SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
FORM 10-KSB
(Mark One)

  X  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 For the fiscal year ended June 30, 1998

     TRANSITIONAL  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934 For the transition period from to

                          Commission File No. 0-25700

                               QCF BANCORP, INC.
 
         (Name of small business issuer in its charter)
                   Minnesota                                    41-1796789
         (State or other jurisdiction                        (I.R.S. employer
         of incorporation or organization)                   identification no.)

         501 Chestnut Street, Virginia, Minnesota                        55792
         (Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:  (218) 741-2040

Securities registered pursuant to Section 12(b) of the Act:
                                 Not Applicable

          Securities registered pursuant to Section 12(g) of the Act:
                     Common stock, par value $.01 per share
                                (Title of Class)

Check  whether  the issuer (1) has filed all  reports  required by Section 13 or
15(d) of the Securities  Exchange Act of 1934 during the preceding 12 months (or
such shorter  period that the  registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. Yes X No

Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B not contained in this form, and no disclosure  will be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB [X]

State issuer's revenues for its most recent fiscal year: $11,935,000.
        
As of August 24,  1998,  the  aggregate  market  value of the 401,405  shares of
Common Stock of the registrant  issued and outstanding held by non-affiliates on
such date was  approximately  $11,841,448  based on the  closing  sale  price of
$29.50 per share of the  registrant's  Common Stock on August 28, 1998 as listed
on the National  Association of Securities Dealers Automated  Quotation National
Market System.  For purposes of this calculation,  it is assumed that directors,
officers and beneficial  owners of more than 5% of the registrant's  outstanding
voting stock are affiliates.

Number of shares of Common Stock outstanding as of August 24, 1998: 1,174,844.

DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents  incorporated by reference and the Part of the
Form 10-KSB into which the document is incorporated:
     1. Portions of the Annual Report to Stockholders  for the fiscal year ended
        June 30, 1998. (Parts I, II and IV)
     
     2.  Portions of Proxy  Statement for 1998 Annual  Meeting of  Stockholders.
         (Part III)

Transitional Small Business Disclosure Format (Check one):   Yes         No    X


                                       1
<PAGE>


PART I


Item 1.  Description of Business

General
QCF Bancorp,  Inc. QCF Bancorp,  Inc. (the "Company") was incorporated under the
laws of the State of Minnesota in November 1994 at the direction of the Board of
Directors  of Queen City  Federal  Savings  Bank (the "Bank") for the purpose of
serving as the holding  company of the Bank upon the  acquisition  of all of the
capital  stock  issued by the Bank upon its  conversion  from the  mutual to the
stock form of ownership (the "Conversion"). Prior to the Conversion, the Company
did not engage in any material  operations.  Currently,  the Company's principal
business is the  business of the Bank.  The  Company has no  significant  assets
other than the  outstanding  capital stock of the Bank, $6.9 million of cash and
investment  securities and a note receivable  from the Company's  Employee Stock
Ownership  Plan (the "ESOP").  At June 30, 1998, the Company had total assets of
$150.5  million,  deposits of $105.6 million and  stockholders'  equity of $26.3
million.

The Company's  executive  offices are located at 501 Chestnut Street,  Virginia,
Minnesota 55792, and its main telephone number is (218) 741-2040.

Queen City Federal  Savings Bank.  The Bank is a federal  savings bank operating
through three offices  serving north central St. Louis County in Minnesota.  The
Bank was  chartered in 1960 under the name "Queen City Federal  Savings and Loan
Association  of  Virginia."  In February  1961,  the Bank  shortened its name to
"Queen City Federal Savings and Loan Association." In 1994, the Bank amended its
charter to become a federal mutual savings bank and adopted its current name. On
March 31,  1995,  the Bank  consummated  its  conversion  to the  stock  form of
ownership as a wholly owned  subsidiary of the Company.  The Bank is a member of
the Federal Home Loan Bank ("FHLB")  System,  and its deposits are insured up to
applicable  limits by the Federal Deposit Insurance  Corporation  ("FDIC") under
the Savings Association Insurance Fund ("SAIF").

The Bank's principal  business consists of attracting  deposits from the general
public and investing  those funds  primarily in investment  securities and loans
secured by first mortgages on  owner-occupied,  single-family  residences in the
Bank's market area and consumer loans.  The Bank also originates  first mortgage
loans on multi-family and commercial real estate and commercial loans.

The Bank derives its income  principally from interest earned on investments and
loans and, to a lesser  extent,  loan and  deposit  fees.  The Bank's  principal
expenses are interest expense on deposits and borrowings and noninterest expense
such as compensation and employee benefits,  office occupancy expenses and other
miscellaneous expenses.
        
The Bank's  executive  offices are  located at 501  Chestnut  Street,  Virginia,
Minnesota 55792, and its main telephone number is (218) 741-2040.

Market Area

The Bank currently  conducts its business  through three banking offices located
in Virginia  and Ely,  which are located in north  central St.  Louis  County in
northeastern Minnesota. The Bank's primary lending area includes the communities
located within a 30-mile radius of the Bank's main office in Virginia.

The  economy in the Bank's  market  area is  dependent  on the  taconite  mining
industry  which  experienced  problems  in the late 1970s and early 1980s due to
foreign competition.  The Bank's market area experienced plant closings, layoffs
and extremely high levels of unemployment at that time. Since then, the taconite
mining  industry has stabilized,  and various  processors and others continue to
operate  taconite  mines and plants in the area.  However,  any  decline in that
industry could cause material losses to the Bank if local residents had to leave
the  area  to  find  employment  and   consequently   defaulted  on  their  debt
obligations. Due primarily to the economic factors discussed above, the Bank has
limited  lending  opportunities  in its market area and does not anticipate that
lending  opportunities will increase in the future because of the lack of growth
in the economy.  As a result,  the Bank has not been able to originate  loans to
the  extent  desired  and  consequently  has had to  invest  available  funds in
investment  securities.  Investment  securities typically earn lower yields than
single-family,  residential  mortgage  loans,  and the Bank's  need to  purchase
investment  securities  because of the lack of lending  opportunities has caused
the Bank's  interest rate spread to be below that of savings banks of comparable
size in more robust market areas.

According to the Virginia Bureau of Economic Development,  the population of St.
Louis County,  Minnesota has decreased  gradually over the past several  decades
from  232,000  for the 1960  Census  to  198,000  for the 1990  Census,  and the
population  of Virginia has  decreased  from 14,000 for the 1960 Census to 9,000
for the 1990 Census.

