii) to interpret the Plan, (iv) to prescribe, amend
and rescind rules and regulations relating to the Plan, and (v) to make other
determinations necessary or advisable for the administration of the Plan. The
Committee shall have and may exercise such other power and authority as may be
delegated to it by the Board from time to time. A majority of the entire
Committee shall constitute a quorum and the action of a majority of the members
present at any meeting at which a quorum is present, or acts approved in writing
by a majority of the Committee without a meeting, shall be deemed the action of
the Committee.
Agreement. Each Option shall be evidenced by a written agreement containing such
provisions as may be approved by the Committee. Each such Agreement shall
constitute a binding contract between the Company and the Participant, and every
Participant, upon acceptance of such Agreement, shall be bound by the terms and
restrictions of the Plan and of such Agreement. The terms of each such Agreement
shall be in accordance with the Plan, but each Agreement may include such
additional provisions and restrictions determined by the Committee, in its
discretion, provided that such additional provisions and restrictions are not
inconsistent with the terms of the Plan. In particular, the Committee shall set
forth in each Agreement (i) the Exercise Price of an Option, (ii) the number of
Shares subject to, and the expiration date of, the Option (iii) the manner, time
and rate (cumulative or otherwise) of exercise or vesting of such Option, and
(iv) the restrictions, if any, to be placed upon such Option, or upon Shares
which may be issued upon exercise of such Option.
The Chairman of the Committee and such other Directors and officers as shall be
designated by the Committee are hereby authorized to execute Agreements on
behalf of the Company and to cause them to be delivered to the recipients of
Options.
Effect of the Committee's Decisions. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
Indemnification. In addition to such other rights of indemnification as they may
have, the members of the Committee shall be indemnified by the Company in
connection with any claim, action, suit or proceeding relating to any action
taken or failure to act under or in connection with the Plan or any Option,
granted hereunder to the full extent provided for under the Company's governing
instruments with respect to the indemnification of Directors.
3
<PAGE>
6. Grant of Options.
General Rule. The Committee shall have the discretion to make discretionary
grants of Options to Employees and Directors (including members of the
Committee).
Reload Grants. In any Agreement or in a formal or informal program, the
Committee may establish terms and conditions under which an Option will be
granted upon the exercise of an Option or stock option granted under another
Company plan; provided that the Exercise Price for the new Option shall equal
the Market Value of the underlying Shares on that date.
Automatic Grants to Employees. On the Effective Date, each of the following
Employees shall receive an Option (in the form of an ISO, to the extent
permissable under the Code) to purchase the number of Shares listed below, at an
Exercise Price per Share equal to the Market Value of a Share on the Effective
Date; provided that such grant shall not be made to an Employee whose Continuous
Service terminates on or before the Effective Date:
Percentage of Shares
Participant Reserved under Paragraph 4
Kevin E. Pietrini 35
Daniel F. Schultz 25
Linda Myklebust 6
Gerald D. McKenna 6
Judith Kauchick 3
Automatic Grants to non-employee Directors. Notwithstanding any other provisions
of this Plan, each Director who is not an Employee but is a Director on the
Effective Date shall receive, on said date, Non-ISOs to purchase a number of
Shares equal to the quotient obtained by dividing - twenty-five (25%) of the
number of Shares reserved under Paragraph 4(a) hereof, by the number of
Directors entitled to receive an Option on the Effective Date, pursuant to this
Paragraph 9(a).
The Options granted to the Participants hereunder (i) shall vest in accordance
with the general rule set forth in Paragraph 8(a) of the Plan, (ii) shall have a
term of ten years from the Effective Date, and (iii) shall be subject to the
general rule set forth in Paragraph 8(c) with respect to the effect of a
Participant's termination of Continuous Service on the Participant's right to
exercise his Options.
7. Exercise Price for Options.
Limits on Committee Discretion. The Exercise Price as to any particular Option
shall not be less than 100% of the Market Value of the Optioned Shares on the
date of grant. In the case of an Employee who owns Shares representing more than
10% of the Company's outstanding Shares of Common Stock at the time an ISO is
granted, the Exercise Price shall not be less than 110% of the Market Value of
the Optioned Shares at the time the ISO is granted.
4
<PAGE>
Standards for Determining Exercise Price. If the Common Stock is listed on a
national securities exchange (including the NASDAQ National Market System) on
the date in question, then the Market Value per Share shall be the average of
the highest and lowest selling price on such exchange on such date, or if there
were no sales on such date, then the Exercise Price shall be the mean between
the bid and asked price on such date. If the Common Stock is traded otherwise
than on a national securities exchange on the date in question, then the Market
Value per Share shall be the mean between the bid and asked price on such date,
or, if there is no bid and asked price on such date, then on the next prior
business day on which there was a bid and asked price. If no such bid and asked
price is available, then the Market Value per Share shall be its fair market
value as determined by the Committee, in its sole and absolute discretion.
8. Exercise of Options.
Generally. Unless the Committee specifically eliminates any vesting requirement
or imposes a different vesting schedule in an Agreement granting an Option, each
Option grant shall be vested and exercisable with respect to 50% of the Optioned
Shares on the date of the grant, and shall become vested and exercisable with
respect to the remaining 50% on the Optionee's completion of one Year of
Service; provided that vesting otherwise scheduled to occur prior to stockholder
approval of the Plan pursuant to Paragraph 12 hereof shall be deferred until the
date of such approval. An Option may not be exercised for a fractional Share.
Procedure for Exercise. A Participant may exercise Options, subject to
provisions relative to its termination and limitations on its exercise, only by
(1) written notice of intent to exercise the Option with respect to a specified
number of Shares, and (2) payment to the Company (contemporaneously with
delivery of such notice) in cash, in Common Stock, or a combination of cash and
Common Stock, of the amount of the Exercise Price for the number of Shares with
respect to which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at its executive
offices. Common Stock utilized in full or partial payment of the Exercise Price
for Options shall be valued at its Market Value at the date of exercise, and may
consist of Shares subject to the Option being exercised.
Period of Exercisability. Except to the extent otherwise provided in the terms
of an Agreement, an Option may be exercised by a Participant only while he is an
Employee and has maintained Continuous Service from the date of the grant of the
Option, or within one year after termination of such Continuous Service (but not
later than the date on which the Option would otherwise expire), except if the
Employee's Continuous Service terminates by reason of -
5
<PAGE>
"Just Cause" which for purposes hereof shall have the meaning set forth in any
unexpired employment or severance agreement between the Participant and the Bank
and/or the Company (and, in the absence of any such agreement, shall mean
termination because of the Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order), then the Participant's rights to exercise such Options
shall expire on the date of such termination; death, then to the extent the
Participant would have been entitled to exercise the Option immediately prior to
his death, such Option of the deceased Participant may be exercised within two
years from the date of his death (but not later than the date on which the
Option would otherwise expire) by the personal representatives of his estate or
person or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution.
Effect of the Committee's Decisions. The Committee's determination whether a
Participant's Continuous Service has ceased, and the effective date thereof,
shall be final and conclusive on all persons affected thereby.
