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, 1999
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: $11,021,000.
As of August 23, 1999, the aggregate market value of the 298,280 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $7,941,705 based on the closing sale price of
$26.625 per share of the registrant's Common Stock on August 27, 1999 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 23, 1999: 1,112,771.
Transitional Small Business Disclosure Format (Check one): Yes No X
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, 1999. (Parts I, II and IV)
2. Portions of Proxy Statement for 1999 Annual Meeting of Stockholders.
(Part III)
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Item 1. Description of Business
QCF Bancorp, Inc. QCF Bancorp, Inc. (the "Company") is the holding company
of the Queen City Federal Savings Bank (the "Bank") 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, $4.6 million of cash and
investment securities and a note receivable from the Company's Employee Stock
Ownership Plan (the "ESOP"). At June 30, 1999, the Company had total
consolidated assets of $148.4 million, deposits of $109.6 million and
stockholders' equity of $20.0 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 $66.2 million at June 30,
1999, representing 44.6% of total assets at that date. It is the Bank's policy
to concentrate its lending within its market area. At June 30, 1999, $32.3
million, or 48.8% 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 $20.4 million, or 30.8% of the Bank's gross loan
portfolio, at June 30, 1999. 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, 1999, multi-family and
commercial real estate loans amounted to $1.4 million, or 2.1% of the Bank's
gross loan portfolio. The Bank also engages in commercial lending within its
market area. At June 30, 1999, commercial loans amounted to $12.1 million or
18.3% 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, 1999, the Bank had no concentration of loans
exceeding 10% of total loans other than as disclosed below.
At June 30,
1999 1998
Amount % Amount %
(Dollars in thousands)
Type of Loan:
Real estate loans:
Single-family residential $ 32,303 48.79% 33,175 49.92
Multi-family and commercial 1,363 2.06 2,097 3.15
Commercial business loans 12,121 18.31 11,369 17.10
Consumer loans:
Automobile 12,960 19.58 12,001 18.06
Other 7,455 11.26 7,825 11.77
Total gross loans 66,202 100.00 66,467 100.00
Allowance for loan losses 570 1,273
Total $ 65,632 65,194
The following table sets forth certain information at June 30, 1999
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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One Year One to Five to More than
or Less Five Years Ten Years Ten Years Total
(In thousands)
Single-family residential
real estate $ 105 2,797 7,171 22,230 32,303
Multi-family and
commercial real estate 18 600 196 549 1,363
Consumer 1,652 14,273 2,513 1,977 20,415
Commercial business 1,631 4,268 2,309 3,913 12,121
Total $ 3,406 21,938 12,189 28,669 66,202
The following table sets forth at June 30, 1999, the dollar amount of all
loans due one year or more after June 30, 1999 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 $ 4,540 27,658
Multi-family and
commercial real estate 1,345 0
Consumer 15,818 2,945
Commercial business 4,309 6,181
Total $26,012 36,784
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
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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.
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 $2.3 million at
June 30, 1999. 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 $378,000 to $1.0 million. All of these loans were current as of June 30,
1999.
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, 1999, approximately $32.3
million, or 48.8%, 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, 1999, the Bank's loan portfolio included $27.7 million in
adjustable-rate, single-family residential mortgage loans, which represented
41.8% 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.
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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, 1999, the Bank's commercial
business loans totaled $12.1 million, or 18.3%, of the total loan portfolio.
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 approve 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 and second mortgage loans. At June
30, 1999, the Bank's consumer loan balance totaled $20.4 million, or 30.8% 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."
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.
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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, 1999, 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.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
At June 30,
1999 1998
(Dollars in thousands)
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential $ 29 --
Commercial -- --
Commercial business 259 --
Consumer -- 15
Total $288 15
Percentage of total loans .44% .02%
Other nonperforming assets (2) $ 18 104
(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, 1999, gross interest income of $43,000 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 $21,000, for the year ended June 30, 1999. At June
30, 1999, the Bank had no restructured loans.
At June 30, 1999, nonaccrual loans consisted of one mortgage and two
commercial loans.
June 30, 1999, 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,
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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, 1999, the Bank had $259,000 of assets classified
as loss or doubtful and $29,000 of assets classified as substandard, all of
which were included in nonaccrual loans. The assets classified as doubtful
consisted of two commercial loans and the assets classified as substandard
consisted of one mortgage loan. At June 30, 1999, assets designated as special
mention totaled $464,000 and consisted of one commercial loan and five consumer
loans, one of which was included in nonaccrual loans.
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,
1999 1998
(Dollars in thousands)
Balance at beginning of year $ 1,273 1,314
Consumer loan charge-offs 103 67
Consumer loan recoveries 36 26
Net loan charge-offs 67 41
Provision for (reduction in allowance) loan losses (636) --
Balance at end of year $ 570 1,273
Ratio of net charge-offs to average loans
outstanding, net during the year .10% .06%
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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.
June 30,
1999 1998
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 $173 50.85 363 53.07%
Commercial business 248 18.31 392 17.10
Consumer 149 30.84 518 29.83
Total allowance for loan losses $570 100.00% 1,273 100.00%
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.
The following table sets forth the carrying value of the Bank's investment
portfolio at the dates indicated.
9
<PAGE>
At June 30,
1999 1998
(Dollars in thousands)
Securities held to maturity:
U.S. government and agency securities. $ 12,187 27,193
Corporate obligations. . . . . . . . . . 2,047 2,423
Collateralized mortgage obligations . . . 43,623 38,972
Mortgage-backed securities. . . . . . 17,015 9,524
Total investment securities . . . . . . . $ 74,872 78,112
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, 1999, the Bank had $43.6 million in CMOs, which amounted to
29.4% of total assets. As of June 30, 1999, 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.
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<PAGE>
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.
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, 1999, the Bank had $17.0 million in mortgage-backed
securities (11.5% 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, 1999.
<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 $3,491 6.84% 7,696 6.26 1,000 6.30 12,187 12,040 6.48
Corporate obligations 1,600 7.00 447 7.50 --- 2,047 2,047 7.11
Collateralized mortgage
obligations 4,936 6.37 38,687 6.34 -- 43,623 43,232 6.34
Mortgage-backed securities 2,953 7.01 13,281 6.31 781 8.00 17,015 16,821 6.51
Total $12,980 60,111 1,781 74,872 74,142
</TABLE>
For additional information, see Notes 3 and 4 of Notes to Consolidated
Financial Statements.
