To Our Shareholders, Customers and Friends:
The directors, officers and staff of QCF Bancorp, Inc. and Queen City Federal
Savings Bank proudly present our annual report to shareholders. This report
represents another exciting and productive year at Queen City Federal and a
record year in terms of earning. We ended the year with a net income of
$2,653,000. This represents a return on average assets of 1.72%. We also ended
the year with record earnings per share of $2.30.
The record earnings are a result of the continuation of our transition from a
traditional thrift to a community bank. Increases from last year in both
consumer and commercial lending are helping us position ourselves as our
community's "local Bank". This focus on commercial and consumer lending has
allowed us to increase our asset yields and provide added fee income as well as
giving us the opportunity to attract low-cost commercial deposits. This has all
been accomplished while cutting the ratio of non-performing assets to total
assets in half. We encourage you to read the "Management's Discussion and
Analysis" section of this report for a more complete explanation of your
company's financial performance.
In the ensuing year, Queen City Federal will continue to pursue its philosophy
of being our region's "local" financial institution., Although we will continue
providing traditional thrift services, we will move ahead with our plan to be
more "bank like". We will continue our commitment to the local community bank
concept by promoting local involvement in the community and keeping the
decision process in the hands of our local board and management.
The directors, officers and staff of Queen City Federal want to thank all of
our stockholders and customers for their confidence and support in our
organization as we endeavor to enhance shareholder value in the year to come. I
would also like to thank our employees for their hard work and dedication in
making this another successful year at Queen City Federal.
Sincerely,
Kevin E. Pietrini
Chairman of the Board,
President and
Chief Executive Officer
FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Data)
At or For the Year Ended
June 30
1998 1997
Operating Results
Net interest income $ 6,467 6,029
Non interest income 691 566
Non interest expense 2,869 3,276
Net Income 2,653 2,011
Per Share Data
Net income (Diluted) $ 2.30 1.65
Book value 19.93 19.23
Balance Sheet Data
Total assets $ 150,486 156,727
Investment Securities 78,112 83,098
Net loans 65,194 61,202
Deposits 105,566 103,681
Short-term borrowings 16,081 22,140
Stockholders' equity 26,328 27,423
Financial Ratios
Return on average assets 1.72% 1.34
Return on average equity 9.82 7.44
Net interest margin 4.31 4.12
Average equity to average assets 17.54 18.03
Non-performing assets to total assets .08 .17
Total regulatory capital to risk-adjusted assets 29.90 27.58
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is provided to assist readers in their understanding of
the consolidated financial statements of QCF Bancorp, Inc. (QCF). This
discussion should be read in conjunction with the consolidated financial
statements and other financial information presented elsewhere in this report.
QCF is the unitary savings and loan holding company for Queen City Federal
Savings Bank (the Bank). The Bank converted from a federally chartered mutual
savings bank to a federally chartered stock savings bank on March 31, 1995.
1
FIVE-YEAR SELECTED FINANCIAL SUMMARY(1)
(Dollars in Thousands, Year Ended June 30
Except per Share Data)
Operating Results 1998 1997 1996 1995 1994
Interest income $ 11,243 10,703 10,658 8,867 7,558
Interest expense 4,776 4,674 4,585 4,018 3,947
Net interest income 6,467 6,029 6,073 4,849 3,611
Provision for loan losses 0 0 0 0 60
Non-interest income 691 566 480 411 416
Non-interest expense 2,869 3,276 2,687 2,378 2,164
Income tax expense 1,636 1,308 1,533 1,166 734
Income before cumulative effect
of change in accounting principle 2,653 2,011 2,333 1,715 1,069
Net income 2,653 2,011 2,333 1,715 1,588
Per Share Data (diluted)
Net income (1995 - March 31-June 30) $ 2.30 1.65 1.46 0.35
Pro forma net income 1.04
Book value 19.93 19.23 18.47 17.17
Balance Sheet Data
Total Assets $ 150,486 156,727 150,430 146,548 133,135
Investment securities 78,112 83,098 89,183 88,503 85,412
Net loans 65,194 61,202 52,361 45,964 40,810
Deposits 105,566 103,681 88,832 113,544 113,091
Short-term borrowings 16,081 22,140 29,264 0 4,190
Stockholders' equity 26,328 27,423 29,685 30,602 13,991
Financial Ratios
Return on average assets 1.72% 1.34 1.56 1.27 0.80 (2)
Return on average equity 9.82 7.44 8.06 10.09 8.02
Average equity to average assets 17.54 18.03 19.33 12.62 9.94
<FN>
(1) QCF Bancorp, Inc. (QCF) completed a public stock offering on March 31, 1995,
which generated net proceeds of $17.0 million. QCF purchased all of the stock of
Queen City Federal Savings Bank (the Bank) with a portion of the conversion
proceeds. The information reflected above represents the financial condition and
the results of operations for the consolidated QCF for 1995 through 1998 and
only the Bank for 1994
(2) Ratio is based on income before cumulative effect of change in accounting
principle. After including cumulative effect of change in accounting principle,
the return on average assets would be 1.18%.
</FN>
Results of Operations
QCF's net income of $2.7 million, or $2.30 per diluted share, in fiscal 1998
increased $642,000, or 31.9%, from fiscal 1997 net income. The increase in net
income for fiscal 1998 as compared to the prior year was due primarily to the
absence of any special assessment by the FDIC during fiscal year 1998. In fiscal
year 1997, the Bank was required to pay a special assessment of $416,000 net of
taxes to help recapitalize the SAIF. The improvement in fiscal 1998 was also due
to an increase in net interest income.
Return on average assets was 1.72% for fiscal 1998 compared to 1.34% for fiscal
1997.
2
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.
Year Ended June 30
1998 1997 1996
Average Rate/ Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield Balance Interest Yield
(Dollars in Thousands)
Interest-Earning Assets (1)
Loans receivable, net (2) $ 64,020 5,758 8.99 57,087 5,144 9.01 48,671 4,439 9.12
Investment securities 79,186 5,159 6.52 84,388 5,385 6.38 90,373 6,011 6.65
Other including cash equivalents 6,841 327 4.78 4,749 174 3.66 4,408 208 4.72
Total interest-earning assets $ 150,047 11,244 7.49 146,244 10,703 7.32 142,909 10,658 7.46
Interest-Bearing Liabilities
NOW accounts $ 8,746 107 1.22 8,835 118 1.34 9,255 127 1.37
Passbooks 25,268 632 2.50 23,939 598 2.50 26,084 652 2.50
Money market accounts 9,418 240 2.55 8,765 224 2.55 9,228 235 2.55
Certificate accounts 55,749 2,978 5.34 52,008 2,925 5.62 52,208 2,900 5.55
Short-term borrowings 19,528 819 4.19 21,956 809 3.68 11,980 671 5.60
Total interest-bearing liabilities $ 118,709 4,776 4.02 115,503 4,674 4.05 108,755 4,585 4.22
Net Interest Income $6,468 6,029 6,073
Net Earning Assets $ 31,338 30,721 34,154
Net Yield on Interest-Earning Assets 4.31% 4.12 4.25
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities 126.40% 126.60 131.40
<FN>
(1) Tax exempt income was not significant; therefore, was not presented on a tax equivalent basis.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and allowance for loan losses.
Average balance includes non-performing loans. Loan fee income is not significant.
</FN>
Net interest income was $6.5 million for the fiscal year ended June 30, 1998, up
from $6.0 million in fiscal 1997. This represents an increase of 7.3% from
fiscal 1997. The increase in net interest income was due to an increase in the
Bank's net interest margin and average net-earning assets.
The following schedule presents the dollar amount of change in interest income
and interest expense for major components of interest-earning assets and
interest- bearing liabilities. It distinguishes between the increase/decrease
related to higher outstanding balances and that due to the levels and volatility
of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) change in volume multiplied by old rate and (ii) change in rate (i.e.,
changes in rate multiplied by old volume) . The change in interest due to both
volume and rate has been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the change in each.