Mandatory Six-Month Holding Period. Notwithstanding any other provisions of this
Plan to be contrary, Common Stock that is purchased upon exercise of an Option
may not be sold within the six-month period following the grant date of that
Option, except in the event of the Participant's death or disability, or such
other event as the Board may specifically deem appropriate.
9. Change in Control; Effect of Changes in Common Stock Subject to the Plan.
Change in Control. Upon the earlier of a Change in Control or the execution of
an agreement to effect a Change in Control, all Options shall become fully
exercisable, notwithstanding any other provision of the Plan or any Agreement.
Recapitalizations; Stock Splits, Etc. The number and kind of shares reserved for
issuance under the Plan, and the number and kind of shares subject to
outstanding Options, and the Exercise Price thereof, shall be proportionately
adjusted for any increase, decrease, change or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
Transactions in which the Company is Not the Surviving Entity. In the event of
(i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding
Options, together with the Exercise Prices thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or kind of shares or
other securities which results from the Transaction.
Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Paragraph, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Option before the adjustment was made.
Other Issuances. Except as expressly provided in this Paragraph, the issuance by
the Company or an Affiliate of shares of stock of any class, or of securities
convertible into Shares or stock of another class, for cash or property or for
labor or services either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, shall not affect, and no adjustment shall be
made with respect to, the number, class, or Exercise Price of Shares then
subject to Options or reserved for issuance under the Plan.
6
<PAGE>
10. Non-Transferability of Options.
Options may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, or any other provision of this
Plan, a Participant who holds Options may transfer such Options (but not ISOs)
to his or her spouse, lineal ascendants, lineal descendants, or to a duly
established trust for the benefit of one or more of these individuals. Options
so transferred may thereafter be transferred only to the Participant who
originally received the grant or to an individual or trust to whom the
Participant could have initially transferred the Options pursuant to this
Paragraph 11. Options which are transferred pursuant to this Paragraph 11 shall
be exercisable by the transferee according to the same terms and conditions as
applied to the Participant.
11. Time of Granting Options.
The date of grant of an Option shall, for all purposes, be the later of the date
on which the Committee makes the determination of granting such Option, and the
Effective Date. Notice of the determination shall be given to each Participant
to whom an Option is so granted within a reasonable time after the date of such
grant.
12. Effective Date.
The Plan shall be effective September 10, 1998; provided that the effectiveness
of the Plan and any Option shall be absolutely contingent upon the Plan's
approval by a favorable vote of stockholders owning at least a majority of the
total votes cast at a duly called meeting of the Company' s stockholders held in
accordance with applicable laws, and no Options shall become exercisable prior
to approval of the Plan by the stockholders of the Company.
13. Modifications of Options.
At any time, and from time to time, the Board may authorize the Committee to
direct execution of an instrument providing for the modification of any
outstanding Option, provided no such modification shall confer on the holder of
said Option any right or benefit which could not be conferred on him by the
grant of a new Option at such time, or impair the Option without the consent of
the holder of the Option.
14. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of this Plan and, with respect
to any Shares at the time not subject to Options, suspend or terminate this
Plan. No amendment, suspension or termination of this Plan shall, without the
consent of any affected holders of an Option, alter or impair any rights or
obligations under any Option theretofore granted.
15.Conditions Upon Issuance of Shares.
Compliance with Securities Laws. Shares of Common Stock shall not be issued with
respect to any Option unless the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed.
Special Circumstances. The inability of the Company to obtain approval from any
regulatory body or authority deemed by the Company's counsel to be necessary to
the lawful issuance and sale of any Shares hereunder shall relieve the Company
of any liability in respect of the non-issuance or sale of such Shares. As a
condition to the exercise of an Option, the Company may require the person
exercising the Option to make such representations and warranties as may be
necessary to assure the availability of an exemption from the registration
requirements of federal or state securities law.
7
<PAGE>
Committee Discretion. The Committee shall have the discretionary authority to
impose in Agreements such restrictions on Shares as it may deem appropriate or
desirable, including but not limited to the authority to impose a right of first
refusal, or to establish repurchase rights, or to pay an Optionee the
in-the-money value of his Option in consideration for its cancellation, or all
of these restrictions.
16. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
17. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options shall be
subject to the Participant's satisfaction of all applicable federal, state and
local income and employment tax withholding obligations. The Committee, in its
discretion, may permit the Participant to satisfy the obligation, in whole or in
part, by irrevocably electing to have the Company withhold Shares, or to deliver
to the Company Shares that he already owns, having a value equal to the amount
required to be withheld. The value of the Shares to be withheld, or delivered to
the Company, shall be based on the Market Value of the Shares on the date the
amount of tax to be withheld is to be determined. As an alternative, the Company
may retain, or sell without notice, a number of such Shares sufficient to cover
the amount required to be withheld.
18. No Employment or Other Rights.
In no event shall an Employee's or Director's eligibility to participate or
participation in the Plan create or be deemed to crate any legal or equitable
right of the Employee, Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. Except to the extent
provided in Paragraphs 6(b) and 9(a), no Employee or Director shall have a right
to be granted an Option or, having received an Option, the right to again be
granted an Option. However, an employee or Director who has been granted an
Option may, if otherwise eligible, be granted an additional Option or Options.
19. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of the
State of Minnesota, except to the extent that federal law shall be deemed to
apply.
8
<PAGE>
EXHIBIT 13
<PAGE>
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 another exciting and productive year at Queen City Federal and a
record year in terms of earning. We ended the year with a net income of
$2,653,000. This represents a return on average assets of 1.72%. We also ended
the year with record earnings per share of $2.30.
The record earnings are a result of the continuation of our transition from a
traditional thrift to a community bank. Increases from last year in both
consumer and commercial lending are helping us position ourselves as our
community's "local Bank". This focus on commercial and consumer lending has
allowed us to increase our asset yields and provide added fee income as well as
giving us the opportunity to attract low-cost commercial deposits. This has all
been accomplished while cutting the ratio of non-performing assets to total
assets in half. 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". We will continue our commitment to the local community bank
concept by promoting local involvement in the community and keeping the
decision process in the hands of our local board and management.
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. I
would also like to thank our employees for their hard work and dedication in
making this another successful year at Queen City Federal.