                                       2
<PAGE>
       
Lending Activities

General. The Bank's gross loan portfolio totaled $66.5 million at June 30, 1998,
representing  44.2% of total  assets at that date.  It is the  Bank's  policy to
concentrate its lending within its market area. At June 30, 1998, $33.2 million,
or 49.9% of the gross loan portfolio,  consisted of  single-family,  residential
mortgage loans. The Bank also originates consumer loans, which primarily consist
of  automobile  loans,  recreation  loan and home equity loans.  Consumer  loans
amounted to $19.8 million, or 29.8% of the Bank's gross loan portfolio,  at June
30,  1998.  To a lesser  extent,  the Bank  also  originates  loans  secured  by
multi-family  and  commercial  properties  and  commercial  loans.  Included  in
mortgage loans are loans which are insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veteran's Administration ("VA").

The  Bank  has  not  actively  pursued  the  origination  of  loans  secured  by
multi-family  or commercial  properties.  Such loans have generally been made to
small  businesses  within the Bank's market area and are secured by  warehouses,
retail stores or other commercial property.  At June 30, 1998,  multi-family and
commercial  real estate loans  amounted to $2.1  million,  or 3.2% of the Bank's
gross loan  portfolio.  The Bank also engages in commercial  lending  within its
market area.  At June 30, 1998,  commercial  loans  amounted to $11.4 million or
17.1% of the Bank's gross loan portfolio.

Loan  Portfolio  Composition.  The  following  table  sets forth  selected  data
relating to the  composition of the Bank's loan portfolio by type of loan at the
dates  indicated.  At June 30,  1998,  the Bank  had no  concentration  of loans
exceeding 10% of total loans other than as disclosed below.


                                             At June 30,
                                      1998                     1997
                                 Amount      %             Amount      %
                                        (Dollars in thousands)

 Type of Loan:
 Real estate loans:
 Single-family residential     $ 33,175   49.92%         $ 31,815   50.89%
 Multi-family and commercial      2,097    3.15             2,343     3.75
 
 Commercial business loans       11,369   17.10            10,067    16.10
 
 Consumer loans:
 Automobile                      12,001   18.06             10,192   16.30
 Recreational                     1,525    2.29              1,455    2.33
 Savings account                    569    0.86                654    1.05
 Second  mortgage                 3,051    4.59              2,948    4.71
 Other                            2,680    4.03              3,042    4.87
   Total  gross loans            66,467   100.00%           62,516  100.00%
 Less:
 
 Allowance for loan losses        1,273                      1,314
   Total  $                      65,194            $        61,202


The following  table sets forth certain  information  at June 30, 1998 regarding
the  dollar  amount of loans  maturing  in the Bank's  portfolio  based on their
contractual  terms to maturity,  including  scheduled  repayments  of principal.
Demand  loans,  loans  having no stated  schedule  of  repayments  and no stated
maturity,  and  overdrafts  are  reported as due in one year or less.  The table
below does not include any estimate of prepayments which  significantly  shorten
the  average  life of all  mortgage  loans and may cause  the  Bank's  repayment
experience to differ from that shown below.


                                       3
<PAGE>







<TABLE>
 
                                             
                                                One to            Five to       More than
                            One Year or Less   Five Years        Ten Years        10 years            Total

                                                                          (In thousands)

Single-family residential
<S>                      <C>               <C>               <C>              <C>                 <C>         
 real estate             $        306      $        2,641    $       7,348    $        22,880     $     33,175
Multi-family and
 commercial real estate            19                 161              987                930            2,097
Consumer                        1,868              14,495            1,894              1,569           19,826
Commercial business             1,890               3,101            2,260              4,118           11,369
 Total                   $      4,083      $        20,398   $      12,489    $        29,497     $     66,467
</TABLE>

The following  table sets forth at June 30, 1998, the dollar amount of all loans
due one year or more after June 30, 1998 which have predetermined interest rates
and have floating or adjustable interest rates.

                                           Predetermined      Floating or
                                                Rate       Adjustable Rates
                                                     (In thousands)

Single-family residential real estate $        6,184    $       26,685
Multi-family  and
 commercial real estate                        1,757               321
Consumer                                      15,672             2,286
Commercial business                            1,848             7,631
Total                                 $       25,461    $       36,923

Scheduled  contractual  principal repayments of loans do not necessarily reflect
the  actual  life  of such  assets.  The  average  life of  long-term  loans  is
substantially  less  than  their  contractual  terms,  due  to  prepayments.  In
addition,  due-on-  sale clauses on loans  generally  give the Bank the right to
declare a loan  immediately  due and payable in the event,  among other  things,
that the borrower  sells the real property  subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage  loan  market  rates are  substantially  higher  than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.

Originations,  Purchases and Sales of Loans.  The Bank's loan  originations  are
derived from a number of sources,  including  referrals by realtors,  depositors
and borrowers,  as well as walk-in customers. In addition, the Bank originates a
portion of its automobile loans on an indirect basis through various  automobile
dealerships located in the Bank's market area. The Bank's solicitation  programs
consist  of   advertisements   in  local  media,   in  addition  to   occasional
participation in various community  organizations and events.  Real estate loans
are  originated by the Bank's  salaried loan  officers.  Loan  applications  are
accepted  only at the Bank's  main  office and the Ely branch  office,  with the
exception of  applications  which are  originated  on an indirect  basis through
various approved automobile dealerships in the Bank's market area. In all cases,
however, the Bank has final approval of the application.

In the  early  1980's,  the Bank  adopted a policy of  selling  all  fixed-rate,
conventional  single-family mortgage loans in the secondary market to remove any
interest rate risk which would result from holding the loans in portfolio.  Such
loans are sold with  servicing  released.  Management  intends  to  continue  to
originate  fixed-rate  loans and to sell in the secondary  market all such loans
with terms in excess of 15 years or which are  insured by the FHA or  guaranteed
by the VA in the secondary market.

Loan  Underwriting  Policies.  The Bank's lending  activities are subject to the
Bank's   written,   non-discriminatory   underwriting   standards  and  to  loan
origination  procedures  prescribed  by the Bank's  Board of  Directors  and its
management.  Detailed loan applications are obtained to determine the borrower's
ability  to repay,  and the more  significant  items on these  applications  are
verified   through  the  use  of  credit  reports,   financial   statements  and
confirmations.  Property valuations, when required by the Bank, are performed by
appraisers approved by the Bank's Board of Directors. Individual officers of the
Bank have been granted  authority by the Board of Directors to approve  loans up
to varying  specified dollar amounts,  depending upon the type of loan. Loans in
excess of $250,000 must be approved by a committee of the Board of Directors.

Applications  for fixed-rate,  single-family  real estate loans are underwritten
and closed in accordance  with the standards of FHLMC and FNMA.  Adjustable-rate
loans originated by the Bank for its portfolio are underwritten and closed based
on the Bank's own loan  guidelines,  which may exceed FHLMC and FNMA  standards.
The Bank's  loans are  secured by a variety of  properties  in its market  area.
Included in its  portfolio  are loans  secured by properties in rural areas that
may not conform to  secondary  market  standards  and  properties  that serve as
second or vacation homes. Generally,  the Bank compensates for the added risk of
these loans through its pricing mechanism.