3
Year Ended June 30
1998 vs 1997 1997 vs 1996
(Dollars in thousands) Increase(Decrease) Due to
Volume Rate Total Volume Rate Total
Interest-earning assets:
Loans receivable, net $ 625 (11) 614 760 (55) 705
Investment securities (341) 115 (226) (388) (238) (626)
Other including cash
equivalents 91 62 153 15 (49) (34)
Total interest-earning assets 375 166 541 387 (342) 45
Interest-bearing liabilities:
NOW accounts $ (1) (10) (11) (6) (3) (9)
Passbooks 34 0 34 (54) 0 (54)
Money market accounts 16 0 16 (11) 0 (11)
Certificate accounts 204 (151) 53 (11) 36 25
Short-term borrowings (95) 105 10 424 (286) 138
Total interest-bearing
liabilities $ 158 (56) 102 342 (253) 89
Change in net interest income $ 217 222 439 45 ( 89) (44)
In fiscal 1998 the yield on average interest-earning assets increased by 17
basis points which increased interest income as compared to fiscal 1997.
Interest income also increased due to a $ 3.8 million increase in average
interest-earning assets between fiscal years 1998 and 1997. The combined impact
(interest rate increase and volume increase) caused interest income for fiscal
1998 to increase $541,000 or 5.1%. Interest expense increased $102,000 from
fiscal 1997 to 1998. The increase was due to an increase in average
interest-bearing liabilities of $3.2 million or 2.8%, partially offset by a 3
basis point decrease in interest rates. The increase in average interest-bearing
liabilities was due to a $2.4 million decrease in average short-term borrowings
partially offset by a $5.6 million increase in deposit accounts.
Provision for Loan Losses
The Bank made no provision for loan losses in fiscal 1998 or 1997. Provisions
for loan losses are charged to earnings to maintain the total allowance for loan
losses at a level considered adequate by management to provide for probable loan
losses, based on prior loss experience, volume and type of lending conducted by
the Bank, past due loans in the Bank's loan portfolio and national, regional and
local economic conditions.
Non-interest Income
Non-interest income was $691,000 for fiscal 1998 compared to $566,000 for fiscal
1997. The following table presents major components of non-interest income.
Year Ended June 30
(Dollars in thousands) 1998 1997
Fees and service charges $ 476 489
Other 103 77
Gain On Sale of Securities 112 0
Total non-interest income $ 691 566
The increase of $125,000 or 22.1% in total non-interest income between fiscal
year 1998 and 1997 was primarily due to gain on sale of securities.
4
Non-interest Expense
Non-interest expense was $2.9 million for fiscal 1998 compared to $3.3 million
for fiscal 1997. The following Table presents the major components of
non-interest expense.
Year Ended June 30
(Dollars in thousands) 1998 1997
Compensation and benefits $2,033 1,865
Occupancy 244 214
Federal deposit insurance premiums 67 675
Advertising 58 74
Other 467 448
Total non-interest expense $2,869 3,276
Total non-interest expense decreased $407,000 or 12.4% from fiscal 1997 to
fiscal 1998. The primary cause of the decrease was a decrease in Federal deposit
insurance premiums. Such decrease was due to a special assessment by the FDIC in
fiscal 1997.
Income Taxes
QCF recorded income tax expense of $1.6 million in fiscal 1998 compared to $1.3
million in fiscal 1997. The increase in income tax expense between 1997 and 1998
is primarily the result of changes in taxable income between the years.
Financial Condition
QCF's total assets at June 30, 1998 were $150.5 million compared to $156.7
million at June 30, 1997. The decrease of $6.2 million from 1998 to 1997
reflects fluctuations in levels of deposits and short-term borrowings, which are
responsive to market conditions.
Investment Securities
Investment securities decreased by $5.0 million or 6.0% from fiscal 1997 to
fiscal 1998. The decrease was due to an increase in loan demand and a decrease
in short-term borrowings. During fiscal 1998, QCF purchased $57.2 million of
investment securities and collected principal from maturities or repayments of
$62.8 million.
Cash and Cash Equivalents
Cash and cash equivalents decreased by $3.8 million from $7.8 million at June
30, 1997 to $4.0 million at June 30, 1998. The Bank's cash and cash equivalents
fluctuate from period to period depending on liquidity needs and the timing of
purchases of investment securities.
Loans Receivable, Net
Net loans receivable, increased $4.0 million or 6.5% from $61.2 million at June
30, 1997 to $65.2 million at June 30, 1998. The increase reflected increased
mortgage demand, consumer demand for installment loans and business demand for
commercial loans.
5
Allowance for Loan Losses
In originating loans, the Bank recognizes that credit losses will be experienced
and that the risk of loss will vary with, among other things, the type of loans
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain an adequate
allowance for loan losses based on, among other things, the Bank's historical
loan loss experience, evaluation of economic conditions, regular reviews of
delinquencies and loan portfolio quality. The Bank increases its allowance for
loan losses by charging provisions for loan losses against the Bank's income.
Management will continue to actively monitor the Bank's asset quality and
allowance for loan losses. Management will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowance for losses,
future adjustments may be necessary if economic conditions differ substantially
from the economic conditions in the assumptions used in making the initial
determinations.
Non-Performing Assets
Non-performing assets totaled $119,000 at June 30, 1998 compared to $263,000 at
June 30, 1997.
Non-performing assets are summarized in the following table.
June 30
(Dollars in thousands) 1998 1997 1996 1995 1994
Non-accrual loans $ 15 225 297 182 43
Foreclosed assets 104 38 6 0 4
Total non-performing assets $ 119 263 303 182 47
Non-performing assets to year-end assets .08 .17 .20 .13 .04
Non-performing loans to year-end loans .18 .43 .58 .40 .11
Allowance for loan losses to
Non-performing assets 1,070 501 439 755 2,955
The non-performing assets reflected above primarily consist of one-to-four
family mortgage loans or consumer loans.
Deposits and Short-term Borrowings
The Bank's deposits increased $1.9 million, or 1.8%, from $103.7 million at June
30, 1997 to $105.6 million at June 30, 1998. Short-term borrowings, which
consist of sales of securities under agreements to repurchase identical
securities remained stable between fiscal years at approximately $14.1 million.
Federal Home Loan Bank advances decreased $6.1 million from $8.1 million at June
30, 1997 to $2.0 million at June 30, 1998.
Capital Adequacy
Stockholders' equity was $26.3 million at June 30, 1998 down from $27.4 million
at June 30, 1997. The decrease was due to the repurchase of stock for the
treasury of $3.5 million and for the stock option trust of $1.0 million offset
primarily by earnings of $2.6 million.
Federal savings institutions are required to satisfy their capital requirements:
(i) a requirement that "tangible capital" equal or exceed 1.5% of adjusted total
assets, (ii) a requirement that core capital" equal or exceed 3.0% of adjusted
total assets, and (iii) a requirement that "risk-based capital" equal or exceed
8.0% of risk-weighted assets. At June 30, 1998 and 1997, the Bank met each of
the three capital requirements.
Liquidity Management
The Bank is required to maintain average daily balances of liquid assets equal
to 4% of its net withdrawable savings deposits plus short-term borrowings. The
Bank has maintained an average daily liquidity ratio in excess of these
requirements.
6
The primary investing activities are the origination of loans and the purchase
of securities. During the year ended June 30, 1998, net loans increased $4.0
million while maturities and principal collected on investment securities, net
of purchases totaled $5.6 million.
The primary financing activity is the attraction of deposits and short-term
borrowings. During the year ended June 30, 1998, deposits and short-term
borrowings decreased $4.2 million.
QCF's most liquid assets are cash and cash equivalents, represented by cash and
interest-bearing deposits with banks. The level of these assets is dependent on
the operating, financing, and investing activities during any given period. Cash
and cash equivalents decreased $3.8 million to $4.0 million during the year
ended June 30, 1998.