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<PAGE>
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.
Year Ended June 30,
1999 1998
Interest- Interest-
Bearing Bearing
Demand Time Demand Time
Deposits Deposits Deposits Deposits
(Dollars in thousands)
Average balance $ 44,822 57,351 43,432 55,749
Average rate 2.27% 5.25 2.25 5.34
The following table shows maturities for certificates of deposit of
$100,000 or more at June 30, 1999.
Three months or less $ 823,465
Over three months to six months 594,653
Over six months to twelve months 1,668,376
Over twelve months 1,224,583
$ 4,311,077
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
12
<PAGE>
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 the FHLB of Des Moines at June 30, 1999 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,
1999 1998
(Dollars in thousands)
Amounts outstanding at end of period $16,218 16,081
Maximum amount of borrowings outstanding
at any month end 17,785 31,444
Approximate average short-term borrowings outstanding (1) 15,220 19,528
Average cost of borrowings 3.48% 4.19%
(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, 1999 the Bank's
total investment in Queen City Service was $71,000.
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.
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<PAGE>
Employees
As of June 30, 1999, the Bank had 25 full-time and 12 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.
Proposed Legislative and Regulatory Changes. The U. S. Congress is in the
process of drafting legislation which may have a profound effect on the
financial services industry. In January 1999 legislation was reintroduced in
both houses of the U. S. Congress restructuring the activities and regulations
oversight of the financial services industry. The stated purposes of the
legislation are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition and would permit affiliations between commercial banks,
securities firms, insurance companies and, subject to certain limitations, other
commercial enterprises allowing holding companies to offer new services and
products. In particular, the legislation would repeal the Glass-Steagall Act
prohibitions on banks affiliating with securities firms and thereby allow
holding companies to engage in securities underwriting and dealing without
limits and to sponsor and act as distributor for mutual funds. The legislation
also would remove the Bank Holding Company Act's prohibitions on insurance
underwriting allowing holding companies to underwrite and broker any type of
insurance product, calls for a new regulatory framework for financial
institutions and their holding companies and preserves the thrift charter and
all existing thrift powers. The Senate version (S. 900) was approved by the
Senate on May 6, 1999. The House version (H.R. 10) was approved by the House on
July 1, 1999. A conference committee has been appointed to reconcile the
differences between the two bills. The two versions differ principally with
respect to the powers of operating subsidiaries, permissible activities of
well-managed holding companies and restrictions on nonfinancial activities of
unitary thrift holding companies. At this time, it is unknown how the
legislation will be modified, or if enacted, what form the final version of the
legislation might take and how it will affect the Company's and the Bank's
business and operations and competitive environment.
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, 1999 of $499,800.
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
14
<PAGE>
certain operating restrictions imposed on national banks and a restriction
on obtaining additional advances from the FHLB System. At June 30, 1999, the
Bank qualified as a QTL.
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, 1999.
Percent of
Amount Assets (1)
(Dollars in thousands)
Tangible capital . . . . . . . . . . . . . . . . $15,178 10.7%
Tangible capital requirement . . . . . . . . .. 2,868 1.5
Excess (deficit) . . . . . . . . . . . . . . $12,310 9.2%
Core capital (2) . . . . . . . . . . . . . . . $15,178 10.7%
Core capital requirement . . . . . . . . . . . . 5,735 3.0
Excess (deficit) . . . . . . . . . . . . . . . . $9,443 7.7%
Risk-based capital . . . . . . . . . . . $15,748 23.6%
Risk-based capital requirement . . . . . . 5,348 8.0
Excess(deficit) . . . . . . . . . . . . . . . . $10,400 15.6%
(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
15
<PAGE>
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.
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.
16
<PAGE>
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 $46.5 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.
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 may pay
capital distributions during any calendar year up to an amount equal to 100% of
its net income for such calendar year plus its retained net income for the
preceding two calendar years provided that at least 30 days notice is given
prior to the capital distribution or distributions. Should the Bank's regulatory
capital fall below certain levels, applicable law and other federal regulations
would require the prior approval of the OTS for any capital distribution and, in
some cases, would prohibit the payment of distributions. 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.
17
<PAGE>
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.
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. The guidelines, adopted by the
Office of Thrift Supervision along with the other federal banking agencies,
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.
18
<PAGE>
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."
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
19
<PAGE>
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.
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 10 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, 1999.
Year Owned or Book Value at Approx Deposits at
Opened Leased June 30, 1999 Sq Ft June 30, 1999
(Deposits in thousands)
Main Office:
501 Chestnut Street 1969 Owned $ 230,189 12,600 $ 101,543
Virginia, Minnesota 55792
Branch Offices:
Thunderbird Mall Office 1976 Leased N/A 500 -- (1)
Virginia, Minnesota 55792
102 E. Sheridan Street 1974 Owned 48,976 9,900 8,018
Ely, Minnesota 55731
(1) 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
$737,000 at June 30, 1999. See Note 7 of Notes to Consolidated Financial
Statements.
20
<PAGE>
Item 3. Legal Proceedings.
From time to time, the Bank is a party to various legal proceedings
incident to its business. At June 30, 1999, 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, 1999.
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, 1999 (the "Annual Report") filed as Exhibit 13 hereto is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or 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.
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 1999 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.
21
<PAGE>
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, 1999 and 1998
Consolidated Statements of Income - Years ended June 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity - Years ended June 30,
1999, and 1998
Consolidated Statements of Cash Flows - Years ended June 30, 1999 and 1998
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.
22
<PAGE>
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.
23
<PAGE>
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 17, 1999
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 17, 1999
Kevin E. Pietrini
Chairman of the Board,
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/Daniel F. Schultx September 17, 1999
Daniel F. Schultz
Vice President, Treasurer and Director
(Principal Financial and Accounting Officer)
/s/Peter J. Johnson September 17, 1999
Peter J. Johnson
Director
/s/ Craig W. Nordling September 17, 1999
Craig W. Nordling
Director
/s/Robert L. Muhich September 17, 1999
Robert L. Muhich
Director
/s/John C. Pearsall September 17, 1999
John C. Pearsall
Director
/s/John A. Trenti September 17, 1999
John A. Trenti
Director
<PAGE>
Exhibit 13
To Our Shareholders, Customers, and Friends:
As we approach the new millenium, we proudly present the results of another
exciting and productive year at Queen City Federal. The annual report to
shareholders represents another record year in terms of return on per share
earnings. We ended the year with earnings per share of $2.52 which represents an
increase of 9.50% from the previous year. We also ended the year with net income
of $2,149,000 representing a return on assets of 1.47%. Our strong financial
performance represents the success of our continued transition from a
traditional thrift to a commercial bank. We continue to have increases from
prior years in both consumer and commercial lending allowing us to increase our
asset yields and provide added fee income as well as giving us the opportunity
to attract low-cost commercial deposits. 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.