                                       4
<PAGE>
 
Under applicable law, with certain limited  exceptions,  loans and extensions of
credit by a savings  institution  to a person  outstanding at one time shall not
exceed  15% of the  association's  unimpaired  capital  and  surplus.  Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus. Applicable law additionally
authorizes savings institutions to make loans to one borrower,  for any purpose,
in an amount not to exceed  $500,000 or in an amount not to exceed the lesser of
$30,000,000  or 30% of  unimpaired  capital and  surplus to develop  residential
housing,  provided: (i) the purchase price of each single-family dwelling in the
development  does not  exceed  $500,000;  (ii) the  savings  institution  is and
continues  to be in  compliance  with its  fully  phased-in  regulatory  capital
requirements; (iii) the loans comply with applicable loan-to-value requirements;
(iv) the  aggregate  amount of loans made under this  authority  does not exceed
150% of unimpaired  capital and surplus;  and (v) the Director of OTS, by order,
permits the savings  association  to avail  itself of this higher  limit.  Under
these  limits,  the Bank's loans to one borrower were limited to $2.9 million at
June 30, 1998. At that date, the Bank had no lending  relationships in excess of
the OTS's loans-to-one-borrower  limit. The Bank's five largest borrowers ranged
from  $389,000 to $1.0  million.  All of these loans were current as of June 30,
1998.
 
 
Interest rates charged by the Bank on mortgage loans are primarily determined by
competitive  loan  rates  offered  in its  market  area  and  the  Bank's  yield
objectives.  Mortgage  loan rates  reflect  factors  such as  prevailing  market
interest rate levels,  the supply of money available to the savings industry and
the  demand  for such  loans.  These  factors  are in turn  affected  by general
economic conditions, the monetary policies of the federal government,  including
the Federal  Reserve  Board,  the general  supply of money in the  economy,  tax
policies and governmental budget matters.

Single-Family  Residential Lending. The Bank historically has been and continues
to be an  originator of loans secured by  single-family  residential  properties
located in its market area. At June 30, 1998,  approximately  $33.2 million,  or
49.9%,  of the  Bank's  gross  loan  portfolio  consisted  of loans  secured  by
single-family residential properties.

Substantially  all  single-family  mortgage  loans  originated  by the  Bank for
retention in the Bank's  portfolio  since 1982 have been  adjustable-rate  loans
with an initial  fixed term of one or five years.  After the initial  term,  the
rate  adjustments  on the  Bank's  adjustable-  rate  loans are  indexed  to the
Contract  Interest  Rate  published by the Federal  Housing  Finance  Board (the
"Contract Rate"). The interest rates on these mortgages are adjusted either once
a year or every five years, with a ceiling rate of 18.75%.  The  adjustable-rate
mortgage  loans offered by the Bank do not provide for initial rates of interest
below the rates that would prevail when the index used for repricing is applied.
At  June  30,  1998,  the  Bank's  loan  portfolio  included  $26.7  million  in
adjustable-rate,  single-family  residential  mortgage loans,  which represented
40.1% of the Bank's gross loan portfolio.

The retention of adjustable-rate  loans in the Bank's portfolio helps reduce the
Bank's exposure to increases in prevailing market interest rates. However, there
are unquantifiable  credit risks resulting from potential  increases in costs to
borrowers  in the event of upward  repricing  of  adjustable-rate  loans.  It is
possible that during periods of rising  interest  rates,  the risk of default on
adjustable-rate  loans  may  increase  due to  increases  in  interest  costs to
borrowers.  Further,  although  adjustable-rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest  sensitivity is limited by the initial fixed-rate period
before  the  first   adjustment  and  the  lifetime   interest  rate  adjustment
limitations.  Accordingly,  there can be no assurance  that yields on the Bank's
adjustable-  rate loans will fully  adjust to  compensate  for  increases in the
Bank's  cost of  funds.  Finally,  adjustable-rate  loans  increase  the  Bank's
exposure to decreases in prevailing market interest rates, although decreases in
the Bank's cost of funds tend to offset this effect.

Multi-Family  and  Commercial  Real  Estate  Lending.  The  Bank's  multi-family
residential  loan  portfolio  consists  primarily  of  loans  secured  by  small
apartment  buildings  with between five and 15 units,  and the  commercial  real
estate loan portfolio  includes loans to finance the acquisition of small office
buildings and warehouse  space.  Multi-family  and commercial  real estate loans
have terms of up to 20 years and are generally  underwritten with  loan-to-value
ratios of up to 80% of the lesser of the appraised  value or the purchase  price
of the property. Because of the inherently greater risk involved in this type of
lending,  the Bank generally  limits its multi-family and commercial real estate
lending to  borrowers  within its market area with which it has had  substantial
experience.  However,  from  time to time,  the Bank  reviews  opportunities  to
purchase   multi-family  and  commercial  real  estate  loans  and  occasionally
purchases such loans outside its market area.

Commercial  Business  Lending.  The Bank's  commercial  lending  activities  are
directed to small  Minnesota-based  businesses.  The Bank's commercial borrowers
consist  primarily of  manufacturing  and  distribution  firms,  retailers,  and
professionals  in  health  care,  accounting  and  law.  Generally,  the  Bank's
commercial  business  loans are secured by assets,  which may  include  accounts
receivable,  inventory,  equipment and other business assets, and are guaranteed
by  the  principals  of the  borrowers.  The  Bank's  commercial  business  loan
portfolio  includes loans which may be at least partially secured by real estate
but for which the  expected  source of  repayment  for the loan is the cash flow
produced by the borrower's  business.  At June 30, 1998,  the Bank's  commercial
business loans totaled $11.4 million, or 17.1%, of the total loan portfolio.

                                       5
<PAGE>

The  Bank  underwrites  its  commercial  business  loans  on  the  basis  of the
borrower's  cash flow and ability to service the debt from earnings  rather than
on the basis of underlying  collateral  value, and seeks to structure such loans
to have more than one source of  repayment.  The borrower is required to provide
the Bank  with  sufficient  information  to allow  the Bank to make its  lending
determination.  In most instances,  this information  consists of at least three
years of financial  statements,  a statement of  projected  cash flows,  current
financial  information  on any guarantor and any  additional  information on the
collateral. For loans with maturities exceeding one year, the Bank requires that
borrowers and guarantors provide updated financial information at least annually
throughout the term of the loan.

The Bank's commercial business loans may be structured as term loans or as lines
of credit.  Commercial  term loans are generally made to finance the purchase of
assets and have maturities of five years or less. Commercial lines of credit are
typically for the purpose of providing  working capital and are usually approved
with a six month term. The Bank also offers both  commercial and standby letters
of credit for its commercial borrowers. Commercial letters of credit are written
for a maximum term of one year. The terms of standby letters of credit generally
do not exceed one year.  The Bank's  commercial  business  loans  generally have
interest  rates  which float at, or at some margin  over,  the Bank's  reference
rate.