Asset/Liability Management and Market Risk
The Bank's primary market risk is interest rate risk. Net interest income, the
primary component of the Bank's net income, is derived from the difference or
"spread" between the yield on interest-earning assets and the cost of
interest-bearing liabilities. The Bank has sought to reduce its exposure to
changes in interest rate by matching more closely the effective maturities or
re-pricing characteristics of its interest-earning assets and interest-bearing
liabilities. The matching of the Bank's assets and liabilities may be analyzed
by examining the extent to which its assets and liabilities are interest rate
sensitive and by monitoring the expected effects of interest rate changes on net
portfolio value.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or re-price within that time period. If the Bank's assets
mature or re-price more quickly or to a greater extent than its liabilities, the
Bank's net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. If the Bank's assets mature or reprice more slowly or to a lesser extent
than its liabilities, the Bank's net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. The Bank's policy has been to mitigate
the interest rate risk inherent in the historical savings institution business
of originating long term loans funded by short term deposits by pursuing certain
strategies designed to decrease the vulnerability of its earnings to material
and prolonged changes in interest rates. The Bank has established an Asset and
Liability Management Committee which currently is comprised of the executive
officers of the Bank. This Committee reviews the maturities of the Bank's assets
and liabilities and establishes policies and strategies designed to regulate the
Bank's flow of funds and to coordinate the sources, uses and pricing of such
funds. The first priority in structuring and pricing the Bank' s a assets and
liabilities is to maintain an acceptable interest rate spread while reducing the
effects of changes in interest rates.
Management's principal strategy in managing the Bank's interest rate risk has
been to maintain short- and intermediate-term assets in its portfolio, including
locally originated adjustable rate mortgage loans. In addition, in managing its
portfolio of investment securities, the Bank seeks to purchase investment
securities that mature on a basis that approximates as closely as possible the
estimated maturities of the Bank's liabilities.
In addition to shortening the average re-pricing period of its assets, the Bank
has sought to lengthen the average maturities of its liabilities by adopting a
tiered pricing program for its certificates of deposits which provides higher
rates of interest on its longer term certificates in order to encourage
depositors to invest in them.
Dividends
QCF has not paid any dividends to stockholders since its incorporation. The
Board of Directors may consider a policy of paying cash dividends to
stockholders in the future. The declaration of dividends are subject to among
other things, QCF's financial condition and earnings, tax considerations,
economic conditions, regulatory restrictions and other factors.
7
Effects of Inflation
Because QCF's asset and liabilities are, for the most part, liquid in nature,
they are not significantly affected by inflation. Interest rates have a more
significant impact on Queen City Federal's performance than the effect of
inflation. However, the rate of inflation affects operating expenses, such as
employee salaries and benefits, occupancy and equipment changes, and other
overhead expenses.
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
The Bank has been identifying potential problems associated with the Y2K issue
and has implemented a plan designed to ensure that all software used in
connection with the Bank's business will manage and manipulate data involving
the transition with data from 1999 to 2000 without functional or data
abnormality and without inaccurate results related to such data. In addition,
the Bank recognizes that its ability to be Y2K compliant is dependent upon the
cooperation of its vendors. The Bank is requiring its vendors to represent that
their products are or will be Y2K compliant and has planned a program for
testing compliance. All Y2K issues for the Bank, including testing, are expected
to be addressed by December 31, 1998 and any problems would be remedied by March
31, 1999. The Bank will also prepare contingency plans in the event there are
system interruptions. The Bank believes that its costs related to Y2K will be
approximately $700,000, primarily related to replacing the bank's core inhouse
computer software and hardware systems.
8
MCGLADREY & PULLEN,LLP RSM
Certified Public Accountants and Consultants international
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
QCF Bancorp, Inc.
Virginia, Minnesota
We have audited the accompanying consolidated statements of financial condition
of QCF Bancorp, Inc. and subsidiary (the Company) as of June 30, 1998 and 1997,
and the related consolidated statements of income, stockholders'equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QCF Bancorp, Inc.
and subsidiary as of June 30, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Mcgladrey & Pullen, llp
Duluth, Minnesota
August 14,1998
9
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
Assets June 30, 1998 June 30, 1997
Cash $ 764,128 747,733
Interest-bearing deposits with banks 3,194,241 7,026,683
Cash and cash equivalents 3,958,369 7,774,416
Securities available for sale
(amortized cost of $25,359,674
at June 30, 1997)8 0 24,985,627
Securities held to maturity
(estimated market value of $78,384,31458,334,591 and
$58,334,591 at June 30, 1998 and 1997, respectively) 78,111,850 58,112,799
Loans receivable, net 65,194,321 61,202,301
Federal Home Loan Bank stock, at cost 425,200 553,900
Accrued interest receivable 1,274,412 1,310,779
Premises and equipment 480,169 424,609
Deferred tax asset 479,200 519,300
Prepaid expenses and other assets 562,812 1,843,672
Total Assets $150,486,333 156,727,403
Liabilities and Stockholders' Equity
Deposits $ 105,566,338 103,68l,490
Short-term borrowings 14,081,081 14,039,794
Federal Home Loan Bank advances 2,000,000 8,100,000
Accrued interest payable 1,129,347 1,071,313
Advance payments made by borrowers
for taxes and insurance 66,831 61,675
Accrued expenses and other liabilities 1,314,640 2,349,845
Total Liabilities 124,158,237 129,304,117
Commitments and Contingencies
Stockholders' equity:
Serial preferred stock; authorized 1,000,000 shares;
issued and outstanding none
Common stock ($.01 par value): authorized 7,000,000 shares;
issued 1,782,750; outstanding 1,321,034 shares in 1998
and 1,426,200 in 1997. 17,828 17,828
Additional paid-in capital 16,375,783 16,665,625
Retained earnings, subject to certain restrictions 22,704,864 20,051,443
Net unrealized loss on securities available for sale 0 (222,745)
Unearned employee stock ownership plan shares (1,022,230) (1,080,710)
Unearned management recognition plan shares (526,123) (746,292)
Deferred compensation payable in common stock 541,339 0
Shares in stock option trust, at exercise price (2,349,884) (1,872,071)
Treasury stock, at cost, 533,484 shares in 1998
and 356,550 in at June 30, 1997 (9,413,481 (5,389,792)
Total Stockholders' Equity 26,328,096 27,423,286
Total Liabilities and Stockholders' Equity $150,486,333 156,727,403
See accompanying notes to consolidated financial statements.
10
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Year Ended June 30
1998 1997
Interest income:
Loans $5,756,593 5,143,815
Securities 5,486,860 5,558,735
Total interest income 11,243,453 10,702,550
Interest expense:
Deposits 3,956,865 3,864,147
Short-term borrowings 819,001 809,248
Total interest expense 4,775,866 4,673,395
Net interest income 6,467,587 6,029,155
Provision for loan losses 0 0
Net interest income after provision
for loan losses 6,467,587 6,029,155
Non-interest income:
Fees and service charges 475,935 489,517
Other 103,156 76,584
Gain on sale of securities 112,218 0
Total non-interest income 691,309 566,101
Non-interest expense:
Compensation and benefits 2,033,453 1,865,372
Occupancy 243,982 213,910
Federal deposit insurance premiums 67,200 675,361
Advertising 58,409 73,683
Other 466,431 447,676
Total non-interest expense 2,869,475 3,276,002
Income before income tax expense 4,289,421 3,319,254
Income tax expense 1,636,000 1,308,000
Net income 2,653,421 $2,011,254
Basic earnings per common share $2.51 1.71
Diluted earnings per common share $2.30 1.65
See accompanying notes to consolidated financial statements.