This last year has also been productive in terms of managing our Year 2000
risk. The major thrust of our Y2K plan was completed in February of this year
with the successful installation of a new data processing system, including both
new hardware and software. With our new computer system in place, we enter the
year confident of our preparation for the Year 2000.
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
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Data)
At or For the Year Ended
June 30
1999 1998
Operating Results
Net interest income $ 5,831 6,467
Provision (reduction in allowance) for loan losses (637) 0
Non interest income 629 691
Non interest expense 3,648 2,869
Net Income 2,149 2,653
Per Share Data
Net income (Diluted) $ 2.52 2.30
Book value 17.90 19.93
Balance Sheet Data
Total assets $ 148,351 150,486
Investment Securities 74,872 78,112
Net loans 65,632 65,194
Deposits 109,561 103,566
Short-term borrowings 16,218 16,081
Stockholders' equity 19,981 26,328
Financial Ratios
Return on average assets 1.47% 1.72
Return on average equity 10.12 9.82
Net interest margin 4.04 4.31
Average equity to average assets 14.50 17.54
Non-performing assets to total assets .21 .08
Total regulatory capital to risk-adjusted assets 24.18 29.90
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 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Interest income $10,392 11,243 10,703 10,658 8,867
Interest expense 4,561 4,776 4,674 4,585 4,018
Net interest income 5,831 6,467 6,029 6,073 4,849
Provision for (reduction in allowance) loan losses (637) 0 0 0 0
Non-interest income 629 691 566 480 411
Non-interest expense 3,648 2,869 3,276 2,687 2,378
Income tax expense 1,300 1,636 1,308 1,533 1,166
Net income 2,149 2,653 2,011 2,333 1,715
Per Share Data (diluted)
Net income (1995 - March 31-June 30) $2.52 2.30 1.65 1.46 0.35
Pro forma net income 1.04
Book value 17.90 19.93 19.23 18.47 17.17
Balance Sheet Data
Total assets $148,351 150,486 156,727 150,430 146,548
Investment securities 74,872 78,112 83,098 89,183 88,503
Net loans 65,632 65,194 61,202 52,361 45,964
Deposits 109,561 105,566 103,681 88,832 113,544
Short-term borrowings 16,218 16,081 22,140 29,264 0
Stockholders' equity 19,981 26,328 27,423 29,685 30,602
Financial Ratios
Return on average assets 1.47% 1.72 1.34 1.56 1.27
Return on average equity 10.12 9.82 7.44 8.06 10.09
Average equity to average assets 14.50 17.54 18.03 19.33 12.62
(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.
</TABLE>
Results of Operations
QCF's net income of $2.1 million, or $2.52 per diluted share, in fiscal
1999 decreased $505,000, or 19.0%, from fiscal 1998 net income. The decrease in
net income for fiscal 1999 as compared to the prior year was due primarily to a
decrease in average yield and volume of interest earning assets and interest
bearing liabilities, a decrease in the allowance for loan losses and the
acceleration of vesting under certain compensation plans. Decrease in average
interest-earning assets, primarily investment securities, was the result of
Queen City Federal Savings Bank's stock buyback programs.
Return on average assets was 1.47% for fiscal 1999 compared to 1.72% for
fiscal 1998.
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
1999 1998
Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield
(Dollars in Thousands)
Interest-Earning Assets (1)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net (2) $65,596 5,781 8.81 64,020 5,758 8.99
Investment securities 74,114 4,410 5.95 79,186 5,159 6.52
Other including cash equivalents 4,598 201 4.37 6,841 327 4.78
Total interest-earning assets $144,308 l0,392 7.20 150,047 11,244 7.49
Interest-Bearing Liabilities
NOW accounts $9,117 115 1.26 8,746 107 1.22
Passbooks 25,719 646 2.51 25,268 632 2.50
Money market accounts 9,986 257 2.57 9,418 240 2.55
Certificate accounts 57,351 3,013 5.25 55,749 2,978 5.34
Short-term borrowings 15,220 530 3.48 19,528 819 4.19
Total interest-bearing liabilities $117,393 4,561 3.89 118,709 4,776 4.02
Net Interest Income 5,831 6,468
Net Earning Assets $26,915 31,338
Net Yield on Interest-Earning Assets 4.04% 4.31
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities 122.93% 126.40
(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.
</TABLE>
Net interest income was $5.8 million for the fiscal year ended June 30,
1999, down from $6.5 million in fiscal 1998. This represents a decrease of 9.8%
from fiscal 1998. The decrease in net interest income was due to a decrease in
the Bank's net interest margin and average net-earning assets.
3
<PAGE>
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.
<TABLE>
Year Ended June 30
1999 vs 1998 1998 vs 1997
(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 $139 (116) 23 625 (11) 614
Investment securities (345) (404) (749) (341) 115 (226)
Other including cash equivalents (100) (26) (126) 91 62 153
Total interest-earning assets (306) (546) (852) 375 166 541
Interest-bearing liabilities:
NOW accounts $6 2 8 (1) (10) (11)
Passbooks 11 3 14 34 0 34
Money market accounts 13 4 17 16 0 16
Certificate accounts 86 (51) 35 204 (151) 53
Short-term borrowings (164) (125) (289) (95) 105 10
Total interest-bearing liabilities (48) (167) (215) 158 (56) 102
Change in net interest income $(258) (379) (637) 217 222 439
</TABLE>
In fiscal 1999 the yield on average interest-earning assets decreased by 29
basis points which decreased interest income as compared to fiscal 1998.
Interest income also decreased due to a $ 5.7 million decrease in average
interest-earning assets between fiscal years 1999 and 1998. The combined impact
(interest rate decrease and volume decrease) caused interest income for fiscal
1999 to decrease $852,000 or 7.6%. Interest expense decreased $215,000 from
fiscal 1998 to 1999. The decrease was due to a decrease in average
interest-bearing liabilities of $1.3 million or 1.1%, and by a 13 basis point
decrease in interest rates. The decrease in average interest-bearing liabilities
was due to a $4.3 million decrease in average short-term borrowings partially
offset by a $3.0 million increase in average interest bearing deposit accounts.
