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>