11
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Net Unrealized Unearned
Addt'l Gain (loss) on Employee Unearned
Common Paid-in Securities Stock Management Deferred Stock Total
Stock Capital Retained Available Ownership Recognition Comp Treasury Option Stockholders
Stock Earnings For Sale Plan Plan Payable Stock Trust Equity
Balance, June 30, 1996 17,828 17,003,711 18,040,189 (636,750) (1,183,330) (944,177) 0 (2,612,675) 0 29,684,796
Net Income 2,011,253 2,011,253
Purchase of treasury stock (2,777,117) (2,777,117)
Purchase of stock for
stock option trust (366,969) (1,872,071) (2,239,040)
Amortization of manage-
ment recognition plan 197,885 197,885
Change in net unrealized
loss on securities avail-
able for sale 414,005 414,005
Earned employee stock
ownership plan shares 28,883 102,620 131,503
Balance, June 30, 1997 l7,828 16,665,625 20,051,443 (222,745) (1,080,710) (746,292) 0 (5,389,792) (1,872,071) 27,423,286
Net Income 2,653,421 2,653,421
Purchase of treasury stock (3,482,350) (3,482,350)
Reclassification of stock to
deferred comp. payable 617,840 (617,840) 0
Settlement of deferred comp payable
in stock 45,942 (76,501) 76,501 45,942
Purchase of stock for
stock option trust (529,957) (601,495) (1,131,452)
Exercise of stock options 51,086 123,682 174,768
Amortization of manage-
ment recognition plan 83,106 220,169 303,275
Change in unrealized
loss on securities avail-
able for sale 222,745 222,745
Earned employee stock
ownership plan shares 59,981 58,480 118,461
Balance, June 30, 1998 17,828 16,375,783 22,704,864 0 (1,022,230) (526,123) 541,339 (9,413,481) (2,349,884) 26,328,096
See accompanying notes to consolidated financial statements.
12
QCF BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year ended June 30
1998 1997
Operating activities:
Net income $2,653,421 2,011,254
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 108,406 91,524
Gain on sale of securities (112,218) 0
Amortization of net (discounts) premiums on securities (97,718) 52,777
Decrease(increase) in accrued interest receivable 36,367 (87,066)
Increase in accrued interest payable 58,034 57,945
(Decrease)Increase in accrued expenses & other liabilities (277,565) 229,422
Increase(decrease) in deferred income taxes (111,200) (105,100)
Amortization of unearned ESOP shares 158,795 175,503
Amortization of MRP 220,169 197,885
Decrease(increase) in other assets 729,159 (68,842)
Net cash provided by operating activities $3,365,650 2,555,302
Investing activities:
Proceeds from sales of securities available for sale 599,600 0
Proceeds from sale of Federal Home Loan Bank stock 128,700 0
Proceeds from maturities and principal collected
on securities held to maturity 54,568,400 22,597,122
Proceeds from maturities and principal collected
on securities available for sale 7,617,805 7,873,050
Purchases of securities held to maturity (57,215,248) (23,751,337)
Net increase in loans (3,992,020) (8,841,080)
Net increase in real estate owned (66,140) (32,302)
Purchases of premises and equipment (163,966) (75,397)
Net cash provided by ( used in) investing activities 1,477,131 (2,229,944)
Financing activities:
Net increase in deposits 1,884,848 14,849,066
Net increase(decrease) in short-term borrowings 41,287 (12,223,942)
Net (decrease) increase in Federal Home Loan
Bank advances (6,100,000) 5,100,000
Purchase of treasury stock (3,482,350) (2,777,117)
Purchase of stock for stock option trust (1,131,452) (2,239,040)
Proceeds from exercise of stock options 123,682 0
Increase in advance payments made by
borrowers for taxes and insurance 5,1576 5,098
Net cash (used in) provided for financing activities (8,658,828) 2,714,065
Decrease(increase) in cash and cash equivalents (3,816,047) 3,039,423
Cash and cash equivalent at beginning of year 7,774,416 4,734,993
Cash and cash equivalents at end of year $3,958,369 7,774,416
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $1,696,547 1,311,807
Interest 4,717,832 4,615,450
Supplemental schedule of non-cash operating and
Investing activities:
Securities transferred to securities held to maturity 17,352,203 0
Deferred compensation obligation and related stock in Grantor
trust reclassified to stockholder's equity 617,840 0
See accompanying notes to consolidated financial statements.
13
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Description of the Business
Description of the Business
QCF Bancorp, Inc. (the Company) is the holding company of Queen City Federal
Savings Bank (the Bank) with operations in Virginia and Ely, Minnesota. The Bank
provides retail and commercial loan and deposit services primarily to customers
within a 30-mile radius of Virginia and Ely, Minnesota. QCF Bancorp, Inc. (the
Company) was incorporated under the laws of the State of Minnesota for the
purpose of becoming the savings and loan holding company of Queen City Federal
Savings Bank (the Bank) in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Company commenced on February 10, 1996, a Subscription and Community
Offering of its stock in connection with the conversion of the Bank (the
Offering). The Offering was closed on March 17, 1996 and the conversion was
consummated on March 31, 1996.
The consolidated financial statements included herein are for the Company, the
Bank and the Bank's wholly-owned subsidiary, Queen City Service Corporation. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
(2) Significant Accounting Policies
The accounting and reporting policies of the Company and its subsidiary conform
to generally accepted accounting principles and to general practice within the
savings and loan industry. The following is a description of the more
significant of those policies which the Company follows in preparing and
presenting its consolidated financial statements.
Consolidation
The consolidated financial statements included herein are for the Company, the
Bank and the Bank's wholly-owned subsidiary, Queen City Service Corporation. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
Material Estimates
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. A material estimate
that is particularly susceptible to significant change in the near-term relates
to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management used available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require additions to the allowance based on their judgment
about information available to them at the time of their examination.
Securities
Securities available for sale are carried at fair value at June 30, 1997. Net
unrealized gains and losses, net of tax effect, are credited or charged to
stockholders equity. Securities held to maturity are carried at amortized cost.
Gains and losses on sales of securities are recognized at the time of sale and
are calculated based on the specific identification method. Transfers of
securities into the held-to-maturity classification from the available-for-sale
classification are made at fair value on the date of transfer.
Premiums and discounts are amortized using the interest method over the term of
the securities.
Loans Receivable
Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses.
Discounts on loans originated or purchased are amortized to income using the
interest method over the estimated average loan life.
The allowance for loan losses is maintained at an amount considered adequate to
provide for probable losses. The allowance for loan losses is based on periodic
analysis of the loan portfolio by management. In this analysis management
considers factors including, but not limited to, specific occurrences, general
economic conditions, loan portfolio composition and historical experience. Loans
are charged off to the extent they are deemed to be uncollectible.
14
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Management believes that the allowance for loan losses is adequate. While
management used available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require additions to the allowance based on their judgment
about information available to them at the time of their examination
The Company defines a loan as impaired when it is probable the Company will be
unable to collect principal and interest payments due in accordance with the
terms of the loan agreement. Impaired' loans that have been separately
identified for evaluation are measured based on the present value of expected
future cash flows or, alternatively, the observable market price of the loans or
the fair value of the collateral. However, for those loans that are collateral
dependent (that is, if repayment of those loans is expected to be provided
solely by the underlying collateral) and for which management has determined
foreclosure is probable, the measure of impairment of those loans is to be based
on the fair value of the collateral.
Interest on loans is recognized over the terms of the loans and is calculated
using the simple interest method on principal amounts outstanding. For impaired
loans, accrual of interest is generally stopped when a loan is greater than
three months past due. Interest on these loans is recognized only when actually
paid by the borrower if collection of the principal is likely to occur. Accrual
of interest is generally resumed when the customer is current on all principal
and interest payments.
Foreclosed Real Estate
Real estate acquired in the settlement of loans is carried at the lower of the
unpaid loan balance plus settlement costs or estimated fair market value less
selling cost. The carrying value of individual properties is periodically
evaluated and reduced to the extent cost exceeds estimated fair value less
selling costs. Costs of developing and improving such properties are
capitalized. Expenses related to holding such real estate, net of rental and
other income, are charged against income as incurred.
Premises and Equipment
Land is carried at cost. Office buildings, improvements, furniture, and
equipment are carried at cost less accumulated depreciation.