Sincerely,
Kevin E. Pietrini
Chairman of the Board,
President and
Chief Executive Officer
<PAGE>
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Data)
At or For the Year Ended
June 30
1998 1997
Operating Results
Net interest income $ 6,467 6,029
Non interest income 691 566
Non interest expense 2,869 3,276
Net Income 2,653 2,011
Per Share Data
Net income (Diluted) $ 2.30 1.65
Book value 19.93 19.23
Balance Sheet Data
Total assets $ 150,486 156,727
Investment Securities 78,112 83,098
Net loans 65,194 61,202
Deposits 105,566 103,681
Short-term borrowings 16,081 22,140
Stockholders' equity 26,328 27,423
Financial Ratios
Return on average assets 1.72% 1.34
Return on average equity 9.82 7.44
Net interest margin 4.31 4.12
Average equity to average assets 17.54 18.03
Non-performing assets to total assets .08 .17
Total regulatory capital to risk-adjusted assets 29.90 27.58
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>
<TABLE>
FIVE-YEAR SELECTED FINANCIAL SUMMARY(1)
(Dollars in Thousands, Year Ended June 30
Except per Share Data)
Operating Results 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest income $ 11,243 10,703 10,658 8,867 7,558
Interest expense 4,776 4,674 4,585 4,018 3,947
Net interest income 6,467 6,029 6,073 4,849 3,611
Provision for loan losses 0 0 0 0 60
Non-interest income 691 566 480 411 416
Non-interest expense 2,869 3,276 2,687 2,378 2,164
Income tax expense 1,636 1,308 1,533 1,166 734
Income before cumulative effect
of change in accounting principle 2,653 2,011 2,333 1,715 1,069
Net income 2,653 2,011 2,333 1,715 1,588
Per Share Data (diluted)
Net income (1995 - March 31-June 30) $ 2.30 1.65 1.46 0.35
Pro forma net income 1.04
Book value 19.93 19.23 18.47 17.17
Balance Sheet Data
Total Assets $ 150,486 156,727 150,430 146,548 133,135
Investment securities 78,112 83,098 89,183 88,503 85,412
Net loans 65,194 61,202 52,361 45,964 40,810
Deposits 105,566 103,681 88,832 113,544 113,091
Short-term borrowings 16,081 22,140 29,264 0 4,190
Stockholders' equity 26,328 27,423 29,685 30,602 13,991
Financial Ratios
Return on average assets 1.72% 1.34 1.56 1.27 0.80 (2)
Return on average equity 9.82 7.44 8.06 10.09 8.02
Average equity to average assets 17.54 18.03 19.33 12.62 9.94
<FN>
(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 1998 and
only the Bank for 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%.
</FN>
</TABLE>
Results of Operations
QCF's net income of $2.7 million, or $2.30 per diluted share, in fiscal 1998
increased $642,000, or 31.9%, from fiscal 1997 net income. The increase in net
income for fiscal 1998 as compared to the prior year was due primarily to the
absence of any special assessment by the FDIC during fiscal year 1998. In fiscal
year 1997, the Bank was required to pay a special assessment of $416,000 net of
taxes to help recapitalize the SAIF. The improvement in fiscal 1998 was also due
to an increase in net interest income.
Return on average assets was 1.72% for fiscal 1998 compared to 1.34% for fiscal
1997.
2
<PAGE>
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 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 interest-bearing liabilities
and the results and yields.
<TABLE>
Year Ended June 30
1998 1997 1996
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) $ 64,020 5,758 8.99 57,087 5,144 9.01 48,671 4,439 9.12
Investment securities 79,186 5,159 6.52 84,388 5,385 6.38 90,373 6,011 6.65
Other including cash equivalents 6,841 327 4.78 4,749 174 3.66 4,408 208 4.72
Total interest-earning assets $ 150,047 11,244 7.49 146,244 10,703 7.32 142,909 10,658 7.46
Interest-Bearing Liabilities
NOW accounts $ 8,746 107 1.22 8,835 118 1.34 9,255 127 1.37
Passbooks 25,268 632 2.50 23,939 598 2.50 26,084 652 2.50
Money market accounts 9,418 240 2.55 8,765 224 2.55 9,228 235 2.55
Certificate accounts 55,749 2,978 5.34 52,008 2,925 5.62 52,208 2,900 5.55
Short-term borrowings 19,528 819 4.19 21,956 809 3.68 11,980 671 5.60
Total interest-bearing liabilities $ 118,709 4,776 4.02 115,503 4,674 4.05 108,755 4,585 4.22
Net Interest Income $6,468 6,029 6,073
Net Earning Assets $ 31,338 30,721 34,154
Net Yield on Interest-Earning Assets 4.31% 4.12 4.25
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities 126.40% 126.60 131.40
<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. Loan fee income is not significant.
</FN>
</TABLE>
Net interest income was $6.5 million for the fiscal year ended June 30, 1998, up
from $6.0 million in fiscal 1997. This represents an increase of 7.3% from
fiscal 1997. The increase in net interest income was due to an increase 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>
<TABLE>
Year Ended June 30
1998 vs 1997 1997 vs 1996
(Dollars in thousands) Increase(Decrease) Due to
Volume Rate Total Volume Rate Total
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net $ 625 (11) 614 760 (55) 705
Investment securities (341) 115 (226) (388) (238) (626)
Other including cash
equivalents 91 62 153 15 (49) (34)
Total interest-earning assets 375 166 541 387 (342) 45
Interest-bearing liabilities:
NOW accounts $ (1) (10) (11) (6) (3) (9)
Passbooks 34 0 34 (54) 0 (54)
Money market accounts 16 0 16 (11) 0 (11)
Certificate accounts 204 (151) 53 (11) 36 25
Short-term borrowings (95) 105 10 424 (286) 138
Total interest-bearing
liabilities $ 158 (56) 102 342 (253) 89
Change in net interest income $ 217 222 439 45 ( 89) (44)
</TABLE>
In fiscal 1998 the yield on average interest-earning assets increased by 17
basis points which increased interest income as compared to fiscal 1997.
Interest income also increased due to a $ 3.8 million increase in average
interest-earning assets between fiscal years 1998 and 1997. The combined impact
(interest rate increase and volume increase) caused interest income for fiscal
1998 to increase $541,000 or 5.1%. Interest expense increased $102,000 from
fiscal 1997 to 1998. The increase was due to an increase in average
interest-bearing liabilities of $3.2 million or 2.8%, partially offset by a 3
basis point decrease in interest rates. The increase in average interest-bearing
liabilities was due to a $2.4 million decrease in average short-term borrowings
partially offset by a $5.6 million increase in deposit accounts.
Provision for Loan Losses
The Bank made no provision for loan losses in fiscal 1998 or 1997. Provisions
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 $691,000 for fiscal 1998 compared to $566,000 for fiscal
1997. The following table presents major components of non-interest income.
Year Ended June 30
(Dollars in thousands) 1998 1997
Fees and service charges $ 476 489
Other 103 77
Gain On Sale of Securities 112 0
Total non-interest income $ 691 566
The increase of $125,000 or 22.1% in total non-interest income between fiscal
year 1998 and 1997 was primarily due to gain on sale of securities.
4
<PAGE>
Non-interest Expense
Non-interest expense was $2.9 million for fiscal 1998 compared to $3.3 million
for fiscal 1997. The following Table presents the major components of
non-interest expense.
Year Ended June 30
(Dollars in thousands) 1998 1997
Compensation and benefits $2,033 1,865
Occupancy 244 214
Federal deposit insurance premiums 67 675
Advertising 58 74
Other 467 448
Total non-interest expense $2,869 3,276
Total non-interest expense decreased $407,000 or 12.4% from fiscal 1997 to
fiscal 1998. The primary cause of the decrease was a decrease in Federal deposit
insurance premiums. Such decrease was due to a special assessment by the FDIC in
fiscal 1997.