Consumer  Lending.  The consumer loans originated by the Bank primarily  include
automobile loans, recreational loans, second mortgage loans and loans secured by
savings  deposits.  At June 30, 1998, the Bank's  consumer loan balance  totaled
$19.8 million, or 29.8% of its total loan portfolio.

The Bank's  automobile loans are generally  underwritten in amounts up to 80% of
the  lesser  of the  purchase  price or the  retail  value as  published  by the
National Automobile Dealers Association.  The terms of the loan generally do not
exceed 60 months  for new  vehicles  or 48 months  for used  vehicles.  The Bank
requires  that the  vehicles  be insured and the Bank be listed as loss payee on
the insurance  policy.  The Bank originates a portion of its automobile loans on
an indirect basis through various  dealerships located in its market area. See "
-- Originations, Purchases and Sales of Loans."

The  Bank's  recreational  loans are loans to  finance  the  purchase  of boats,
snowmobiles,  motorcycles  and other  recreational  vehicles.  The terms of such
loans generally do not exceed 60 months.  At June 30, 1998,  recreational  loans
amounted to $1.5 million, or 2.3% of the Bank's total loan portfolio.

The Bank's second  mortgage loans are made on the security of  residential  real
estate and generally do not exceed 80% of the  estimated  value of the property,
less the outstanding principal of the first mortgage, and have terms of up to 15
years. Second mortgage loans an adjustable-rate  basis at a rate which generally
is equal to the  Contract  Rate plus a margin of between .5% and 1%. At June 30,
1998,  second  mortgage  loans  amounted to $3.0 million,  or 4.0% of the Bank's
total loan portfolio.

Other consumer loans primarily consist of loans for consumer purposes.

Consumer loans generally entail greater risk than do residential mortgage loans,
particularly  in the case of consumer  loans which are  unsecured  or secured by
rapidly  depreciable assets such as automobiles.  In such cases, any repossessed
collateral for a defaulted  consumer loan may not provide an adequate  source of
repayment of the outstanding loan balance as a result of the greater  likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further  substantial  collection  efforts  against the  borrower.  In  addition,
consumer loan collections are dependent on the borrower's  continuing  financial
stability,  and thus are more  likely  to be  adversely  affected  by job  loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws,  including  federal and state  bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans.  Such loans may
also give rise to claims and  defenses by a consumer  loan  borrower  against an
assignee  of such loans such as the Bank,  and a borrower  may be able to assert
against such assignee claims and defenses which it has against the seller of the
underlying collateral.

Nonperforming  Loans and Other  Problem  Assets.  It is  management's  policy to
continually  monitor its loan portfolio to anticipate and address  potential and
actual  delinquencies.  When a borrower  fails to make a payment on a loan,  the
Bank takes immediate  steps to have the delinquency  cured and the loan restored
to current status.

All loans generally are placed on nonaccrual status if the loan becomes past due
more than 90 days, or management  concludes  that payment in full is not likely.
At June 30,  1998,  the Bank had no loans  which were past due more than 90 days
and still on accrual  status.  Consumer loans are generally  charged off, or any
expected  loss is reserved  for,  after they become more than 120 days past due.
All  other  loans  are  charged  off when  management  concludes  that  they are
uncollectible. See Note 2 of Notes to Consolidated Financial Statements.

Real estate  acquired by the Bank as a result of  foreclosure  is  classified as
real estate  acquired  through  foreclosure  until such time as it is sold. When
such property is acquired, it is recorded at the lower of cost or its fair value
less estimated  selling costs.  Any required  write-down of the loan to its fair
value less  estimated  selling  costs upon  foreclosure  is charged  against the
allowance  for  loan  losses.  See Note 2 of  Notes  to  Consolidated  Financial
Statements.

                                       6
<PAGE>

The  following  table  sets  forth   information  with  respect  to  the  Bank's
nonperforming assets at the dates indicated.

                                                          At June 30,
                                                    1998              1997
                                                     (Dollars in thousands)

Loans accounted for on a non-accrual basis: (1)
Real Estate:
 Residential                                   $        --       $        171
 Commercial                                             --                 --
Commercial business                                     --                 20
Consumer                                                15                 34
 Total                                         $        15        $       225
Percentage of total loans                              .02%               .36%
Other nonperforming assets   (2)               $       104        $        38
____________
(1) Nonaccrual status denotes loans on which, in the opinion of management,  the
collection of additional interest is unlikely. Payments received on a nonaccrual
loan are either  applied to the  outstanding  principal  balance or  recorded as
interest income, depending on assessment of the collectibility of the loan.
(2) Other nonperforming  assets represents property acquired by the Bank through
foreclosure or repossession or accounted for as a foreclosure in-substance. This
property is carried at the lower of its fair value less estimated  selling costs
or the principal balance of the related loan, whichever is lower.


During the year ended June 30, 1998,  gross interest income of $1,000 would have
been recorded on loans accounted for on a nonaccrual basis if the loans had been
current  throughout  the year.  Interest on such loans included in income during
such year  amounted  to $1,000,  for the year ended June 30,  1998.  At June 30,
1998, the Bank had no restructured loans.

At June 30, 1998, nonaccrual loans consisted of one consumer loan.

June 30, 1998, the Bank had no loans  modified in troubled debt  restructurings,
and there were no loans which are not  currently  classified as  nonaccrual,  90
days past due or restructured but where known  information about possible credit
problems of  borrowers  caused  management  to have  serious  concerns as to the
ability of the  borrowers to comply with present  loan  repayment  terms and may
result in disclosure as nonaccrual, 90 days past due or restructured.

Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset meeting one of the  classification
definitions set forth below may be classified and still be a performing loan. An
asset is  classified  as  substandard  if it is  determined  to be  inadequately
protected by the current net worth and paying  capacity of the obligor or of the
collateral  pledged,  if  any.  An  asset  is  classified  as  doubtful  if full
collection is highly questionable or improbable.  An asset is classified as loss
if it is considered uncollectible,  even if a partial recovery could be expected
in the future.  The regulations also provide for a special mention  designation,
described as assets which do not  currently  expose a savings  institution  to a
sufficient  degree  of risk to  warrant  classification  but do  possess  credit
deficiencies or potential  weaknesses  deserving  management's  close attention.
Such  assets  designated  as special  mention may  include  nonperforming  loans
consistent  with the above  definition.  Assets  classified  as  substandard  or
doubtful require a savings  institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount.  Federal  examiners may
disagree with a savings institution's classifications.  If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination  to the OTS  Regional  Director.  The Bank  regularly  reviews its
assets   to   determine   whether   any   assets   require   classification   or
re-classification.  At June 30, 1998, the Bank had no assets  classified as loss
or doubtful and $79,000 of assets classified as substandard,  none of which were
included in nonaccrual loans. The assets classified as substandard  consisted of
one consumer loan, and two mortgage loans. At June 30, 1998,  assets  designated
as special  mention  totaled  $356,000 and consisted of one commercial  loan and
five consumer loans, one of which was included in nonaccrual loans.