Depreciation is computed using straight-line and accelerated methods
over the estimated useful lives of 7 to 33 years for office buildings and
improvements, and 5 to 7 years for furniture and equipment.
Cash Equivalents and Cash Flows
Cash equivalents primarily represent amounts on deposit at other financial
institutions and highly liquid financial instruments with original maturities at
the date of purchase of three months or less. Cash flows from loans, deposits,
short term borrowings and FHLB advances are reported net.
Earnings per Share and Accounting Change
The FASB has issued Statement No. 128, Earnings per Share, which supersedes APB
Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are required to
present basic earnings per share amounts. Basic per-share amounts are computed
by dividing net income (the numerator) by the weighted-average number of common
shares outstanding (the denominator). All other entities are required to present
basic and diluted per-share amounts. Diluted per-share amounts assume the
conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce the loss or increase the income per common share
from continuing operations.
15
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Company initially applied Statement No. 128 for the year and six months
ended June 30, 1998 and (as required by the Statement), has restated all per
share information for the prior periods to conform to the Statement.
Following is information about the computation of the earnings per share data
for the Years ended June 30, 1998 and 1997.
Year Ended June 30, 1998 Year Ended June 30, 1997
Net Net
Income Income
Per Per
Numerator Denominator Share Numerator Denominator Share
Basic earnings per
share
Income available
to common
stockholders $2,653,421 1,055,186 $2.51 $2,011,254 1,173,936 $1.71
Effect of dilutive
securities:
Stock options - 76,710 - 31,320
Management recog-
nition plan - 22,358 - 11,732
Diluted earnings per
share
Income available to
common stockholders $2,653,421 1,154,254 $2.30 $2,011,254 1,216,988 $1.65
Income taxes
Deferred taxes are provided on an asset and liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss or tax credit carry forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the amounts of assets and liabilities recorded for income tax and
financial reporting purposes. Deferred tax assets are reduced by a valuation
allowance when management determines that it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Impact on Recently Issued Statements of Financial Accounting Standards
The Financial Accounting Standards Board (FASB) has issued SFAS No.
125."Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" and SFAS No. 127 "Deferral of the Effective Date
of Certain Provisions of Statement No. 125. "SFAS No. 123 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities based on control of the underlying financial
assets. The provisions of SFAS No. 125 including those applicable to the
servicing of financial assets were effective as of January 1, 1997. The impact
of these provisions on the consolidated financial statements are not material.
Other provisions of SFAS No. 125, including those applicable to transfers of
financial assets and extinguishment of liabilities, are effective as of January
1, 1999. The impact of these provisions on the consolidated financial statements
are not expected to be material.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130") SFAS No. 130 requires
that all items that are components of comprehensive income (defined as "the
change in equity {net assets} of a business enterprise during a period from
transactions and other events and circumstances from non owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners", be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Companies will be required to (a) classify items of other
comprehensive income by its this nature in a financial statement and (b)display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 13, 1997 and requires reclassification of prior periods presented. As
the requirements of SFAS No. 130 are disclosure-related, its implementation will
have had no impact on the Company's financial condition or results of
operations.
16
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on net income or
Stockholders' equity.
(3) Securities Available for Sale
Securities available for sale at June 30, 1997 are summarized as follows:
June 30, 1997
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
Collateralized mortgage
obligations $14,969,882 11,397 (343,326) 14,637,953
U.S. government and
agency securities 8,000,000 0 (83,700) 7,916,300
Corporate bonds and
notes 1,152,410 2,365 (6,526) 1,148,249
Preferred stocks 1,237,382 46,993 (1,250) 1,283,125
$25, 359,674 60,755 (434,802) 24,985,627
Collateralized mortgage obligations presented in the table above aggregating to
$992,361 (cost) at June 30, 1997 have been issued by private issuers and are not
guaranteed or insured by the U.S. government.
Proceeds from the sale of securities available for sale for the year ended June
30, 1998 were $599,600. There were no sales of securities available for sale
during the year ended June 30, 1997. Gross realized gains from the sale of
securities available for sale for the year ended June 30, 1998 were $112,218.
There were no gross realized losses from the sale of securities available for
sale for the year ended June 30, 199798.. Accrued interest receivable on
securities available for sale aggregated to $201,005 at June 30, 1997. During
1998, available-for-sale securities with an amortized cost of $17,352,203 were
transferred to the held-to-maturity classification. The transfer was made at
amortized cost which approximated fair value.
(4) Securities Held to Maturity
Securities held to maturity at June 30, 1998 and June 30, 1997 are summarized as
follows:
June 30, 1998
Gross Gross
Amortized unrealized unrealized Fair
Cost gains losses value
Mortgage backed securities $9,524,274 56,481 (20,019) 9,560,738
Collateralized mortgage obligations 38,972,039 167,134 (77,784) 39,061,390
U.S. government & agency obligations 27,193,044 115,918 (8,650) 27,300,312
Corporate bonds & notes 2,422,493 39,384 0 2,461,875
$78,111,850 378,917 (106,453) 78,384,314
17
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
June 30, 1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Mortgage backed securities $3,598,753 27,836 (16,054) 3,610,535
Collateralized mortgage obligations 26,139,503 195,842 (66,947) 26,268,389
U.S. government & agency obligations 26,413,704 91,188 (56,733) 26,448,159
Corporate bonds and notes 1,960,839 46,669 (0) 2,007,508
$58,112,799 361,535 (139,743) 58,334,591
Collateralized mortgage obligations presented in the tables above aggregating
$819,817 and $2,022,092 (cost) at June 30, 1998 and 1997 respectively have been
issued by private issuers and are not guaranteed or insured by the U.S.
government.
The carrying amount and fair value of securities held to maturity at June 30,
1998, by maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. The allocation of
mortgage-backed securities and collateralized mortgage obligations is based upon
the anticipated average lives of the securities using estimated mortgage
prepayment speeds.
June 30, 1998
Amortized Fair
cost value
Due within one year $17,553,051 17,580,450
Due after one year through
five years 56,757,052 56,982,116
Due after five years
through ten years 3,801,748 3,821,749
Due after ten years 0 0
$78,111,850 78,384,314
There were no sales of securities held to maturity during the years ended June
30, 1998 and 1997.
Accrued interest receivable on securities held to maturity aggregated $788,536
and $661l,685 at June 30, 1998 and 1997, respectively. Held-to-maturity
securities with carrying values of $16,630,189 and $15,631,513 at June 30, 1998
and 1997, respectively, were pledged to secure public deposits.
(5) Loans Receivable
Loans receivable at June 30, 1998 and 1997 are summarized as follows:
18
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
June 30
1998 1997
Residential one-to-four family
mortgage loans $33,174,947 31,815,328
Multifamily and
commercial mortgage loans 2,096,809 2,343,198
Consumer loans 19,827,147 18,291,160
Commercial loans 11,368,603 10,066,789
66,467,506 62,516,475
Less:
Allowance for losses (1,273,185) (1,314,174)
$65,194,321 61,202,301
The weighted average annual contractual interest rate for all loans was 8.76%
and 8.82% at June 30, 1998 and 1997, respectively.
Non-accrual loans totaled $15,312 and $224,842 at June 30, 1998 and 1997,
respectively. There were no restructured loans at June 30, 1998 and 1997.
Non-accrual loans are the only loans that are considered to be impaired under
the criteria established by SFAS No. 114 and SFAS No. 118. The related allowance
for credit losses as of June 30, 1998 was $0. The average investment in impaired
loans during fiscal 1998 was $237,000.
The effect of impaired loans on interest income for the years ended June 30,
1998, and 1997 was insignificant.
There are no material commitments to lend additional funds to customers whose
loans were classified as non-accrual.
The aggregate amount of loans to directors and executive officers of the Bank
were $70,670 and $50,329 at June 30, 1998 and 1997, respectively. Such loans
were made in the ordinary course of business on normal credit terms, including
interest rate and collateralization and do not represent more than normal risk
of collection.