Provision for Loan Losses
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. During fiscal
1999, management undertook a thorough review of its loan portfolio. Based on the
results of this review, the continued low level of loan losses and nonperforming
loans and current economic conditions, management determined that the loan loss
reserves should be reduced. A net reduction of $637,000 was recognized in
earnings for fiscal 1999.
Non-interest Income
Non-interest income was $629,000 for fiscal 1999 compared to $691,000 for
fiscal 1998. The following table presents major components of non-interest
income.
4
<PAGE>
Year Ended June 30
(Dollars in thousands) 1999 1998
Fees and service charges $496 476
Other 133 103
Gain On Sale of Securities 0 112
Total non-interest income $629 691
The decrease of $62,000 or 9.0% in total non-interest income between fiscal
year 1999 and 1998 was primarily due to 1998 including a gain on sale of
securities.
Non-interest Expense
Non-interest expense was $3.6 million for fiscal 1999 compared to $2.9
million for fiscal 1998. The following table presents the major components of
non-interest expense.
Year Ended June 30
(Dollars in thousands) 1999 1998
Compensation and benefits $2,683 2,033
Occupancy 343 244
Other 622 592
Total non-interest expense $3,648 2,869
Total non-interest expense increased $779,000 or 27.2% from fiscal 1998 to
fiscal 1999. The primary cause of the increase in compensation and benefits was
due to an acceleration of vesting in the management recognition plan and the
supplemental executive retirement plan during fiscal 1999. The effect of the
acceleration was to increase compensation and benefits expense by $644,000. The
increase in other occupancy expense was primarily due to the Bank's data
processing conversion during fiscal 1999.
Income Taxes
QCF recorded income tax expense of $1.3 million in fiscal 1999 compared to
$1.6 million in fiscal 1998. The decrease in income tax expense between 1998 and
1999 is primarily the result of changes in taxable income between the years.
Financial Condition
QCF's total assets at June 30, 1999 were $148.4 million compared to $150.5
million at June 30, 1998. The decrease of $2.1 million from 1999 to 1998 was
primarily due to a decrease in investment securities.
Investment Securities
Investment securities decreased by $3.2 million or 4.1% from fiscal 1998 to
fiscal 1999. The decrease was primarily due to the Company's stock buyback
program. During fiscal 1999, QCF purchased $59.6 million of investment
securities and collected principal from maturities or repayments of $62.6
million.
Cash and Cash Equivalents
Cash and cash equivalents increased by $564,000 from $4.0 million at June
30, 1998 to $4.5 million at June 30, 1999. 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 $438,000 or 0.7% from $65.2 million at June
30, 1998 to $65.6 million at June 30, 1999.
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 $306,000 at June 30, 1999 compared to
$119,000 at June 30, 1998.
Non-performing assets are summarized in the following table.
June 30
(Dollars in thousands) 1999 1998 1997 1996 1995
Non-accrual loans $288 15 225 297 182
Foreclosed assets 18 104 38 6 0
Total non-performing assets $306 119 263 303 182
Non-performing assets to year-end assets. .21% .08 .17 .20 .13
Non-performing loans to year-end loans .47% .18 .43 .58 .40
Allowance for loan losses to
non-performing assets 186% 1070 501 439 755
The non-performing assets reflected above primarily consist of one-to-four
family mortgage, consumer, or commercial loans.
Deposits and Short-term Borrowings
The Bank's deposits increased $4.0 million, or 3.8%, from $105.6 million at
June 30, 1998 to $109.6 million at June 30, 1999. Short-term borrowings, which
consist of sales of securities under agreements to repurchase identical
securities remained stable between fiscal years at approximately $14.2 million.
Federal Home Loan Bank advances also remained stable at $2.0 million.
Capital Adequacy
Stockholders' equity was $20.0 million at June 30, 1999 down from $26.3
million at June 30, 1998. The decrease was due to the repurchase of stock for
the treasury of $6.6 million and for the stock option trust of $2.9 million
offset primarily by earnings of $2.1 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, 1999 and 1998, 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, 1999, net loans increased
$438,000 while maturities and principal collected on investment securities, net
of purchases totaled $3.0 million.
The primary financing activity is the attraction of deposits and short-term
borrowings. During the year ended June 30, 1999, deposits and short-term
borrowings increased $4.1 million.
QCF's most liquid assets are cash and cash equivalents, represented by cash
and interest-bearing deposits with banks. The level of these assets is dependent
on the operating, financing, and investing activities during any given period.
Cash and cash equivalents increased $564,000 to $4.5 million during the year
ended June 30, 1999.
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.
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.
7
<PAGE>
Year 2000 Readiness Disclosure
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" 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 is in the process of testing
compliance. All major Y2K issues for the Bank, including testing, have been
addressed and all problems have been remedied as of June 30, l999. The Bank has
also prepared a contingency plan 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.
The most likely, worst case scenario for the transition to the Year 2000
would be the failure of the application software and teller software. Due to the
complexity and time needed to convert to an alternative system in the event that
the Bank's application and teller system do not operate in the Year 2000, it
will be necessary to manually update information until such time that the
programs and applications are corrected to accommodate the year 2000. When data
processing functions are completed on December 31, 1999, a detailed trial
balance of all the applications will be generated. Authorization for withdrawals
will be based on the information contained in these trial balances. Any
transactions completed in subsequent days will be reflected in an addendum to
the trial balances on a daily basis.