Income Taxes
QCF recorded income tax expense of $1.6 million in fiscal 1998 compared to $1.3
million in fiscal 1997. The increase in income tax expense between 1997 and 1998
is primarily the result of changes in taxable income between the years.
Financial Condition
QCF's total assets at June 30, 1998 were $150.5 million compared to $156.7
million at June 30, 1997. The decrease of $6.2 million from 1998 to 1997
reflects fluctuations in levels of deposits and short-term borrowings, which are
responsive to market conditions.
Investment Securities
Investment securities decreased by $5.0 million or 6.0% from fiscal 1997 to
fiscal 1998. The decrease was due to an increase in loan demand and a decrease
in short-term borrowings. During fiscal 1998, QCF purchased $57.2 million of
investment securities and collected principal from maturities or repayments of
$62.8 million.
Cash and Cash Equivalents
Cash and cash equivalents decreased by $3.8 million from $7.8 million at June
30, 1997 to $4.0 million at June 30, 1998. 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 $4.0 million or 6.5% from $61.2 million at June
30, 1997 to $65.2 million at June 30, 1998. 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 $119,000 at June 30, 1998 compared to $263,000 at
June 30, 1997.
Non-performing assets are summarized in the following table.
June 30
(Dollars in thousands) 1998 1997 1996 1995 1994
Non-accrual loans $ 15 225 297 182 43
Foreclosed assets 104 38 6 0 4
Total non-performing assets $ 119 263 303 182 47
Non-performing assets to year-end assets .08 .17 .20 .13 .04
Non-performing loans to year-end loans .18 .43 .58 .40 .11
Allowance for loan losses to
Non-performing assets 1,070 501 439 755 2,955
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 $1.9 million, or 1.8%, from $103.7 million at June
30, 1997 to $105.6 million at June 30, 1998. Short-term borrowings, which
consist of sales of securities under agreements to repurchase identical
securities remained stable between fiscal years at approximately $14.1 million.
Federal Home Loan Bank advances decreased $6.1 million from $8.1 million at June
30, 1997 to $2.0 million at June 30, 1998.
Capital Adequacy
Stockholders' equity was $26.3 million at June 30, 1998 down from $27.4 million
at June 30, 1997. The decrease was due to the repurchase of stock for the
treasury of $3.5 million and for the stock option trust of $1.0 million offset
primarily by earnings of $2.6 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% of adjusted
total assets, and (iii) a requirement that "risk-based capital" equal or exceed
8.0% of risk-weighted assets. At June 30, 1998 and 1997, 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 4% of its net withdrawable savings deposits plus short-term borrowings. The
Bank has maintained an average daily liquidity ratio in excess of these
requirements.
6
<PAGE>
The primary investing activities are the origination of loans and the purchase
of securities. During the year ended June 30, 1998, net loans increased $4.0
million while maturities and principal collected on investment securities, net
of purchases totaled $5.6 million.
The primary financing activity is the attraction of deposits and short-term
borrowings. During the year ended June 30, 1998, deposits and short-term
borrowings decreased $4.2 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 decreased $3.8 million to $4.0 million during the year
ended June 30, 1998.
Asset/Liability Management and Market Risk
The Bank's primary market risk is interest rate risk. 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' s 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.
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.
7
<PAGE>
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.
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
The Bank has been identifying potential problems associated with the Y2K issue
and has implemented a plan designed to ensure that all software used in
connection with the Bank's business will manage and manipulate data involving
the transition with data from 1999 to 2000 without functional or data
abnormality and without inaccurate results related to such data. In addition,
the Bank recognizes that its ability to be Y2K compliant is dependent upon the
cooperation of its vendors. The Bank is requiring its vendors to represent that
their products are or will be Y2K compliant and has planned a program for
testing compliance. All Y2K issues for the Bank, including testing, are expected
to be addressed by December 31, 1998 and any problems would be remedied by March
31, 1999. The Bank will also prepare contingency plans in the event there are
system interruptions. The Bank believes that its costs related to Y2K will be
approximately $700,000, primarily related to replacing the bank's core inhouse
computer software and hardware systems.
8
<PAGE>
MCGLADREY & PULLEN,LLP RSM
Certified Public Accountants and Consultants international
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
QCF Bancorp, Inc.
Virginia, Minnesota
We have audited the accompanying consolidated statements of financial condition
of QCF Bancorp, Inc. and subsidiary (the Company) as of June 30, 1998 and 1997,
and the related consolidated statements of income, stockholders'equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QCF Bancorp, Inc.
and subsidiary as of June 30, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Mcgladrey & Pullen, llp
Duluth, Minnesota
August 14,1998
9
<PAGE>
<TABLE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
Assets June 30, 1998 June 30, 1997
<S> <C> <C>
Cash $ 764,128 747,733
Interest-bearing deposits with banks 3,194,241 7,026,683
Cash and cash equivalents 3,958,369 7,774,416
Securities available for sale
(amortized cost of $25,359,674
at June 30, 1997)8 0 24,985,627
Securities held to maturity
(estimated market value of $78,384,31458,334,591 and
$58,334,591 at June 30, 1998 and 1997, respectively) 78,111,850 58,112,799
Loans receivable, net 65,194,321 61,202,301
Federal Home Loan Bank stock, at cost 425,200 553,900
Accrued interest receivable 1,274,412 1,310,779
Premises and equipment 480,169 424,609
Deferred tax asset 479,200 519,300
Prepaid expenses and other assets 562,812 1,843,672
Total Assets $150,486,333 156,727,403
Liabilities and Stockholders' Equity
Deposits $ 105,566,338 103,68l,490
Short-term borrowings 14,081,081 14,039,794
Federal Home Loan Bank advances 2,000,000 8,100,000
Accrued interest payable 1,129,347 1,071,313
Advance payments made by borrowers
for taxes and insurance 66,831 61,675
Accrued expenses and other liabilities 1,314,640 2,349,845
Total Liabilities 124,158,237 129,304,117
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock; authorized 1,000,000 shares;
issued and outstanding none
Common stock ($.01 par value): authorized 7,000,000 shares;
issued 1,782,750; outstanding 1,321,034 shares in 1998
and 1,426,200 in 1997. 17,828 17,828
Additional paid-in capital 16,375,783 16,665,625
Retained earnings, subject to certain restrictions 22,704,864 20,051,443
Net unrealized loss on securities available for sale 0 (222,745)
Unearned employee stock ownership plan shares (1,022,230) (1,080,710)
Unearned management recognition plan shares (526,123) (746,292)
Deferred compensation payable in common stock 541,339 0
Shares in stock option trust, at exercise price (2,349,884) (1,872,071)
Treasury stock, at cost, 533,484 shares in 1998
and 356,550 in at June 30, 1997 (9,413,481 (5,389,792)
Total Stockholders' Equity 26,328,096 27,423,286
Total Liabilities and Stockholders' Equity $150,486,333 156,727,403
See accompanying notes to consolidated financial statements.