Accrued interest receivable on loans receivable at June 30, 1998 and 1997 was
$485,876 and $448,089, respectively.
The Bank grants loans to customers who live primarily in northeastern Minnesota.
Although the Bank has a diversified loan portfolio a substantial portion of its
debtors' ability to honor their contracts is dependent upon local economy which
is concentrated in the iron mining and wood products industries.
At June 30, 1998 and 1997 Bank was servicing loans for others with aggregate
unpaid principal balances of approximately $2,039,010 and $2,899,003,
respectively.
(6) Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as follows
Balance at June 30, 1996 $ 1,331,352
Provision for losses 0
Charge-offs (44,013)
Recoveries 26,835
19
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Balance at June 30, 1997 1,314,174
Provision for losses 0
Charge offs (67,389)
Recoveries 26,400
Balance at June 30, 1998 $1,273,185
(7) Foreclosed Real Estate
Foreclosed real estate, included in other assets, consisted of the following:
June 30
1998 1997
Real estate in judgment $104,527 38,387
Less allowance for losses 0 0
$104,527 38,387
(8) Premises and Equipment
A summary of premises and equipment at June 30, 1998 and 1997 is as follows:
June 30
1998 1997
Land $ 90,800 90,800
Office buildings and improvements 1,083,340 1,085,715
Furniture and equipment 1,037,690 873,724
2,211,830 2,050,239
Less accumulated depreciation (1,731,661) (1,625,630)
$ 480,169 424,609
(9) Deposits
Deposits and weighted-average interest rates at June 30, 1998 and 1997 are
summarized as follows (dollar amounts in thousands)
June 30
1998 1997
Weighted Weighted
Average Average
Amount Rate Amount Rate
Passbook $25,372 2.50% 25,317 2.50
Demand deposits 14,101 0.78 13,506 0.61
Money market 10,252 2.55 9,320 2.55
Certificates 55,841 5.25 55,538 5.28
$105,566 103,681
20
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At June 30, 1998 and 1997, the Bank had $5,903,000 and $5,023,000 respectively,
of deposit accounts with balances of $100,000 or more. Deposit balances greater
than $100,000 are not insured. The Bank did not have any brokered deposits at
June 30, 1998 or 1997.
Interest expense on deposits is summarized as follows:
Year ended June 30
1998 1997
Passbook $631,695 598,475
Demand deposits 107,380 117,637
Money market 240,166 223,508
Certificates 2,977,624 2,924,527
$3,956,86 3,864,147
Certificates had the following remaining maturities (dollar amounts in thousands
June 30, 1998
Weighted
Average
Amount rate
Less than 3 months $ 9,021 4.04%
3-12 months 20,483 4.98
13-36 months 19,723 6.22
Over 36 months 6,614 5.89
$ 55,841 5.25%
At June 30, 1998 and 1997 no securities were pledged as collateral for deposits.
(10) Short-term Borrowings
Short-term borrowings consist of sales of securities under agreements to
repurchase the identical securities. The agreements generally mature within 180
days and bear a weighted average interest rate of 3.56% at June 30, 1998.
The agreements are treated as financings with the obligations to repurchase
securities reflected as a liability and the dollar amount of the securities
collateralizing the agreements remaining in the asset accounts. The securities
collateralizing the agreements are in safekeeping at the Federal Home Loan Bank
of Des Moines in the Bank's account. At June 30, 1998, the agreements were
collateralized by securities with a carrying value of $16,630,189 and an
approximate market value of $16,776,474. At June 30, 1997 the agreements were
collateralized by securities with a carrying value of $15,631,513 and an
approximate market value of $15,670,527
Federal Home Loan Bank advances totaled $2,000,000 and $8,100,000 at June 30,
1998 and 1997, respectively. The advances have an average maturity of 2 months
and 14 months and an average rate of 5.74% and 5.81% at June 30,1998 and 1997,
respectively. The advances are collateralized by the Bank's Federal Home Loan
Bank stock and a blanket pledge of residential one-to-four family mortgage
loans.
21
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes
Federal and state income tax expense is as follows:
Year ended June 30
1998 1997
Current:
Federal $1,314,000 1,075,100
State 433,000 338,000
Total current 1,747,000 1,413,100
Deferred:
Federal (82,300) (78,900)
State (28,700) (26,200)
Total deferred (111,000) (105,100)
$1,636,000 1,308,000
The actual income tax expense differs from the "expected" income tax expense
computed by applying the U.S. federal corporate tax rate to income before taxes
as follows:
Year Ended June 30
1998 1997
Federal "expected" income tax expense $1,458,403 1,128,546
Items affecting federal income tax:
Preferred stock dividends (7,875) (22,696)
State income taxes, net of federal
income tax benefit 267,911 206,010
Low income housing tax credits (52,433) 0
Other, net (30,006) (3,860)
$1,636,000 1,308,000
Effective income tax rate 38.1% 39.4%
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at June 30, 1998 and 1997 are as follows:
Year Ended June, 30
1998 1997
Deferred tax assets:
Allowance for unrealized losses on securities
available for sale $ 0 151,191
Allowance for loan losses 89,871 86,793
Deferred compensation 186,682 205,985
Supplemental executive retirement plan 272,724 183,172
Limited partnership 12,361 0
Other 7,569 0
$ 569,207 627,141
Deferred tax liabilities:
Federal Home Loan Bank stock $ 55,128 76,225
Premises and equipment 34,879 18,847
22
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Other 0 12,769
90,007 107,841
Net deferred tax asset $479,200 519,300
No valuation allowance was required for deferred tax assets at June 30, 1998 or
1997.
Retained earnings at June 30, 1998 includes approximately $2,270,000 for which
no provision for federal income tax has been made. This amount represents
allocations of income to bad debt deductions for tax purposes. Reduction of the
amount so allocated for purposes other than to absorb losses will create income
for tax purposes, which will be subject to the then- current corporate income
tax rate.
(12) Commitments and Contingencies
The Bank is a party to financial instruments with off balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve to varying degrees, elements of credit,
interest rate and liquidity risk in excess of the amount recognized in the
accompanying statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer provided there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since certain of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customers' creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on the loan type and on management's
evaluation of the borrower. Collateral consists primarily of residential real
estate and personal property. The Bank had outstanding commitments to extend
credit of $1,450,024 and $2,113,765 at June 30, 1998 and 1997, respectively.
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. The standby letters
of credit are primarily issued to support private borrowing arrangements, and
expire within the next fiscal year. The credit risk involved in issuing standby
letters of credit is essentially the same as that involved in making loans to
customers. The amount of collateral the Bank obtains to support standby letters
of credit is based on management's credit evaluation of the borrower. Since the
conditions under which the Bank is required to fund standby letters of credit
may not materialize, the cash requirements are expected to be less than the
total outstanding commitments. The Bank had outstanding standby letters of
credit of $171,500 and $247,000 at June 30, 1998 and 1997, respectively.
(13) Regulatory Capital Requirements
The Bank as a member of the Federal Home Loan Bank System is required to hold a
specified number of shares of capital stock, which is carried at cost, in the
Federal Home Loan Bank of Des Moines. In addition, the Bank is required to
maintain cash and liquid assets in an amount equal to 5% of its deposit accounts
and other obligations due within one year. The Bank has met these requirements.
Federal savings institutions are required to satisfy three capital requirements:
(i) a requirement that "tangible capital" equal or exceed 1.5% of adjusted total
assets, (ii) a requirement that "core-capital" equal or exceed
23
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
3% of adjusted total assets, and (iii) a risk-based capital standard of 8% of
"risk-adjusted assets". Failure to meet these requirements can initiate
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material affect on the Bank's financial
statements. The Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weighting, and
other factors. As of June 30, 1998, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The following table sets forth the Bank's calculation of tangible, core and
risk-based capital and applicable percentages of adjusted assets at June 30,
1998 together with the excess over the minimum capital requirements.