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, 1999
and 1998, 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, 1999 and 1998, 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 11, 1999
9
<PAGE>
<TABLE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
Assets June 30, 1999 June 30, 1998
<S> <C> <C>
Cash $879,094 764,128
Interest-bearing deposits with banks 3,643,229 3,194,241
Cash and cash equivalents 4,522,323 3,958,369
Securities held to maturity
(estimated fair value of $74,141,613 and
$78,384,314 at June 30, 1999 and 1998, respectively) 74,871,676 78,111,850
Loans receivable, net 65,632,062 65,194,321
Federal Home Loan Bank stock, at cost 499,800 425,200
Accrued Interest Receivable 983,826 1,274,412
Premises and equipment 737,277 480,169
Deferred tax 573,000 479,200
Prepaid expenses and other assets 531,065 562,812
Total Assets $148,351,029 150,486,333
Liabilities and Stockholders' Equity
Deposits $109,561,041 105,566,338
Short-term borrowings 14,217,535 14,081,081
Federal Home Loan Bank advances 2,000,000 2,000,000
Accrued interest payable 1,077,269 1,129,347
Advance payments made by borrowers
for taxes and insurance 71,063 66,831
Accrued expenses and other liabilities 1,442,808 1,314,640
Total Liabilities 128,369,716 124,158,237
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock; authorized 1,000,000 shares;
issued none
Common stock ($.01 par value): authorized 7,000,000 shares;
issued 1,116,371 shares in 1999 and 1,782,750 shares in 1998. 11,164 17,828
Additional paid-in capital 11,236,851 16,375,783
Retained earnings, subject to certain restrictions 16,188,396 22,704,864
Unearned employee stock ownership plan shares (951,550) (1,022,230)
Unearned management recognition plan shares (104,304) (526,123)
Deferred compensation payable in common stock 669,830 541,339
Shares in stock option trust, at exercise price (5,411,153) (2,349,884)
Treasury stock, at cost, 94,857 shares in 1999
and 533,484 in 1998 (1,657,921) (9,413,481)
Total Stockholders' Equity 19,981,313 26,328,096
Total Liabilities and Stockholders' Equity $148,351,029 150,486,333
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
<TABLE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Year Ended June 30
1999 1998
Interest income:
<S> <C> <C>
Loans $5,781,385 5,756,593
Securities 4,610,896 5,486,860
Total interest income 10,392,281 11,243,453
Interest expense:
Deposits 4,030,582 3,956,865
Short-term borrowings 530,418 819,001
Total interest expense 4,561,000 4,775,866
Net interest income 5,831,281 6,467,587
Provision (reduction in allowance) for loan losses (636,523) 0
Net interest income after provision (reduction in
allowance) for loan losses 6,467,804 6,467,587
Non-interest income:
Fees and service charges 495,749 475,935
Other 133,303 103,156
Gain on sale of securities 0 112,218
Total non-interest income 629,052 691,309
Non-interest expense:
Compensation and benefits 2,683,171 2,033,453
Occupancy 342,569 243,982
Other 622,357 592,040
Total non-interest expense $3,648,097 2,869,475
Income before income tax expense 3,448,759 4,289,421
Income tax expense 1,300,000 1,636,000
Net income $2,148,759 2,653,421
Basic earnings per common share $2.79 2.51
Diluted earnings per common share $2.52 2.30
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
<TABLE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Net Unrealized Unearned
Gain (loss) on Employee Unearned
Addt'l Securities Stock Management Deferred Stock Total
Comprehensive Common Paid-in Retained Available Ownership Recognition Comp Option Treas Stockholders
Income Stock Capital Earnings For Sale Plan Shares Plan Shares Payable Trust Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 l7,828 16,665,625 20,051,443 (222,745) (1,080,710) (746,292) 0 (1,872,071)(5,389,792) 27,423,286
Comprehensive Income:
Net Income $2,653,421 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) -
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 available for sale 222,745 222,745
222,745
Comprehensive Income$2,876,166
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 (2,349,884)(9,413,481) 26,328,096
Comprehensive Income:
Net Income $2,148,759 2,148,759 2,148,759
Comprehensive Income $2,148,759
Purchase of treasury stock (6,583,983)(6,583,983)
Retirement of treasury stock (6,664)(5,667,652) (8,665,227) 14,339,543 -
Increase in deferred comp payable
in stock 128,491 128,491
Purchase of stock for
stock option trust 214,299 (3,080,000) (2,865,701)
Exercise of stock options 6,351 18,731 25,082
Amortization of manage-
ment recognition plan 191,100 421,819 612,919
Earned employee stock
ownership plan share 116,970 70,680 187,650
Balance, June 30, 1999 11,164 11,236,851 16,188,396 0 (951,550)(104,304 669,830 (5,411,153)(1,657,921) 19,981,313
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
<TABLE>
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year ended June 30
1999 1998
Operating activities:
<S> <C> <C>
Net income $2,148,759 2,653,421
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 195,822 108,406
Gain on sale of securities 0 (112,218)
Amortization of net premiums (discounts) on securities 140,402 (97,718)
Reduction in allowance for loan losses (636,523) 0
Decrease in accrued interest receivable 290,586 36,367
Increase (decrease) in accrued interest payable (52,078) 58,034
Increase (decrease) in accrued expenses & other liabilities 323,500 (371,175)
Increase (decrease) in deferred income taxes (93,800) (111,200)
Increase in deferred compensation payable 128,491 98,767
Amortization of unearned ESOP shares 187,650 158,795
Amortization of MRP 421,819 220,169
(Increase) decrease in other assets (54,056) 729,159
Net cash provided by operating activities $3,000,572 3,370,807
Investing activities:
Proceeds from sales of securities available for sale 0 599,600
Proceeds from sale of Federal Home Loan Bank stock 0 128,700
Proceeds from maturities and principal collected
on securities held to maturity 62,629,695 54,568,400
Proceeds from maturities and principal collected
on securities available for sale 0 7,617,805
Purchases of securities held to maturity (59,604,523) (57,215,248)
Net decrease ( increase) in loans 198,782 (3,992,020)
Net decrease (increase) in real estate owned 85,803 (66,140)
Purchases of premises and equipment (452,930) (163,966)
Net cash provided by investing activities 2,856,827 1,477,131
Financing activities:
Net increase in deposits 3,994,703 1,884,848
Net increase in short-term borrowings 136,454 41,287
Net decrease in Federal Home Loan Bank advances 0 (6,100,000)
Purchase of treasury stock (6,583,983) (3,482,350)
Purchase of stock for stock option trust (2,865,701) (1,131,452)
Proceeds from exercise of stock options 25,082 123,682
Net cash used in financing activities (5,293,445) (8,663,985)
Increase (decrease) in cash and cash equivalents 563,954 (3,816,047)
Cash and cash equivalent at beginning of year 3,958,369 7,774,416
Cash and cash equivalents at end of year $4,522,323 3,958,369
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $1,527,423 1,696,547
Interest 4,613,078 4,717,832
Supplemental schedule of non-cash operating and
Investing activities:
Securities transferred to securities held to maturity 0 17,352,203
Deferred compensation obligation and related stock in Grantor
trust reclassified to stockholder's equity 0 617,840
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) 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.
(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.
Securities
Securities held to maturity are carried at amortized cost. Gains and losses
on sales of securities are recognized at the time of sale and are calculated
based on the specific identification method.