                                       7
<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 loan being made, the  creditworthiness  of the borrower over
the term of the loan, general economic  conditions and, in the case of a secured
loan,  the quality of the security for the loan.  It is  management's  policy to
maintain an adequate allowance for loan losses based on, among other things, the
Bank's  and the  industry's  historical  loan  loss  experience,  evaluation  of
economic conditions, regular reviews of delinquencies and loan portfolio quality
and evolving standards imposed by federal bank examiners. The Bank increases its
allowance  for loan  losses by  charging  provisions  for  possible  loan losses
against the Bank's income.

Management  will  continue to  actively  monitor  the Bank's  asset  quality and
allowance  for loan  losses.  Management  will  charge off loans and  properties
acquired in settlement of loans against the  allowances for losses on such loans
and such properties when  appropriate and will provide  specific loss allowances
when  necessary.  Although  management  believes  it uses the  best  information
available  to make  determinations  with respect to the  allowances  for losses,
future adjustments may be necessary if economic conditions differ  substantially
from the  economic  conditions  in the  assumptions  used in making the  initial
determinations.

The Bank's  methodology  for  establishing  the  allowance for losses takes into
consideration  probable  losses that have been  identified  in  connection  with
specific  assets as well as  losses  that  have not been  identified  but can be
expected to occur.  Management conducts regular reviews of the Bank's assets and
evaluates  the  need to  establish  allowances  on the  basis  of  this  review.
Allowances are  established by the Board of Directors on a quarterly basis based
on an  assessment of risk in the Bank's  assets  taking into  consideration  the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience,  loan concentrations,  the state of the real estate market,
regulatory reviews conducted in the regulatory  examination process and economic
conditions generally.  Specific reserves will be provided for individual assets,
or portions of assets,  when ultimate  collection  is  considered  improbable by
management  based on the current payment status of the assets and the fair value
of the security. At the date of foreclosure or other repossession or at the date
the Bank determines a property is an  "in-substance  foreclosed"  property,  the
Bank would transfer the property to real estate  acquired in settlement of loans
at the lower of cost or fair value less estimated  selling costs. Any portion of
the  outstanding  loan  balance in excess of fair value less  estimated  selling
costs  would be charged  off against the  allowance  for loan  losses.  If, upon
ultimate disposition of the property, net sales proceeds exceed the net carrying
value of the property, a gain on sale of real estate would be recorded.

The  following  table sets forth an  analysis of the Bank's  allowance  for loan
losses for the periods indicated.


                                                        Year Ended June 30,
                                                       1998            1997
                                                       (Dollars in thousands)
Balance at beginning of year                 $        1,314    $        1,331
Consumer loan charge-offs                                67                44
Consumer loan recoveries                                 26                27
Net loan charge-offs                                     41                17
Provision for loan losses                                --                --
Balance at end of year                       $        1,273    $        1,314
Ratio of net charge-offs to average loans
  outstanding, net during the year                      .06%               .03%

The following table allocates the allowance for loan losses by asset category at
the dates  indicated.  The  allocation  of the allowance to each category is not
necessarily  indicative  of future  losses and does not  restrict the use of the
allowance to absorb losses in any category.


                                       8
<PAGE>














                                                   June30,
                                       1998                           1997
                                        Percent of                Percent of
                                        Loans in Each             Loans in Each
                                        Category to               Category to
                                Amount  Total Loans     Amount    Total Loans

                                             (Dollars in thousands)

Real estate                        363      53.07%   $    360        54.69%
Commercial business                392      17.10         379        16.08
Consumer                           518      29.83         575        29.23
Total allowance for loan losses  1,273     100.00%   $  1,314       100.00%

Investment Activities

The Bank is permitted under federal law to make certain  investments,  including
investments  in  securities  issued by various  federal  agencies  and state and
municipal  governments,  deposits  at the FHLB of Des  Moines,  certificates  of
deposit in federally  insured  institutions,  certain  bankers'  acceptances and
federal  funds.  The Bank may also invest,  subject to certain  limitations,  in
commercial  paper  having  one  of  the  two  highest  investment  ratings  of a
nationally recognized credit rating agency, and certain other types of corporate
debt  securities  and mutual  funds.  Federal  regulations  require  the Bank to
maintain  an  investment  in FHLB of Des  Moines  stock and a minimum  amount of
liquid assets which may be invested in cash and specified  securities.  The Bank
is also permitted to invest in mortgage-related  securities.  From time to time,
the OTS adjusts the percentage of liquid assets which savings  associations  are
required  to  maintain.  For  additional  information,  see " --  Regulation  --
Regulation of the Bank -- Liquidity Requirements."

The Bank makes  investments  in order to  maintain  the levels of liquid  assets
required by regulatory  authorities and manage cash flow,  diversify its assets,
obtain yield and to satisfy  certain  requirements  for favorable tax treatment.
The  investment  activities  of the Bank  consist  primarily of  investments  in
mortgage-backed   and  related  securities  and  other  investment   securities,
consisting  primarily of securities issued or guaranteed by the U.S.  government
or agencies thereof.  Typical  investments  include  federally  sponsored agency
mortgage  pass-through  and  federally  sponsored  agency  and  mortgage-related
securities.  Investment and aggregate investment  limitations and credit quality
parameters of each class of investment are  prescribed in the Bank's  investment
policy.  The Bank  performs  analyses on mortgage  related  securities  prior to
purchase and on an ongoing  basis to determine the impact on earnings and market
value under various  interest rate and prepayment  conditions.  Under the Bank's
current investment policy,  securities  purchases must be approved by the Bank's
Treasurer.  The Board of Directors reviews all securities purchased on a monthly
basis.

Securities  designated as "held to maturity" are those assets which the Bank has
the ability and intent to hold to maturity.  Upon  acquisition,  securities  are
classified  as to the Bank's  intent and a sale  would only be  effected  due to
deteriorating  investment  quality.  The  investment  portfolio  is not used for
speculative  purposes  and is carried at amortized  cost.  In the event the Bank
sells securities from this portfolio for other than credit quality reasons,  all
securities within the investment portfolio with matching  characteristics may be
reclassified as assets available for sale.  Securities  designated as "available
for sale" are those  assets which the Bank may not hold to maturity and thus are
carried at market  value with  unrealized  gains or losses,  net of tax  effect,
recognized in stockholders  equity.  During 1998,  available for sale securities
with an amortized cost and a fair value of $17,352,203  were  transferred to the
held to maturity  classification.  The transfer was made at amortized cost which
approximated fair value.