Actual Required Excess
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
Tangible capital $19,169 13.43% $2,141 1.50% $17,028 11.93%
Core capital 19,169 13.43 4,281 3.00 14,888 10.43
Plus allowed portion of general
allowance for loan losses 1,273
Risk-based capital $20,442 29.90 $ 5,469 8.00 $14,973 21.90
(14) Employee Benefits
The Company adopted an Employee Stock Ownership Plan (the ESOP) which meets the
requirements of Section 4975(e)(7) of the Internal Revenue Code and Section
407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended
(ERISA), and as such the ESOP is empowered to borrow in order to finance
purchases of the common stock of the Company. The ESOP borrowed $1,426,200 from
the Company to purchase 142,620 shares of common stock of the Company. The Bank
has committed to make annual contributions to the ESOP necessary to repay the
loan including interest. The Bank contributed $161,147 and $212,078 to the ESOP
for the years ended June 30, 1998 and 1997, respectively.
As the debt is repaid, ESOP shares which were initially pledged as collateral
for its debt, are released from collateral and allocated to active employees,
based on the proportion of debt service paid in the year. The Company accounts
for its ESOP in accordance with Statement of Position 93-6, "Employers
Accounting for Employee Stock Ownership Plans". Accordingly, the shares pledged
as collateral are reported as unearned ESOP shares in stockholders' equity. As
shares are determined to be ratably released from collateral, the Company
reports compensation expense equal to the current market price of the shares,
and the shares become outstanding for earnings per share computations. ESOP
compensation benefit expense for 1998 and 1997 was $158,795 and $175,503,
respectively.
All employees of the Bank are eligible to participate in the ESOP after they
attain age 21 and complete one year of service during which they worked at least
1,000 hours. In 1998, the company committed to release 5,848 shares of common
stock which were allocated to eligible participants subject to the restrictions
of the ESOP.
Shares released and allocated 37,909
Unreleased shares 102,223
Total ESOP shares 140,132
Fair value of unreleased shares at June 30, 1998 $3,117,802
24
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Bank has individual deferred compensation and supplemental retirement
agreements with certain directors and officers. The cost of such individual
agreements is being accrued over the period of actual service from the date of
the respective agreement. The cost of such agreements was $221,292 and $205,047
for the years ended June 30, 1998 and1997 respectively. The agreements are
funded through a grantor trust with assets which match the investment options
selected by the directors and officers. The agreements allow the individual to
select among two investment options, bank certificates of deposit or common
stock of the Company. Earnings are credited to the individual accounts based
upon the investment option selected. Investment elections are irrevocable. The
value of an individual's account that is measured by the value of common stock
will be distributed solely in shares of the Company's common stock. In 1998, the
Company adopted the provisions of the FASB Emerging Issues Task Force Issue No.
97-14 relating to the deferred compensation and supplemental retirement
agreements. Accordingly, the cost of common stock held in the grantor trust has
been reclassed to treasury stock and the cost of the compensation obligation
payable in common stock has been reclassed as a component of stockholders'
equity.
The Company has established the Management Recognition Plan (MRP) for directors
and key officers. Under the plan, 78,441 shares are available for grant and
71,310 were granted to directors and officers in 1996. The cost of the shares
awarded under the plan is recorded as unearned compensation, a contra equity
account, and is being recognized as an expense in accordance with the vesting
requirements under the plan. For the fiscal year ended June 30, 1998 and 1997,
the amount included in compensation expense was $220,169 and $197,885,
respectively.
The Company has established a stock option plan for directors, officers and
employees. In accordance with the terms of the plan, the exercise price was
established at the fair market price on the date of shareholder approval of
$13.875 per share. Awards made under the plan may be incentive stock options as
defined by Section 422 of the Internal Revenue Code of 1986 or options that do
not qualify. Under the plan 178,275 options were available for grant and 160,448
options were granted in 1996. 51,698 options were eligible to be exercised as of
June 30, 1998. 8,914 options had been exercised as of June 30, 1998. All options
expire on October 11, 2005.
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method prescribed in the FASB Statement No. 123, reported net income and
earnings per share would have been reduced to:
Year ended June 30 Net income Per share
1998 $2,531,021 2.20
1997 1,888,854 1.55
In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the fair value method prescribed in Statement No. 123,
with the following weighted-average assumptions for grants in 1996: No
dividends; risk-free interest rate of 6.0%, expected life of 10 years, and
expected price volatility of 14.57%.
(15) Stockholders' Equity
The Company was incorporated for the purpose of becoming the savings and loan
holding company of the Bank in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank, pursuant to a Plan of Conversion adopted on October 25, 1995.
The Company commenced on February 10, 1995, a Subscription and Community
Offering of its shares in connection with the conversion of the Bank (the
Offering). The Offering was closed on March 17, 1995 and the conversion was
consummated on March 31, 1995, with the issuance of 1,782,750 shares of the
25
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Company's common stock at a price of $10 per share. Total proceeds from the
conversion of $16,998,000 net of costs relating to the conversion of $829,500,
have been recorded as common stock and additional paid-in capital. The Company
purchased all of the capital stock of the Bank in exchange for 50% of the net
proceeds of the conversion.
The Company's articles of incorporation authorized the issuance of up to
1,000,000 shares of preferred stock but to date no shares have been issued.
In order to grant a priority to eligible account holders in the event of future
liquidation, the Bank, at the time of conversion established a liquidation
account equal to its regulatory capital as of December 31, 1994. In the event of
future liquidation of the Bank, an eligible account holder who continues to
maintain their deposit account shall be entitled to receive a distribution from
the liquidation account. The total amount of the liquidation account will be
decreased as the balance of eligible account holders are reduced subsequent to
the conversion, based on an annual determination of such balance.
The Bank may not declare or pay a cash dividend to the Company in excess of 100%
of its net income to date during the current calendar year plus the amount that
would reduce by one-half the Bank's surplus capital ratio at the beginning of
the calendar year without prior notice to the Office of Thrift Supervision
(OTS). Additional limitations on dividends declared or paid on, or repurchases
of, the Bank's capital stock are tied to the Bank's level of compliance with its
regulatory capital requirements.
(16) Stockholders' Equity and Subsequent Events
Subsequent to the Companys fiscal year end, the Company purchased 156,490
shares of its stock at an average price of $30.57 per share. These shares were
placed into treasury stock by the Company.
(17) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," requires
disclosures of estimated fair values of the Bank's financial instruments,
including assets, liabilities and off- balance sheet items for which it is
practicable to estimate fair value. The fair value estimates are made as of June
30, 1998 and 1997 based upon relevant market information, if available, and upon
the characteristics of the financial instruments themselves. Because no market
exists for a significant portion of the Bank's financial instruments, fair value
estimates are based upon judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. The estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based only on existing financial instruments without
attempting to estimate the value of anticipated future business or the value of
assets and liabilities that are not considered financial instruments. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on the fair value estimates and
have not been considered in any of the estimates.
The estimated fair value of the Bank's financial instruments are shown below.
Following the table, there is an explanation of the methods and assumptions used
to estimate the fair value of each class of financial instruments. June 30 1998
1997
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
Financial assets:
Cash and cash equivalents $ 3,958 3,958 7,774 7,774
Securities available
for sale 0 0 24,986 24,986
Securities held to maturity 78,112 78,384 58,113 58,335
Loans receivable, net 65,194 65,761 61,202 60,989
26
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Federal Home Loan
Bank Stock 425 425 554 554
Accrued accounts receivable 1,274 1,274 1,311 1,311
Financial liabilities:
Deposits 105,566 105,727 103,681 103,366
Short-term borrowings 16,081 16,076 22,140 22,076
Accrued interest payable 1,129 1,129 1,071 1,071
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates their fair value.
Securities Available for Sale and Securities Held to Maturity
The fair value of securities are based upon quoted market prices.