</TABLE>
10
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Year Ended June 30
1998 1997
Interest income:
Loans $5,756,593 5,143,815
Securities 5,486,860 5,558,735
Total interest income 11,243,453 10,702,550
Interest expense:
Deposits 3,956,865 3,864,147
Short-term borrowings 819,001 809,248
Total interest expense 4,775,866 4,673,395
Net interest income 6,467,587 6,029,155
Provision for loan losses 0 0
Net interest income after provision
for loan losses 6,467,587 6,029,155
Non-interest income:
Fees and service charges 475,935 489,517
Other 103,156 76,584
Gain on sale of securities 112,218 0
Total non-interest income 691,309 566,101
Non-interest expense:
Compensation and benefits 2,033,453 1,865,372
Occupancy 243,982 213,910
Federal deposit insurance premiums 67,200 675,361
Advertising 58,409 73,683
Other 466,431 447,676
Total non-interest expense 2,869,475 3,276,002
Income before income tax expense 4,289,421 3,319,254
Income tax expense 1,636,000 1,308,000
Net income 2,653,421 $2,011,254
Basic earnings per common share $2.51 1.71
Diluted earnings per common share $2.30 1.65
See accompanying notes to consolidated financial statements.
11
<PAGE>
<TABLE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Net Unrealized Unearned
Addt'l Gain (loss) on Employee Unearned
Common Paid-in Securities Stock Management Deferred Stock Total
Stock Capital Retained Available Ownership Recognition Comp Treasury Option Stockholders
Stock Earnings For Sale Plan Plan Payable Stock Trust Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 17,828 17,003,711 18,040,189 (636,750) (1,183,330) (944,177) 0 (2,612,675) 0 29,684,796
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 manage-
ment recognition plan 197,885 197,885
Change in net unrealized
loss on securities avail-
able for sale 414,005 414,005
Earned employee stock
ownership plan shares 28,883 102,620 131,503
Balance, June 30, 1997 l7,828 16,665,625 20,051,443 (222,745) (1,080,710) (746,292) 0 (5,389,792) (1,872,071) 27,423,286
Net Income 2,653,421 2,653,421
Purchase of treasury stock (3,482,350) (3,482,350)
Reclassification of stock to
deferred comp. payable 617,840 (617,840) 0
Settlement of deferred comp payable
in stock 45,942 (76,501) 76,501 45,942
Purchase of stock for
stock option trust (529,957) (601,495) (1,131,452)
Exercise of stock options 51,086 123,682 174,768
Amortization of manage-
ment recognition plan 83,106 220,169 303,275
Change in unrealized
loss on securities avail-
able for sale 222,745 222,745
Earned employee stock
ownership plan shares 59,981 58,480 118,461
Balance, June 30, 1998 17,828 16,375,783 22,704,864 0 (1,022,230) (526,123) 541,339 (9,413,481) (2,349,884) 26,328,096
See accompanying notes to consolidated financial statements.
</TABLE>
12
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
Year ended June 30
1998 1997
Operating activities:
<S> <C> <C>
Net income $2,653,421 2,011,254
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 108,406 91,524
Gain on sale of securities (112,218) 0
Amortization of net (discounts) premiums on securities (97,718) 52,777
Decrease(increase) in accrued interest receivable 36,367 (87,066)
Increase in accrued interest payable 58,034 57,945
(Decrease)Increase in accrued expenses & other liabilities (277,565) 229,422
Increase(decrease) in deferred income taxes (111,200) (105,100)
Amortization of unearned ESOP shares 158,795 175,503
Amortization of MRP 220,169 197,885
Decrease(increase) in other assets 729,159 (68,842)
Net cash provided by operating activities $3,365,650 2,555,302
Investing activities:
Proceeds from sales of securities available for sale 599,600 0
Proceeds from sale of Federal Home Loan Bank stock 128,700 0
Proceeds from maturities and principal collected
on securities held to maturity 54,568,400 22,597,122
Proceeds from maturities and principal collected
on securities available for sale 7,617,805 7,873,050
Purchases of securities held to maturity (57,215,248) (23,751,337)
Net increase in loans (3,992,020) (8,841,080)
Net increase in real estate owned (66,140) (32,302)
Purchases of premises and equipment (163,966) (75,397)
Net cash provided by ( used in) investing activities 1,477,131 (2,229,944)
Financing activities:
Net increase in deposits 1,884,848 14,849,066
Net increase(decrease) in short-term borrowings 41,287 (12,223,942)
Net (decrease) increase in Federal Home Loan
Bank advances (6,100,000) 5,100,000
Purchase of treasury stock (3,482,350) (2,777,117)
Purchase of stock for stock option trust (1,131,452) (2,239,040)
Proceeds from exercise of stock options 123,682 0
Increase in advance payments made by
borrowers for taxes and insurance 5,1576 5,098
Net cash (used in) provided for financing activities (8,658,828) 2,714,065
Decrease(increase) in cash and cash equivalents (3,816,047) 3,039,423
Cash and cash equivalent at beginning of year 7,774,416 4,734,993
Cash and cash equivalents at end of year $3,958,369 7,774,416
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $1,696,547 1,311,807
Interest 4,717,832 4,615,450
Supplemental schedule of non-cash operating and
Investing activities:
Securities transferred to securities held to maturity 17,352,203 0
Deferred compensation obligation and related stock in Grantor
trust reclassified to stockholder's equity 617,840 0
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
Description of the Business
QCF Bancorp, Inc. (the Company) is the holding company of Queen City Federal
Savings Bank (the Bank) with operations in Virginia and Ely, Minnesota. The Bank
provides retail and commercial loan and deposit services primarily to customers
within a 30-mile radius of Virginia and Ely, Minnesota. 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, 1996, 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, 1996 and the conversion was
consummated on March 31, 1996.
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.
(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.
Consolidation
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.
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 fair value at June 30, 1997. 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. Transfers of
securities into the held-to-maturity classification from the available-for-sale
classification are made at fair value on the date of transfer.
Premiums and discounts are amortized using the interest method over the term of
the securities.
Loans Receivable
Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses.
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
Management believes that the allowance for loan losses is adequate. While
management used available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require additions to the allowance based on their judgment
about information available to them at the time of their examination
The Company defines a loan as impaired when it is probable the Company will be
unable to collect principal and interest payments due in accordance with the
terms of the loan agreement. Impaired' loans that have been separately
identified for evaluation are measured based on the present value of expected
future cash flows or, alternatively, the observable market price of the loans or
the fair value of the collateral. However, for those loans that are collateral
dependent (that is, if repayment of those loans is expected to be provided
solely by the underlying collateral) and for which management has determined
foreclosure is probable, the measure of impairment of those loans is to be based
on the fair value of the collateral.
Interest on loans is recognized over the terms of the loans and is calculated
using the simple interest method on principal amounts outstanding. For impaired
loans, accrual of interest is generally stopped when a loan is greater than
three months past due. Interest on these loans is recognized only when actually
paid by the borrower if collection of the principal is likely to occur. Accrual
of interest is generally resumed when the customer is current on all principal
and interest payments.