Premiums and discounts are amortized using the interest method over the
term of the securities.
Loans Receivable
Loans are 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
Basic per-share amounts are computed by dividing net income (the numerator)
by the weighted-average number of common shares outstanding (the denominator).
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
Following is information about the computation of the earnings per share
data for the years ended June 30, 1999 and 1998.
<TABLE>
Year Ended June 30, 1999 Year Ended June 30, 1998
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 $2,148,759 769,995 $2.79 $2,653,421 1,055,186 $2.51
Effect of dilutive
securities:
Stock options - 71,714 - 76,710
Management recog-
nition plan - 11,612 - 22,358
Diluted earnings per
Share:
Income available
to common
stockholders $2,148,759 853,321 $2.52 $2,653,421 1,154,254 $2.30
</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 of Recently Issued Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
(FASB) No. l33, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 2000. The
statement permits early adoption as of the beginning of any fiscal quarter after
its issuance. The Company has not determined whether to adopt the new statement
early. The statement will require the Company to recognize all derivatives on
the consolidated statement of financial condition at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new statement will have a significant effect
on the Company's earnings or financial position.
(3) Securities Held to Maturity
Securities held to maturity at June 30, 1999 and June 30, 1998 are
summarized as follows:
16
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
<TABLE>
June 30, 1999
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
<S> <C> <C> <C> <C>
Mortgage backed securities $17,014,555 45,430 238,643 16,821,342
Collateralized mortgage obligations 43,623,022 51,339 442,599 43,231,762
U.S. government & agency obligations 12,186,800 2,200 148,868 12,040,132
Corporate bonds and notes 2,047,299 1,078 0 2,048,377
$74,871,676 100,047 830,110 74,141,613
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
</TABLE>
Collateralized mortgage obligations presented in the tables above
aggregating $252,180 and $819,817 (cost) at June 30, 1999 and 1998 respectively
have been issued by private issuers.
The carrying amount and fair value of securities held to maturity at June
30, 1999, 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, 1999
Amortized Fair
cost value
Due within one year $12,980,206 12,959,409
Due after one year through five years 60,110,382 59,402,284
Due after five years through ten years 1,781,088 1,779,920
Due after ten years 0 0
$74,871,676 74,141,613
There were no sales of securities held to maturity during the years ended
June 30, 1999 and 1998.
Accrued interest receivable on securities held to maturity aggregated
$499,159 and $788,536 at June 30, 1999 and 1998, respectively. Held-to-maturity
securities with carrying values of $16,136,819 and $16,630,189 at June 30, 1999
and 1998, respectively, were pledged to secure public deposits.
(4) Loans Receivable
Loans receivable at June 30, 1999 and 1998 are summarized as follows:
17
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
June 30
1999 1998
Residential one-to-four family mortgage loans $32,302,910 33,174,947
Multifamily and commercial mortgage loans 1,363,370 2,096,809
Consumer loans 20,414,839 19,827,147
Commercial loans 12,120,581 11,368,603
66,201,700 66,467,506
Less: Allowance for losses (569,638) (1,273,185)
$65,632,062 65,194,321
The weighted average annual contractual interest rate for all loans was
8.58% and 8.76% at June 30, 1999 and 1998, respectively.
Non-accrual loans totaled $288,192 and $15,312 at June 30, 1999 and 1998,
respectively. There were no restructured loans at June 30, 1999 and 1998.
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, 1999 was $135,389. The average
investment in impaired loans during fiscal 1999 was $313,000.
The effect of impaired loans on interest income for the years ended June
30, 1999, and 1998 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 $66,588 and $70,670 at June 30, 1999 and 1998, 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, 1999 and 1998
was $484,667 and $485,876, 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, 1999 and 1998 Bank was servicing loans for others with
aggregate unpaid principal balances of approximately $1,299,976 and $2,039,010,
respectively.
(5) Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows
June 30
1999 1998
Balance, beginning of year $1,273,185 1,314,174
Provision (reduction in allowance) for losses (636,523) 0
Charge-offs (102,913) (67,389)
Recoveries 35,889 26,400
Balance, end of year $569,638 1,273,185
During fiscal 1999, management undertook a thorough review of its loan
portfolio. Based on the results of this review, continued low level of loan
losses and non-performing loans and current economic conditions, management
determined that the loan loss reserves should be reduced. A net reduction of
$636,523 was recognized in earnings for fiscal 1999.
18
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Foreclosed Real Estate
Foreclosed real estate, included in other assets, consisted of the following:
June 30
1999 1998
Real estate in judgment $18,724 104,527
Less allowance for losses 0 0
$18,724 104,527
(7) Premises and Equipment
A summary of premises and equipment at June 30, 1999 and 1998 is as follows:
June 30
1999 1998
Land $90,800 90,800
Office buildings and improvements 1,080,965 1,083,340
Furniture and equipment 1,189,370 1,037,690
2,361,135 2,211,830
Less accumulated depreciation (1,623,858) (1,731,661)
$737,277 480,169
(8) Deposits
Deposits and weighted-average interest rates at June 30, 1999 and 1998 are
summarized as follows:
June 30
1999 1998
Weighted Weighted
Average Average
Amount Rate Amount Rate
Passbook $26,383,768 2.50% 25,372,064 2.50%
Demand deposits 15,069,106 0.63 14,101,439 0.78
Money market 10,384,235 2.57 10,251,715 2.55
Certificates 57,723,932 5.20 55,841,120 5.25
$109,561,041 105,566,338
19
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At June 30, 1999 and 1998, the Bank had $4,311,000 and $5,903,000
respectively, of certificates 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, 1999 or 1998.
Interest expense on deposits is summarized as follows:
Year ended June 30
1999 1998
Passbook $645,547 631,695
Demand deposits 115,202 107,380
Money market 256,640 240,166
Certificates 3,013,193 2,977,624
$4,030,582 3,956,865
Certificates had the following remaining maturities.
June 30, 1999
Weighted
average
Amount rate
Less than 3 months $ 8,205,012 4.81%
3-12 months 28,716,093 5.36
13-36 months 16,401,443 5.16
Over 36 months 4,401,384 5.53
$ 57,723,932 5.20%
At June 30, 1999 and 1998 no securities were pledged as collateral for deposits.
(9) 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 3.07% at June 30, 1999.
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, 1999, the agreements were
collateralized by securities with a carrying value of $16,136,819 and an
approximate market value of $16,010,194. 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.