The  following  table sets  forth the  carrying  value of the Bank s  investment
portfolio at the dates indicated.
                                                          At June 30,
                                                   1998                1997
                                                    (Dollars in thousands)
Securities available for sale:
  U.S. Government and agency securities...  $         0               7,916
  Corporate obligations...                            0               2,431
  Collateralized mortgage obligations..               0              14,638
 
Securities held to maturity:
  U.S. government and agency securities.         27,193              26,414
  Corporate obligations. . . . . . . . . .        2,423               1,960
  Collateralized mortgage obligations . . .      38,972              26,140
  Mortgage-backed securities. . . . . .           9,524               3,599
 
Total investment securities . . . . .  . . .    $78,112             $83,098

                                       9
<PAGE>
 

The  Bank  invests  in  various  types of  liquid  assets  that are  permissible
investments  for federally  chartered  savings banks,  including  U.S.  Treasury
obligations,  securities of various federal  agencies,  certain  certificates of
deposit of insured banks and savings  institutions and federal funds. Subject to
various  restrictions  applicable to all federally  chartered savings banks, the
Bank also invests its assets in investment grade corporate debt securities.

Mortgage-Related  Securities.  CMOs and REMICs are typically issued by a special
purpose  entity,  which may be organized in a variety of legal forms,  such as a
trust,  a  corporation  or  a  partnership.   The  entity  aggregates  pools  of
pass-through  securities,  which are used to collateralize the  mortgage-related
securities.  Once  combined,  the cash flows can be divided into  "tranches"  or
"classes" of individual  securities,  thereby creating more predictable  average
lives for each security than the  underlying  pass-through  pools.  Accordingly,
under this security structure, all principal pay downs from the various mortgage
pools  are  allocated  to  a  mortgage-related   securities'  class  or  classes
structured  to have  priority  until  it has been  paid  off.  These  securities
generally have fixed interest rates, and, as a result, changes in interest rates
generally  would affect the market value and  possibly the  prepayment  rates of
such securities.

Some   mortgage-related   securities   instruments  are  like  traditional  debt
instruments  due to their stated  principal  amounts and  traditionally  defined
interest rate terms.  Purchasers of certain  other  mortgage-related  securities
instruments  are entitled to the excess,  if any, of the issuer's  cash inflows.
These mortgage-related securities instruments may include instruments designated
as residual  interest and are riskier in that they could result in the loss of a
portion of the original investment.  Cash flows from residual interests are very
sensitive to prepayments and, thus, contain a high degree of interest rate risk.
The Bank does not purchase residual interests in mortgage-related securities.

At June 30, 1998, the Bank had $39.0 million in CMOs, which amounted to 25.9% of
total  assets.  As of June  30,  1998,  the  securities  in the  Bank's  private
mortgage-backed  securities  portfolio were rated AAA by at least one nationally
recognized investment rating service.

Prepayments in the Bank's mortgage-related  securities portfolio may be affected
by  declining  and  rising  interest  rate  environments.  In a low and  falling
interest rate environment, prepayments would be expected to increase. In such an
event,  the Bank's  fixed-rate  CMO/REMICs  purchased  at a premium  price could
result in actual yields to the Bank that are lower than anticipated  yields. The
Bank's floating rate CMO/REMICs  would be expected to generate lower yields as a
result of the effect of falling  interest  rates on the indexes for  determining
payment of interest. Additionally, the increased principal payments received may
be subject to  reinvestment  at lower rates.  Conversely,  in a period of rising
rates,  prepayments  would be  expected  to  decrease,  which  would  make  less
principal  available  for  reinvestment  at  higher  rates.  In  a  rising  rate
environment,  floating  rate  instruments  would  generate  higher yields to the
extent that the indexes for  determining  payment of interest did not exceed the
life-time  interest rate caps. Such prepayment may subject the Bank's CMO/REMICs
to yield and price volatility.

Mortgage-Backed Securities. Mortgage-backed securities represent a participation
interest in a pool of single- family or  multi-family  mortgages,  the principal
and interest payments on which are passed from the mortgage  originators through
intermediaries that pool and repackage the participation interest in the form of
securities  to  investors  such as the Bank.  Such  intermediaries  may  include
quasi-governmental  agencies  such as FHLMC,  FNMA and GNMA which  guarantee the
payment of  principal  and  interest to  investors.  Mortgage-backed  securities
generally  increase the quality of the Bank's assets by virtue of the guarantees
that back them, are more liquid than  individual  mortgage loans and may be used
to collateralize borrowings or other obligations of the Bank.

Mortgage-backed  securities  typically are issued with stated principal  amounts
and the  securities  are  backed  by pools of  mortgages  that have  loans  with
interest  rates  that  are  within  a range  and have  similar  maturities.  The
underlying   pool  of  mortgages  can  be  composed  of  either   fixed-rate  or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  generally  are
referred to as mortgage participation certificates or pass-through certificates.
As a result,  the interest rate risk  characteristics  of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate,  as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security is equal to the life of the underlying mortgages.

The actual maturity of a mortgage-backed  security varies, depending on when the
mortgagors  prepay  or  repay  the  underlying  mortgages.  Prepayments  of  the
underlying  mortgages may shorten the life of the investment,  thereby adversely
affecting   its  yield  to  maturity  and  the  related   market  value  of  the
mortgage-backed  security.  The yield is based upon the interest  income and the
amortization  of the  premium  or  accretion  of  the  discount  related  to the
mortgage-backed security.  Premiums and discounts on mortgage-backed  securities
are amortized or accredited  over the estimated term of the  securities  using a
level  yield  method.   The  prepayment   assumptions   used  to  determine  the
amortization  period for premiums and  discounts  can  significantly  affect the
yield of the  mortgage-backed  security,  and  these  assumptions  are  reviewed
periodically  to reflect the actual  prepayment.  The actual  prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon  rate,  the  age of  the  mortgages,  the  geographical  location  of the
underlying  real estate  collateralizing  the  mortgages  and general  levels of
market  interest  rates.  The  difference  between  the  interest  rates  on the
underlying  mortgages and the prevailing mortgage interest rates is an important
determinant  in the rate of  prepayments.  During  periods of  falling  mortgage
interest rates, prepayments generally increase, and, conversely,  during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying  mortgage  significantly  exceeds the  prevailing  market
interest rates offered for mortgage loans,  refinancing  generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.

                                       10
<PAGE>

The Bank's  mortgage-backed  securities portfolio consists primarily of seasoned
fixed-rate and adjustable rate mortgage-backed and mortgage-related  securities.
At June 30, 1998, the Bank had $9.5 million in mortgage-backed  securities (6.3%
of total assets) insured or guaranteed by FNMA, FHLMC or GNMA.


The following table sets forth  information  regarding the expected  maturities,
market value and weighted average yields for the Bank's investment securities at
June 30, 1998.