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 using straight-line and accelerated methods
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 and Accounting Change
The FASB has issued Statement No. 128, Earnings per Share, which supersedes APB
Opinion No. 15. 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 earnings per share amounts. Basic per-share amounts are computed
by dividing net income (the numerator) by the weighted-average number of common
shares outstanding (the denominator). All other entities are required to present
basic and diluted per-share amounts. Diluted per-share amounts assume the
conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce the loss or increase the income per common share
from continuing operations.
15
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Company initially applied Statement No. 128 for the year and six months
ended June 30, 1998 and (as required by the Statement), has restated all per
share information for the prior periods to conform to the Statement.
Following is information about the computation of the earnings per share data
for the Years ended June 30, 1998 and 1997.
<TABLE>
Year Ended June 30, 1998 Year Ended June 30, 1997
Net Net
Income Income
Per Per
Numerator Denominator Share Numerator Denominator Share
Basic earnings per
share
Income available
to common
<S> <C> <C> <C> <C> <C> <C>
stockholders $2,653,421 1,055,186 $2.51 $2,011,254 1,173,936 $1.71
Effect of dilutive
securities:
Stock options - 76,710 - 31,320
Management recog-
nition plan - 22,358 - 11,732
Diluted earnings per
share
Income available to
common stockholders $2,653,421 1,154,254 $2.30 $2,011,254 1,216,988 $1.65
</TABLE>
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 are 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
are not expected to be material.
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 non owner 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 its 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 had 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 1998
presentation. These reclassifications had no effect on net income or
Stockholders' equity.
(3) Securities Available for Sale
Securities available for sale at June 30, 1997 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
Collateralized mortgage obligations presented in the table above aggregating to
$992,361 (cost) at June 30, 1997 have been issued by private issuers and are not
guaranteed or insured by the U.S. government.
Proceeds from the sale of securities available for sale for the year ended June
30, 1998 were $599,600. There were no sales of securities available for sale
during the year ended June 30, 1997. Gross realized gains from the sale of
securities available for sale for the year ended June 30, 1998 were $112,218.
There were no gross realized losses from the sale of securities available for
sale for the year ended June 30, 199798.. Accrued interest receivable on
securities available for sale aggregated to $201,005 at June 30, 1997. During
1998, available-for-sale securities with an amortized cost of $17,352,203 were
transferred to the held-to-maturity classification. The transfer was made at
amortized cost which approximated fair value.
(4) Securities Held to Maturity
Securities held to maturity at June 30, 1998 and June 30, 1997 are summarized as
follows:
June 30, 1998
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
Mortgage backed securities $9,524,274 56,481 (20,019) 9,560,738
Collateralized mortgage obligations 38,972,039 167,134 (77,784) 39,061,390
U.S. government & agency obligations 27,193,044 115,918 (8,650) 27,300,312
Corporate bonds & notes 2,422,493 39,384 0 2,461,875
$78,111,850 378,917 (106,453) 78,384,314
17
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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 & 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
Collateralized mortgage obligations presented in the tables above aggregating
$819,817 and $2,022,092 (cost) at June 30, 1998 and 1997 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,
1998, 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, 1998
Amortized Fair
cost value
Due within one year $17,553,051 17,580,450
Due after one year through
five years 56,757,052 56,982,116
Due after five years
through ten years 3,801,748 3,821,749
Due after ten years 0 0
$78,111,850 78,384,314
There were no sales of securities held to maturity during the years ended June
30, 1998 and 1997.
Accrued interest receivable on securities held to maturity aggregated $788,536
and $661l,685 at June 30, 1998 and 1997, respectively. Held-to-maturity
securities with carrying values of $16,630,189 and $15,631,513 at June 30, 1998
and 1997, respectively, were pledged to secure public deposits.
(5) Loans Receivable
Loans receivable at June 30, 1998 and 1997 are summarized as follows:
18
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
June 30
1998 1997
Residential one-to-four family
mortgage loans $33,174,947 31,815,328
Multifamily and
commercial mortgage loans 2,096,809 2,343,198
Consumer loans 19,827,147 18,291,160
Commercial loans 11,368,603 10,066,789
66,467,506 62,516,475
Less:
Allowance for losses (1,273,185) (1,314,174)
$65,194,321 61,202,301
The weighted average annual contractual interest rate for all loans was 8.76%
and 8.82% at June 30, 1998 and 1997, respectively.
Non-accrual loans totaled $15,312 and $224,842 at June 30, 1998 and 1997,
respectively. There were no restructured loans at June 30, 1998 and 1997.
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, 1998 was $0. The average investment in impaired
loans during fiscal 1998 was $237,000.
The effect of impaired loans on interest income for the years ended June 30,
1998, and 1997 was insignificant.
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 $70,670 and $50,329 at June 30, 1998 and 1997, 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, 1998 and 1997 was
$485,876 and $448,089, 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.
At June 30, 1998 and 1997 Bank was servicing loans for others with aggregate
unpaid principal balances of approximately $2,039,010 and $2,899,003,
respectively.
(6) Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows
Balance at June 30, 1996 $ 1,331,352
Provision for losses 0
Charge-offs (44,013)
Recoveries 26,835
19
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Balance at June 30, 1997 1,314,174
Provision for losses 0
Charge offs (67,389)
Recoveries 26,400
Balance at June 30, 1998 $1,273,185
(7) Foreclosed Real Estate
Foreclosed real estate, included in other assets, consisted of the following:
June 30
1998 1997
Real estate in judgment $104,527 38,387
Less allowance for losses 0 0
$104,527 38,387
(8) Premises and Equipment
A summary of premises and equipment at June 30, 1998 and 1997 is as follows:
June 30
1998 1997
Land $ 90,800 90,800
Office buildings and improvements 1,083,340 1,085,715
Furniture and equipment 1,037,690 873,724
2,211,830 2,050,239
Less accumulated depreciation (1,731,661) (1,625,630)
$ 480,169 424,609
(9) Deposits
Deposits and weighted-average interest rates at June 30, 1998 and 1997 are
summarized as follows (dollar amounts in thousands)
June 30
1998 1997
Weighted Weighted
Average Average
Amount Rate Amount Rate
Passbook $25,372 2.50% 25,317 2.50
Demand deposits 14,101 0.78 13,506 0.61
Money market 10,252 2.55 9,320 2.55
Certificates 55,841 5.25 55,538 5.28
$105,566 103,681
20
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At June 30, 1998 and 1997, the Bank had $5,903,000 and $5,023,000 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, 1998 or 1997.
Interest expense on deposits is summarized as follows:
Year ended June 30
1998 1997
Passbook $631,695 598,475
Demand deposits 107,380 117,637
Money market 240,166 223,508
Certificates 2,977,624 2,924,527
$3,956,86 3,864,147
Certificates had the following remaining maturities (dollar amounts in thousands
June 30, 1998
Weighted
Average
Amount rate
Less than 3 months $ 9,021 4.04%
3-12 months 20,483 4.98
13-36 months 19,723 6.22
Over 36 months 6,614 5.89
$ 55,841 5.25%
At June 30, 1998 and 1997 no securities were pledged as collateral for deposits.