Federal Home Loan Bank advances totaled $2,000,000 at June 30, 1999 and
1998. The advances have an average maturity of 7 months and 2 months and an
average rate of 5.58% and 5.74% at June 30, 1999 and 1998, 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.
20
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes
Federal and state income tax expense is as follows:
Year ended June 30
1999 1998
Current:
Federal $1,066,800 1,314,000
State 327,000 433,200
Total current 1,393,800 1,747,200
Deferred:
Federal (72,400) (82,300)
State (21,400) (28,900)
Total deferred (93,800) (111,200)
$1,300,000 1,636,000
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
1999 1998
Federal "expected" income tax expense $1,172,578 1,458,403
Items affecting federal income tax:
Preferred stock dividends 0 (7,875)
State income taxes, net of federal
income tax benefit 215,711 267,911
Low income housing tax credits (52,433) (52,433)
Other, net (35,856) (30,006)
$1,300,000 1,636,000
Effective income tax rate 37.7% 38.1%
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at June 30, 1999 and 1998 are as follows:
Year Ended June, 30
1999 1998
Deferred tax assets:
Allowance for loan losses $0 89,871
Deferred compensation 198,337 186,682
Supplemental executive retirement plan 525,923 272,724
Limited partnership 23,308 12,361
Other 8,184 7,569
755,752 569,207
Deferred tax liabilities:
Allowance for loan losses 96,727 0
Federal Home Loan Bank stock 55,128 55,128
Premises and equipment 30,898 34,879
182,753 90,007
Net deferred tax asset $573,000 479,200
21
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
No valuation allowance was required for deferred tax assets at June 30,
1999 or 1998.
Retained earnings at June 30, 1999 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.
(11) 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 $1,955,000 and $1,450,024 at June 30, 1999 and 1998, 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 $261,000 and $171,500 at June 30, 1999 and 1998, respectively.
(12) 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.
The Bank is subject to various regulatory capital requirements administered
by the Bank's primary federal regulatory agency. Failure to meet minimum capital
requirements can initiate mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material affect
on the Company's consolidated financial statements. Under capital adequacy
guidelines, and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
assets and certain off-balance sheet items calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weighting, and other factors. Quantitative measures established by regulation to
ensure capital adequacy require the Bank to maintain mimimum ratios (set forth
in the table below) of total and Tier I capital, and of Tier I capital to
average assets (all as defined in the regulations). Management believes, as of
June 30, 1999, that the Bank meets all capital adequacy requirements to which it
is subject.
22
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
As of June 30, 1999, 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,
1999 together with the excess over the minimum capital requirements.
To Be Well Capitalized
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
(000's) (000's) (000's)
As of June 30, 1999
Total capital (to
risk weighted assets) $15,748 23.6% $5,348 > 8.0% $6,685 > 10.0%
Tier I capital (to
risk weighted assets) 15,178 22.7% 2,674 > 4.0% 4,011 > 6.0%
Tier I capital (to
average assets) 15,178 10.7% 5,673 > 4.0% 7,091 > 5.0%
As of June 30, 1998
Total capital (to
risk weighted assets 20,442 29.9% 5,469 > 8.0% 6,837 > 10.0%
Tier I capital (to
risk weighted assets) 19,169 28.0% 2,735 > 4.0% 4,102 > 6.0%
Tier I capital (to
average assets) 19,169 13.4% 5,724 > 4.0% 7,155 > 5.0%
(13) 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 $159,485 and $161,147 to the ESOP
for the years ended June 30, 1999 and 1998, 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 1999 and 1998 was $187,650 and $158,795,
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 1999, the company committed to release 7,068 shares of
common stock which were allocated to eligible participants subject to the
restrictions of the ESOP.
Shares released and allocated 44,913
Unreleased shares 95,219
Total ESOP shares 140,132
Fair value of unreleased shares at June 30, 1999 $2,523,303
23
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Bank has entered into deferred compensation and supplemental retirement
agreements with certain directors and officers. One of the supplemental
retirement agreements is a defined benefit type agreement and the other is a
defined contribution type agreement. Under the deferred compensation agreements
and the defined contribution type supplemental retirement agreement, amounts
earned each year are charged to expense and credited to individual accounts. The
individual accounts are credited with earnings based upon one of two investment
options, bank certificates of deposit or common stock of the Company. Investment
elections are irrevocable. The obligation for accrued amounts that are measured
by the value of the Company's common stock are reported at cost in the statement
of stockholders' equity.
The defined benefit type supplemental retirement agreement provides for an
annual retirement benefit based on average annual compensation less amounts that
the executive is expected to receive under the Bank's qualified retirement
plans. Benefits are payable for the life expectancy of the executive beginning
at age 55. During the year ended June 30, 1999 the Bank accelerated the vesting
to l00 percent as of June 30, 1999. As a result, the Bank has fully recognized
the present value of estimated future benefits payable under the agreement. The
amount charged to expense for the deferred compensation and supplemental
retirement agreements was $625,677 and $22l,292 for the years ended June 30,
1999 and 1998, respectively.
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 1995. 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. During the fiscal year ended June 30, 1999,
the Company accelerated vesting resulting in an additional expense of $233,000.
For the fiscal year ended June 30, 1999 and 1998, the amount included in
compensation expense was $421,819 and $220,169, respectively.
The Company has established stock option plans for directors, officers and
employees. In accordance with the terms of the plan, the exercise prices were
established at the fair market price on the date of shareholder approval of
$13.875 and $28.00 per share for the respective plans. 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.
The options vest over a five and one-year period at the rate of 20% and 50%
per year. If unused, the options expire in October 2005 and September 2008. A
summary of the status of the Company's stock option plan as of June 30, 1999 and
1998, and changes during the years ending on those dates is presented below:
1999 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 151,534 $13.88 160,448 13.88
Granted 110,000 28.00 - -
Exercised ( 4,350) 13.00 (8,914) 13.88
Outstanding at end of year 260,184 19.85 151,534 13.88
Exercisable at end of year 142,710 51,698
Weighted-average fair value
per option of options granted
during the year $13.58 -
At June 30, 1999, the options outstanding under the stock option plans have
a weighted-average remaining contractual life of 6.9 years. All of the nonvested
options are expected to eventually vest.