<TABLE>

                               One Year or Less  One to Five Years Five to Ten Years  Total Investment Portfolio
                               Carrying Average  Carrying Average   Carrying Average  Carrying Market  Average
                                Value    Yield    Value    Yield     Value    Yield    Value    Value   Yield
                                                                (Dollars in thousands)

Securities held to maturity:
 U.S. government and agency
<S>                             <C>       <C>     <C>       <C>       <C>      <C>    <C>       <C>      <C> 
  securities                    $5,953    6.22    $18,240   6.49      $ 3,000  6.25   $27,193   27,300   6.40
 Corporate obligations           2,422    7.49         --                 ---           2,422    2,462   7.49
 Collateralized mortgage
  obligations                    8,535    6.26     30,437   6.62           --          38,972   39,061   6.53
 Mortgage-backed
  securities                       643    7.63      8,080   6.44          802   8.09    9,525    9,561   6.26
  Total                 $       17,553            $56,757           $   3,802         $78,112   78,384
</TABLE>


For additional information, see Notes 3 and 4 of Notes to Consolidated Financial
Statements.

The Bank is required to maintain  average daily balances of liquid assets (cash,
deposits  maintained  pursuant to Federal Reserve Board  requirements,  time and
savings  deposits in certain  institutions,  obligations  of state and political
subdivisions thereof,  shares in mutual funds with certain restricted investment
policies,  highly rated corporate  debt, and mortgage loans and  mortgage-backed
securities  with less than one year to maturity or subject to repurchase  within
one year)  equal to a monthly  average of not less than a  specified  percentage
(currently  4%)  of  its  net  withdrawable  savings  deposits  plus  short-term
borrowings.  Monetary  penalties  may be imposed for  failure to meet  liquidity
requirements.  The  Bank  was in  compliance  with  all  liquidity  requirements
throughout the year.

Deposit Activity and Other Sources of Funds

General.  Deposits  are the primary  source of the Bank's  funds for lending and
other investment  activities and general  operational  purposes.  In addition to
deposits,  the Bank derives funds from loan principal repayments,  maturities of
investment  securities  and  interest  payments.  Loan  repayments  and interest
payments are a relatively  stable  source of funds,  while  deposit  inflows and
outflows are  significantly  influenced by prevailing  market interest rates and
money  market  conditions.  Borrowings  may be used  to  supplement  the  Bank's
available  funds.  The Bank obtains  short-term  borrowings  through the sale of
securities  under agreement to repurchase.  In addition,  the Bank has access to
borrow from the FHLB of Des Moines and the Federal Reserve Bank of Minneapolis.

Deposits.  The Bank attracts deposits principally from within its market area by
offering a variety of deposit instruments,  including checking accounts, savings
accounts, money market accounts, retirement savings accounts and certificates of
deposit  which  range in term  from  three to 120  months.  Deposit  terms  vary
principally on the basis of the minimum balance required, the length of time the
funds must remain on deposit and the interest rate.  Maturities,  terms, service
fees and withdrawal  penalties for its deposit  accounts are  established by the
Bank on a periodic  basis.  The Bank  reviews  its deposit mix and pricing on an
ongoing basis. In determining the  characteristics of its deposit accounts,  the
Bank considers the rates offered by competing  institutions,  funds  acquisition
and liquidity requirements,  growth goals, and federal regulations The Bank does
not accept brokered deposits.


The following table sets forth the average  balances and interest rates based on
month-end balances for interest- bearing demand deposits and time deposits as of
the dates indicated.

                                       11
<PAGE>

                                        Year Ended June 30,
                                    1998                      1997
                           Interest-                 Interest-
                           Bearing                   Bearing
                           Demand       Time         Demand            Time
                           Deposits     Deposits     Deposits          Deposits
(Dollars in thousands)

Average balance   $        43,432  $     55,749   $    41,539   $       52,008
Average rate                 2.25%         5.34%         2.26%            5.62%

The following table shows  maturities for certificates of deposit of $100,000 or
more at June 30, 1998.

           Three months or less                                  $    204,838
           Over three months to six months                            132,000
           Over six months to twelve months                           115,572
           Over twelve months                                       1,927,906
                                                                  $ 2,380,316
 
In the unlikely  event the Bank is  liquidated,  depositors  will be entitled to
full payment of their  deposit  accounts  prior to any payment being made to the
stockholder of the Bank, which is the Company.

Borrowings.  Savings deposits historically have been the primary source of funds
for the Bank's lending, investment and general operating activities. The Bank is
authorized,  however,  to use advances from the FHLB of Des Moines to supplement
its supply of lendable funds and to meet deposit  withdrawal  requirements.  The
FHLB of Des Moines  functions  as a central  reserve bank  providing  credit for
savings  institutions  and certain  other member  financial  institutions.  As a
member of the FHLB system,  the Bank is required to own stock in the FHLB of Des
Moines and is authorized  to apply for  advances.  Advances are made pursuant to
several different programs, each of which has its own interest rate and range of
maturities. The Bank is also eligible to borrow from the Federal Reserve Bank of
Minneapolis. The Bank had $2.0 million in outstanding borrowings from either the
FHLB of Des  Moines  at June 30,  1998 and no  outstanding  borrowings  from the
Federal Reserve.

From time to time the Bank borrows  utilizing  repurchase  agreements  issued to
high  balance  customers.  The  form of  repurchase  agreement  used by the Bank
involves  the  sale  of  securities  owned  by the  Bank  with a  commitment  to
repurchase  the same or  substantially  the same  securities at a  predetermined
price at a future  date.  The  Bank  utilizes  the  funds it  receives  from the
repurchase  agreements to purchase investment  securities with the same maturity
date as the repurchase agreements.

 
The  following  table  sets  forth  certain  information  regarding  the  Bank's
short-term borrowings at the dates and for the periods indicated:

                                                           At or for the
                                                         Year Ended June 30,

                                                          1998          1997
                                                         (Dollars in thousands)

Amounts outstanding at end of period              $       16,081       $ 22,140
Maximum amount of borrowings outstanding
 at any month end                                         31,444         22,140
Approximate average short-term borrowings outstanding (1) 19,528         21,956
Average cost of borrowings                                  4.19%          3.68%
 
(1) Based on month-end balances.


Subsidiary Activities

The Bank has one wholly owned subsidiary: Queen City Service Corporation ("Queen
City Service"). Queen City Service, a Minnesota corporation, currently owns part
of a commercial  condominium  building located in Ely, Minnesota that houses the
Bank's Ely branch.  A portion of the  property is also leased to three  tenants.
Queen City Service is also engaged in the sale of tax deferred annuity contracts
and credit life and  disability  insurance.  At June 30,  1998 the Bank's  total
investment in Queen City Service was $70,000.

                                       12
<PAGE>

Competition

The Bank faces  strong  competition  both in  originating  real estate and other
loans and in  attracting  deposits.  The Bank competes for real estate and other
loans  principally  on the basis of interest rates and the loan fees it charges,
the types of loans it  originates  and the  quality of  services  it provides to
borrowers. Its competition in originating real estate loans comes primarily from
other savings  institutions,  commercial banks and mortgage bankers making loans
secured by real estate  located in the Bank's  market  area.  Commercial  banks,
credit unions and finance  companies  provide  vigorous  competition in consumer
lending.  Competition  may increase as a result of the  continuing  reduction of
restrictions on the interstate operations of financial institutions.