(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, 1998.
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, 1998, the agreements were
collateralized by securities with a carrying value of $16,630,189 and an
approximate market value of $16,776,474. 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
Federal Home Loan Bank advances totaled $2,000,000 and $8,100,000 at June 30,
1998 and 1997, respectively. The advances have an average maturity of 2 months
and 14 months and an average rate of 5.74% and 5.81% at June 30,1998 and 1997,
respectively. The advances are collateralized by the Bank's Federal Home Loan
Bank stock and a blanket pledge of residential one-to-four family mortgage
loans.
21
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes
Federal and state income tax expense is as follows:
Year ended June 30
1998 1997
Current:
Federal $1,314,000 1,075,100
State 433,000 338,000
Total current 1,747,000 1,413,100
Deferred:
Federal (82,300) (78,900)
State (28,700) (26,200)
Total deferred (111,000) (105,100)
$1,636,000 1,308,000
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:
Year Ended June 30
1998 1997
Federal "expected" income tax expense $1,458,403 1,128,546
Items affecting federal income tax:
Preferred stock dividends (7,875) (22,696)
State income taxes, net of federal
income tax benefit 267,911 206,010
Low income housing tax credits (52,433) 0
Other, net (30,006) (3,860)
$1,636,000 1,308,000
Effective income tax rate 38.1% 39.4%
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at June 30, 1998 and 1997 are as follows:
Year Ended June, 30
1998 1997
Deferred tax assets:
Allowance for unrealized losses on securities
available for sale $ 0 151,191
Allowance for loan losses 89,871 86,793
Deferred compensation 186,682 205,985
Supplemental executive retirement plan 272,724 183,172
Limited partnership 12,361 0
Other 7,569 0
$ 569,207 627,141
Deferred tax liabilities:
Federal Home Loan Bank stock $ 55,128 76,225
Premises and equipment 34,879 18,847
22
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Other 0 12,769
90,007 107,841
Net deferred tax asset $479,200 519,300
No valuation allowance was required for deferred tax assets at June 30, 1998 or
1997.
Retained earnings at June 30, 1998 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.
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 $1,450,024 and $2,113,765 at June 30, 1998 and 1997, 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 $171,500 and $247,000 at June 30, 1998 and 1997, 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
23
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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, 1998, 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,
1998 together with the excess over the minimum capital requirements.
<TABLE>
Actual Required Excess
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $19,169 13.43% $2,141 1.50% $17,028 11.93%
Core capital 19,169 13.43 4,281 3.00 14,888 10.43
Plus allowed portion of general
allowance for loan losses 1,273
Risk-based capital $20,442 29.90 $ 5,469 8.00 $14,973 21.90
</TABLE>
(14) Employee Benefits
The Company adopted an Employee Stock Ownership Plan (the ESOP) which meets the
requirements of Section 4975(e)(7) of the Internal Revenue Code and Section
407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended
(ERISA), and as such the ESOP is empowered to borrow in order to finance
purchases of the common stock of the Company. The ESOP borrowed $1,426,200 from
the Company to purchase 142,620 shares of common stock of the Company. The Bank
has committed to make annual contributions to the ESOP necessary to repay the
loan including interest. The Bank contributed $161,147 and $212,078 to the ESOP
for the years ended June 30, 1998 and 1997, 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 1998 and 1997 was $158,795 and $175,503,
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 1998, the company committed to release 5,848 shares of common
stock which were allocated to eligible participants subject to the restrictions
of the ESOP.
Shares released and allocated 37,909
Unreleased shares 102,223
Total ESOP shares 140,132
Fair value of unreleased shares at June 30, 1998 $3,117,802
24
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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 $221,292 and $205,047
for the years ended June 30, 1998 and1997 respectively. The agreements are
funded through a grantor trust with assets which match the investment options
selected by the directors and officers. The agreements allow the individual to
select among two investment options, bank certificates of deposit or common
stock of the Company. Earnings are credited to the individual accounts based
upon the investment option selected. Investment elections are irrevocable. The
value of an individual's account that is measured by the value of common stock
will be distributed solely in shares of the Company's common stock. In 1998, the
Company adopted the provisions of the FASB Emerging Issues Task Force Issue No.
97-14 relating to the deferred compensation and supplemental retirement
agreements. Accordingly, the cost of common stock held in the grantor trust has
been reclassed to treasury stock and the cost of the compensation obligation
payable in common stock has been reclassed as a component of stockholders'
equity.
The Company has established the Management Recognition Plan (MRP) for directors
and key officers. Under the plan, 78,441 shares are available for grant and
71,310 were granted to directors and officers in 1996. The cost of the shares
awarded under the plan is recorded as unearned compensation, a contra equity
account, and is being recognized as an expense in accordance with the vesting
requirements under the plan. For the fiscal year ended June 30, 1998 and 1997,
the amount included in compensation expense was $220,169 and $197,885,
respectively.
The Company has established a stock option plan for directors, officers and
employees. In accordance with the terms of the plan, the exercise 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 1996. 51,698 options were eligible to be exercised as of
June 30, 1998. 8,914 options had been exercised as of June 30, 1998. 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 interpretations. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method prescribed in the FASB Statement No. 123, reported net income and
earnings per share would have been reduced to:
Year ended June 30 Net income Per share
1998 $2,531,021 2.20
1997 1,888,854 1.55
In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the fair value method prescribed in Statement No. 123,
with the following weighted-average assumptions for grants in 1996: 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, 1995.
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
25
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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.
(16) Stockholders' Equity and Subsequent Events
Subsequent to the Companys fiscal year end, the Company purchased 156,490
shares of its stock at an average price of $30.57 per share. These shares were
placed into treasury stock by the Company.
(17) 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, 1998 and 1997 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 1998
1997
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
Financial assets:
Cash and cash equivalents $ 3,958 3,958 7,774 7,774
Securities available
for sale 0 0 24,986 24,986
Securities held to maturity 78,112 78,384 58,113 58,335
Loans receivable, net 65,194 65,761 61,202 60,989
26
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Federal Home Loan
Bank Stock 425 425 554 554
Accrued accounts receivable 1,274 1,274 1,311 1,311
Financial liabilities:
Deposits 105,566 105,727 103,681 103,366
Short-term borrowings 16,081 16,076 22,140 22,076
Accrued interest payable 1,129 1,129 1,071 1,071
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.
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, 1998 and 1997 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, 1998 and 1997 for short-term
borrowings with maturities similar to the remaining maturities of the existing
short-term borrowings.
27
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair value
since it is short-term in nature.
Off-balance Sheet Instruments
Since the majority of the Bank's off-balance sheet instruments consist of
non-fee producing, variable rate commitments, the Bank has determined they do
not have a distinguishable fair value.
(18) 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, 1998 and 1997.