Loans Receivable
The fair value of loans receivable were estimated for groups of loans with
similar characteristics. The fair value of the loan portfolio, was calculated by
discounting the scheduled cash flows through the estimated maturity using
anticipated prepayment speeds and using discount rates that reflect the credit
and interest rate risk inherent in each loan portfolio. The fair value of the
adjustable loan portfolio was estimated by grouping the loans with similar
characteristics and comparing the characteristics of each group to the prices
quoted for similar types of loans in the secondary market.
Federal Home Loan Bank Stock
The carrying amount at FHLB stock approximates its fair value.
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair value
since it is short-term in nature and does not present unanticipated credit
concerns.
Deposits
The fair value of deposits with no stated maturity such as checking, savings and
money market accounts, is equal to the amount payable on demand. The fair value
of certificates of deposit is based on the discounted value of contractual cash
flows using as discount rates the rates that were offered by the Bank as of June
30, 1998 and 1997 for deposits with maturities similar to the remaining
maturities of the existing certificates of deposit.
The fair value estimate for deposits does not include the benefit that results
from the low cost funding provided by the Bank's existing deposits and long-term
customer relationships compared to the cost of obtaining different sources of
funding. This benefit is commonly referred to as the core deposit intangible.
Short-term Borrowings
The fair value of short-term borrowings due on demand, is equal to the amount
payable on demand. The fair value of other short-term borrowings is based on the
discounted value of contractual cash flows using as discount rates the rates
that were available to the Bank as of June 30, 1998 and 1997 for short-term
borrowings with maturities similar to the remaining maturities of the existing
short-term borrowings.
27
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair value
since it is short-term in nature.
Off-balance Sheet Instruments
Since the majority of the Bank's off-balance sheet instruments consist of
non-fee producing, variable rate commitments, the Bank has determined they do
not have a distinguishable fair value.
(18) QCF Bancorp, Inc. Financial Information (Parent Company Only)
The parent company's principal assets are its investment in the Bank and its
savings deposits at the Bank. The following are the condensed financial
statements for the parent company only as of June 30, 1998 and 1997.
June 30
Condensed Balance Sheets 1998 1997
Assets:
Cash and cash equivalents $ 3,119,061 1,826,158
Securities available for sale 0 8,484,571
Securities held to maturity 3,798,098 0
Investment in subsidiary 19,169,233 16,783,814
Other assets 241,704 372,743
Total assets $ 26,328,096 27,467,286
Liabilities: 0 0
Stockholders' equity: 26,328,096 27,467,286
Total liabilities and
stockholders' equity $26,328,096 27,467,286
Year Ended June 30
1998 1997
Condensed Statements of Income
Interest income $ 598,497 722,139
Equity in earnings of subsidiary 2,252,721 1,610,787
Other (69,797) (140,672)
Income before income tax expense 2,781,421 2,192,254
Income tax expense 128,000 181,000
Net income $ 2,653,421 2,011,254
Condensed Statements of Cash Flows
Operating activities:
Net income $ 2,653,421 2,011,254
Equity in earnings of subsidiary (2,252,721) (1,610,787)
Distributions of earnings of subsidiary 0 6,000,000
Amortization of Unearned ESOP shares 158,795 175,503
Amortization of MRP 220,169 197,885
28
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Decrease in liabilities 0 (945,668)
Decrease (increase) in other assets (165,740) (56,914)
Net cash provided by operating activities 945,402 5,771,273
Investing activities:
Principal collected from securities held
to maturity 2,386,916 0
Principal collected from securities
available for sale 2,450,704 1,071,042
Net cash provided by
investing activities 4,837,620 1,071,042
Financing activities:
Purchase of stock
into stock option trust (1,131,452) (2,239,040)
Proceeds from exercise of stock options 123,682 0
Purchase of treasury stock (3,482,350) (2,777,117)
Net cash (used in)
financing activities (4,490,119) (5,016,157)
Increase in cash and
cash equivalents 1,292,903 1,826,158
Cash and cash equivalents, beginning
of period 1,826,158 0
Cash and cash equivalents, end
of period $3,119,061 1,826,158
(19) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data (in thousands of dollars except for per
share amounts) for fiscal 1998 and 1997 are as follows:
Three Months Ended
Selected Operations Data 6/30/98 3/31/98 12/31/97 9/30/97
Interest income $2,785 2,761 2,868 2,829
Interest expense 1,161 1,151 1,235 1,229
Net interest income 1,624 1,610 1,633 1,600
Non-interest income 217 185 148 141
Non-interest expense 736 719 735 679
Income tax expense 428 393 393 422
Net income $677 682 654 640
Diluted earnings per common share .60 .60 .57 .52
High stock price 33.00 29.38 29.75 26.25
Low stock price 27.25 27.25 26.50 2l.25
6/30/97 3/31/97 12/31/96 9/30/96
Interest income $ 2,726 2,627 2,692 2,657
Interest expense 1,196 1,137 1,175 1,165
Net interest income 1,530 1,490 1,517 1,492
Non-interest income 169 128 134 135
Non-interest expense 678 674 544 1,381
Income tax expense 402 370 436 100
net income 619 574 671 147
Diluted Earnings per common share .51 .48 .57 .11
High stock price 20.25 19.75 18.25 15.75
Low stock price 20.38 18.75 16.25 15.00
29
QCF BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Selected Financial Condition Data 6/30/98 3/31/98 12/31/97 9/30/97
Total assets $150,486 154,089 152,668 158,192
Investment securities 78,112 77,899 76,918 82,357
Net loans 65,194 64,525 64,819 63,673
Deposits 105,566 105,239 103,693 104,549
Short-term borrowings 14,081 13,862 14,158 14,253
Stockholders' equity 26,328 27,275 26,820 26,020
6/30/97 3/31/97 12/31/96 9/30/96
Total assets $ 156,727 149,637 146,922 148,321
Investment securities 83,098 81,889 80,493 87,278
Net loans 61,202 58,465 57,665 55,744
Deposits 103,681 104,946 102,842 81,794
Short-term borrowings 14,040 15,850 15,746 37,905
Stockholders' equity 27,423 27,070 26,760 26,161
30
STOCKHOLDERS' INFORMATION
Annual Meeting Stock Listing
The annual meeting of shareholders QCF's common stock is listed on
will be held on Wednesday, the NASDAQ National Market System with
October 14, 1998 at 9:00 A. M. at a ticker symbol of QCFB.
the executive office of the Company. Stockholders of record: 344
Executive Office Form 1O-KSB
QCF Bancorp, Inc. QCF's Form 1OKSB is filled with the
501 Chestnut Street Securities and Exchange Commission and
Virginia, MN 55792-1147 is available without charge upon request
(218) 741-2O4O from: QCF Bancorp, Inc.
Attn: Investor Relations
Independent Auditors P.O. Box 1147
McGladrey & Pullen, LLP Virginia, MN 55792
227 West First Street
Duluth, MN 55802 Transfer Agent & Registrar
Inquiries regarding change of address,
QCF Bancorp, Inc. transfer requirements, and certificates
Investor Relations should he directed to the transferagent:
P.O. Box 1147 Registrar and Transfer Company
Virginia, MN 55802 10 Commerce Drive
Cranford, New Jersey 07016
1-800-368-5948
Directors and Officers:
Directors: Executive Officers:
Kevin E. Pietrini Kevin E. Pietrini
President and Chief President
Executive Officer
Daniel F. Schultz
Robert A. Muhich Vice President and Treasurer
Computer Consultant
Culbert Realty & Appraisal Service Linda M. Myklebust
Vice President
John A. Trenti
Attorney at the Trenti Law Firm Gerald D. McKenna
Vice President
Peter J. Johnson
President of Hoover Construction Branch Offices:
Thunderbird Mall
Craig W. Nordling Virginia, Mn. 55792
Line Department Manager
Lake Country Power 102 East Sheridan Street
Ely, MN 5573l
John C. Pearsall
Partner with Mesabi Dental Service
Daniel F. Schultz
Vice President/Treasurer
31