As permitted under generally accepted accounting principles, grants under
the plan are accounted for following the provisions of APB Opinion No. 25 and
its related interpretations. Accordingly, no compensation cost has been
recognized for grants made to date. Had compensation cost been determined based
on the fair value method prescribed in the FASB Statement No. 123, reported net
income and earnings per share would have been reduced to the proforma amounts
shown below:
24
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Year Ended June 30,
1999 1998
Net income:
As reported $2,148,759 $2,653,421
Proforma 1,677,923 2,584,747
Basic earnings per share:
As reported 2.79 2.51
Proforma 2.18 2.45
Diluted earnings per share
As reported 2.52 2.30
Proforma 1.97 2.24
In determining the pro forma amounts above, the fair value of each grant is
estimated at the grant date using the Black-Scholes option-pricing model, with
the following weighted-average assumptions for grants in fiscal years 1996 and
1999: No dividends; risk-free interest rate of 6.0%, expected life of 10 years
and price volatility of 14.57% and 18.57%, respectively.
(14) 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
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.
(15) 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, 1999 and 1998 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,
25
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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
1999 1998
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
Financial assets:
Cash and cash equivalents $4,522 4,522 3,958 3,958
Securities held to maturity 74,872 74,142 78,1127 8,384
Loans receivable, net 65,632 65,629 65,194 65,761
Federal Home Loan Bank Stock 500 500 425 425
Accrued accounts receivable 984 984 1,274 1,274
Financial liabilities:
Deposits 109,561 109,172 105,566 105,727
Short-term borrowings 16,218 16,203 16,081 16,076
Accrued interest payable 1,077 1,077 1,129 1,129
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.
26
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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, 1999 and 1998 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, 1999 and 1998 for
short-term borrowings with maturities similar to the remaining maturities of the
existing short-term borrowings.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair value
since it is short-term in nature.
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.
(17) QCF Bancorp, Inc. Financial Information (Parent Company Only)
The parent company's principal assets are its investment in the Bank and
its savings deposits at the Bank. The following are the condensed financial
statements for the parent company only as of June 30, 1999 and 1998.
June 30
Condensed Balance Sheets 1999 1998
Assets:
Cash and cash equivalents $3,055,266 3,119,061
Securities held to maturity 1,527,807 3,798,098
Investment in subsidiary 15,177,733 19,169,233
Other 220,507 241,704
Total assets $19,981,313 26,328,096
Liabilities: 0 0
Stockholders' equity: 19,981,313 26,328,096
Total liabilities and
stockholders' equity $19,981,313 26,328,096
27
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Year Ended June 30
1999 1998
Condensed Statements of Income
Interest income $308,291 598,497
Equity in earnings of subsidiary 2,008,500 2,252,721
Other (163,465) (69,797)
Income before income tax expense 2,153,326 2,781,421
Income tax expense 4,567 128,000
Net income $2,148,759 2,653,421
Condensed Statements of Cash Flows
Operating activities:
Net income $2,148,759 2,653,421
Equity in earnings of subsidiary (2,008,500) (2,252,721)
Distributions of earnings of subsidiary 6,000,000 0
Increase in deferred compensation payable 128,492 541,339
Amortization of Unearned ESOP shares 187,650 158,795
Amortization of MRP 421,819 220,169
Increase in other assets 212,296 (165,740)
Net cash provided by operating activities 7,090,516 1,486,741
Investing activities:
Principal collected from securities held to maturity 2,270,291 2,386,916
Principal collected from securities available for sale 0 2,450,704
Net cash provided by investing activities 2,470,291 4,837,620
Financing activities:
Purchase of stock into stock option trust (2,8565,701) (1,131,452)
Proceeds from exercise of stock options 25,082 123,682
Purchase of treasury stock (6,583,983) (4,023,689)
Net cash (used in) financing activities (9,424,602) (5,031,458)
(Decrease) increase in cash and cash equivalents (63,795) 1,292,903
Cash and cash equivalents, beginning of period 3,119,061 1,826,158
Cash and cash equivalents, end of period $3,055,266 $3,119,061
(18) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data (in thousands of dollars except for per
share amounts) for fiscal 1999 and 1998 are as follows:
Three Months Ended
Selected Operations Data 6/30/99 3/31/99 12/31/98 9/30/98
Interest income $2,501 2,581 2,615 2,695
Interest expense 1,113 1,121 1,167 1,160
Net interest income 1,388 1,460 l,448 l,535
Provision for (reduction in) allowance
for loan losses (637) 0 0 0
Non-interest income 169 129 171 160
Non-interest expense 1335 775 775 63
Income tax expense 324 304 318 54
Net income 535 509 526 79
Diluted Earnings per common share $.72 .65 .61 .58
High stock price 26.68 25.50 27.50 31.50
Low stock price 25.00 25.00 25.00 27.50
28
<PAGE>
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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 inc 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
Selected Financial Condition Data 6/30/99 3/31/99 12/31/98 9/30/98
Total assets $148,351 144.934 145,332 148,878
Investment securities 74,872 73,334 69,691 74,563
Net loans 65,632 65,226 65,895 66,670
Deposits 109,561 108,574 107,708 105,869
Short-term borrowings 16,218 14,453 15,436 18,079
Stockholders' equity 19,981 19,414 19,701 21,919
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 16,081 13,862 14,158 14,253
Stockholders' equity 26,328 27,275 26,820 26,020
29
<PAGE>
STOCKHOLDERS' INFORMATION
<TABLE>
<S> <C>
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 13, 1999 at 9:00 A. M. at a ticker symbol of QCFB.
the executive office of the Company. Stockholders of record: 305
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 transfer agent:
P.O. Box 1147 Registrar and Transfer Company
Virginia, MN 55802 10 Commerce Drive
Cranford, New Jersey 07016
1-800-368-5948
Directors and Officers:
Directors: Executive Officers:
Kevin E. Pietrini Kevin E. Pietrini
Chairman of the Board, Chairman of the Board,
President and Chief President and Chief Executive Officer
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
</TABLE>
30
<PAGE>
Exhibit 21
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 l00%
Subsidiaries of Queen City Federal Savings Bank (l)
Queen City Service Corporation Minnesota l00%
(l) 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 22
McGLADREY&PULLEN,LLP RSM
Certified Public Accountants 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 11, 1999, included in this Form 10-KSB and in the previously filed
Registration Statement of QCF Bancorp, Inc. on Form S-8 (No. 33-98154).
McGLADREY & PULLEN, LLP
Duluth, Minnesota
September 15,1999
<PAGE>
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
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