June 30
Condensed Balance Sheets 1998 1997
Assets:
Cash and cash equivalents $ 3,119,061 1,826,158
Securities available for sale 0 8,484,571
Securities held to maturity 3,798,098 0
Investment in subsidiary 19,169,233 16,783,814
Other assets 241,704 372,743
Total assets $ 26,328,096 27,467,286
Liabilities: 0 0
Stockholders' equity: 26,328,096 27,467,286
Total liabilities and
stockholders' equity $26,328,096 27,467,286
Year Ended June 30
1998 1997
Condensed Statements of Income
Interest income $ 598,497 722,139
Equity in earnings of subsidiary 2,252,721 1,610,787
Other (69,797) (140,672)
Income before income tax expense 2,781,421 2,192,254
Income tax expense 128,000 181,000
Net income $ 2,653,421 2,011,254
Condensed Statements of Cash Flows
Operating activities:
Net income $ 2,653,421 2,011,254
Equity in earnings of subsidiary (2,252,721) (1,610,787)
Distributions of earnings of subsidiary 0 6,000,000
Amortization of Unearned ESOP shares 158,795 175,503
Amortization of MRP 220,169 197,885
28
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Decrease in liabilities 0 (945,668)
Decrease (increase) in other assets (165,740) (56,914)
Net cash provided by operating activities 945,402 5,771,273
Investing activities:
Principal collected from securities held
to maturity 2,386,916 0
Principal collected from securities
available for sale 2,450,704 1,071,042
Net cash provided by
investing activities 4,837,620 1,071,042
Financing activities:
Purchase of stock
into stock option trust (1,131,452) (2,239,040)
Proceeds from exercise of stock options 123,682 0
Purchase of treasury stock (3,482,350) (2,777,117)
Net cash (used in)
financing activities (4,490,119) (5,016,157)
Increase in cash and
cash equivalents 1,292,903 1,826,158
Cash and cash equivalents, beginning
of period 1,826,158 0
Cash and cash equivalents, end
of period $3,119,061 1,826,158
(19) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data (in thousands of dollars except for per
share amounts) for fiscal 1998 and 1997 are as follows:
Three Months Ended
Selected Operations Data 6/30/98 3/31/98 12/31/97 9/30/97
Interest income $2,785 2,761 2,868 2,829
Interest expense 1,161 1,151 1,235 1,229
Net interest income 1,624 1,610 1,633 1,600
Non-interest income 217 185 148 141
Non-interest expense 736 719 735 679
Income tax expense 428 393 393 422
Net income $677 682 654 640
Diluted earnings per common share .60 .60 .57 .52
High stock price 33.00 29.38 29.75 26.25
Low stock price 27.25 27.25 26.50 2l.25
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
Diluted Earnings per common share .51 .48 .57 .11
High stock price 20.25 19.75 18.25 15.75
Low stock price 20.38 18.75 16.25 15.00
29
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Selected Financial Condition Data 6/30/98 3/31/98 12/31/97 9/30/97
Total assets $150,486 154,089 152,668 158,192
Investment securities 78,112 77,899 76,918 82,357
Net loans 65,194 64,525 64,819 63,673
Deposits 105,566 105,239 103,693 104,549
Short-term borrowings 14,081 13,862 14,158 14,253
Stockholders' equity 26,328 27,275 26,820 26,020
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 103,681 104,946 102,842 81,794
Short-term borrowings 14,040 15,850 15,746 37,905
Stockholders' equity 27,423 27,070 26,760 26,161
30
<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 14, 1998 at 9:00 A. M. at a ticker symbol of QCFB.
the executive office of the Company. Stockholders of record: 344
Executive Office Form 1O-KSB
QCF Bancorp, Inc. QCF's Form 1OKSB 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, LLP Virginia, MN 55792
227 West First Street
Duluth, MN 55802 Transfer Agent & Registrar
Inquiries regarding change of address,
QCF Bancorp, Inc. transfer requirements, and certificates
Investor Relations should he directed to the transferagent:
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:
Kevin E. Pietrini Kevin E. Pietrini
President and Chief President
Executive Officer
Daniel F. Schultz
Robert A. Muhich Vice President and Treasurer
Computer Consultant
Culbert Realty & Appraisal Service Linda M. Myklebust
Vice President
John A. Trenti
Attorney at the Trenti Law Firm Gerald D. McKenna
Vice President
Peter J. Johnson
President of Hoover Construction Branch Offices:
Thunderbird Mall
Craig W. Nordling Virginia, Mn. 55792
Line Department Manager
Lake Country Power 102 East Sheridan Street
Ely, MN 5573l
John C. Pearsall
Partner with Mesabi Dental Service
Daniel F. Schultz
Vice President/Treasurer
31
<PAGE>
Exhibit 21
<PAGE>
Subsidiaries of the Registrant
State or Other
Jurisdiction of Percentage
Incorporation Ownership
Parent
QCF Bancorp, Inc. Minnesota
Subsidiary (1)
Queen City Federal Savings Bank United States 100%
Subsidiaries of Queen City Federal Savings Bank (1)
Queen City Service Corporation Minnesota 100%
________________
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the Annual Report to
Stockholders attached hereto as an exhibit.
<PAGE>
Exhibit 23
1
<PAGE>
McGLADREY&PULLEN,LLP RSM
Certified Public Accoutants and Consultants international
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
QCF Bancorp, Inc.
Virginia, Minnesota
We hereby consent to the incorporation by reference of our report, dated August
14, 1998, included in this Form 10-KSB In the previously filed Registration
Statement of QCF Bancorp, Inc. on Form S-8 (No. 33-98154).
McGLADREY & PULLEN, LLP
Duluth, Minnesota
September 25, 1998
<PAGE>
Exhibit 27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 764128
<INT-BEARING-DEPOSITS> 3194241
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 78111850
<INVESTMENTS-MARKET> 78384314
<LOANS> 65194321
<ALLOWANCE> 1273185
<TOTAL-ASSETS> 150486333
<DEPOSITS> 105566338
<SHORT-TERM> 16081081
<LIABILITIES-OTHER> 2510818
<LONG-TERM> 0
0
0
<COMMON> 17828
<OTHER-SE> 26310268
<TOTAL-LIABILITIES-AND-EQUITY> 150486333
<INTEREST-LOAN> 5756593
<INTEREST-INVEST> 5486860
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11243453
<INTEREST-DEPOSIT> 3956865
<INTEREST-EXPENSE> 819001
<INTEREST-INCOME-NET> 6467587
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 112218
<EXPENSE-OTHER> 2869475
<INCOME-PRETAX> 4289421
<INCOME-PRE-EXTRAORDINARY> 4289421
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2653421
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.30
<YIELD-ACTUAL> 7.49
<LOANS-NON> 15000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1314174
<CHARGE-OFFS> 67389
<RECOVERIES> 26400
<ALLOWANCE-CLOSE> 1273185
<ALLOWANCE-DOMESTIC> 1273185
<ALLOWANCE-FOREIGN> 0
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</TABLE>