The Bank attracts all its deposits through its branch offices primarily from the
communities in which those offices are located.  Consequently,  competition  for
deposits is  principally  from other  savings  institutions,  commercial  banks,
credit unions and brokers in these  communities.  The Bank competes for deposits
and loans by offering a variety of deposit accounts at competitive rates, a wide
array of loan  products,  convenient  business  hours and  branch  locations,  a
commitment  to  outstanding  customer  service  and  a  well-trained  staff.  In
addition,  the Bank believes it has developed  strong  relationships  with local
businesses, realtors, and the public in general.

Employees


As of June 30, 1998, the Bank had 25 full-time and 10 part-time employees,  none
of whom was represented by a collective bargaining agreement.


Regulation

General. As a federally chartered savings bank, the Bank is subject to extensive
regulation by the OTS. The lending  activities and other investments of the Bank
must  comply  with  various  federal  regulatory   requirements,   and  the  OTS
periodically   examines  the  Bank  for  compliance   with  various   regulatory
requirements.  The FDIC also has the authority to conduct special  examinations.
The Bank must file reports with OTS  describing  its  activities  and  financial
condition and is also subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is intended primarily for
the  protection of  depositors.  Certain of these  regulatory  requirements  are
referred to below or appear elsewhere herein.

Regulation of the Bank

Federal  Home Loan Bank System.  The Bank is a member of the FHLB System,  which
consists of 12  district  Federal  Home Loan Banks  subject to  supervision  and
regulation by the Federal Housing Finance Board ("FHFB").  The Federal Home Loan
Banks provide a central credit facility primarily for member institutions.  As a
member of the FHLB of Des  Moines,  the Bank is  required  to  acquire  and hold
shares of capital stock in the FHLB of Des Moines in an amount at least equal to
1% of the aggregate unpaid  principal of its home mortgage loans,  home purchase
contracts,  and  similar  obligations  at the end of each  year,  or 1/20 of its
advances  (borrowings)  from the FHLB of Des Moines,  whichever is greater.  The
Bank was in compliance with this  requirement  with an investment in FHLB of Des
Moines stock at June 30, 1998 of $425,200.

Qualified  Thrift  Lender  Test.  A savings  institution  that does not meet the
Qualified  Thrift Lender  ("QTL") test must either  convert to a bank charter or
comply with the following  restrictions on its  operations:  (I) the institution
may not  engage in any new  activity  or make any new  investment,  directly  or
indirectly,  unless such activity or investment  is  permissible  for a national
bank; (ii) the branching powers of the institution  shall be restricted to those
of a national bank;  (iii) the  institution  shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the  institution  shall
be subject to the rules regarding  payment of dividends by a national bank. Upon
the expiration of three years from the date the institution  ceases to be a QTL,
it must cease any activity and not retain any investment not  permissible  for a
national bank and immediately  repay any outstanding  FHLB advances  (subject to
safety and soundness considerations).

A savings  institution  must  maintain its status as a QTL on a monthly basis in
nine out of every 12  months.  A  savings  institution  that  fails to  maintain
Qualified  Thrift Lender status will be permitted to requalify  once,  and if it
fails the QTL test a second  time,  it will  become  immediately  subject to all
penalties  as if all time  limits on such  penalties  had  expired.  Failure  to
qualify as a QTL results in a number of sanctions,  including the  imposition of
certain  operating  restrictions  imposed on national banks and a restriction on
obtaining  additional  advances from the FHLB System. At June 30, 1998, the Bank
qualified as a QTL.

                                       13
<PAGE>

Regulatory  Capital   Requirements.   Under  OTS  capital   standards,   savings
associations  must maintain  "tangible"  capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and a combination of
core and  "supplementary"  capital  equal to 8% of  "risk-weighted"  assets.  In
addition,  the OTS has adopted regulations which impose certain  restrictions on
savings  associations  that have a total  risk-based  capital ratio that is less
than 8%, a ratio of Tier 1 capital to risk-weighted  assets of less than 4% or a
ratio of Tier 1 capital to adjusted  total  assets of less than 4% (or 3% if the
institution is rated Composite 1 under the OTS examination  rating system).  See
"-- Prompt  Corrective  Regulatory  Action." The Bank is in compliance  with all
currently applicable capital requirements.
 
In addition to requiring  generally  applicable  capital  standards  for savings
institutions,  the OTS is  authorized  to establish the minimum level of capital
for a savings  institution at such amount or at such ratio of  capital-to-assets
as the OTS  determines to be necessary or  appropriate  for such  institution in
light of the particular circumstances of the institution.  The OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound  practice and may issue a directive  requiring  any savings
institution  which  fails to  maintain  capital  at or above the  minimum  level
required by the OTS to submit and adhere to a plan for increasing capital.  Such
an order may be enforced in the same manner as an order issued by the FDIC.

The table below provides  information with respect to the Bank s compliance with
its regulatory capital requirements at June 30, 1998.
 
                                                                   Percent of
                                                 Amount            Assets (1)
                                                    (Dollars in thousands)
Tangible capital . . . . . . . . . . . . . . . . $19,169             13.4%
Tangible capital requirement . . . . . . . . ..    2,141              1.5
   Excess (deficit) . . . . . . . . . . . . . . .$17,028             11.9%

Core capital (2) . . . . . . . . . . . . . . . . .19,169             13.4$
Core capital requirement . . . . . . . . . . . .   4,281              3.0
Excess (deficit) . . . . . . . . . . . . . . . . $14,888             10.4$

Risk-based  capital  . . . . . .  .  .  .  .  .  $20,442             29.9% 
Risk-based  capital  requirement  . . . . . . .    5,469              8.0 
Excess(deficit) . . . . . . . . . . . . . . . . .$14,973             21.9%

(1) Based on adjusted total assets for purposes of the tangible capital and core
capital  requirements  and  risk-weighted  assets for purpose of the  risk-based
capital requirement.

(2)  Reflects  the  capital  requirement  which the Bank must  satisfy  to avoid
regulatory restrictions that may be imposed pursuant to prompt corrective action
regulations.

Prompt  Corrective  Regulatory  Action.  Under  the  Federal  Deposit  Insurance
Corporation  Improvement Act of 1991 ("FDICIA"),  the federal banking regulators
are  required  to  take  prompt  corrective  action  if  an  insured  depository
institution  fails  to  satisfy  certain  minimum  capital   requirements.   All
institutions, regardless of their capital levels, are restricted from making any
capital  distribution  or paying any management  fees if the  institution  would
thereafter   fail  to  satisfy  the  minimum  levels  for  any  of  its  capital
requirements.  An  institution  that  fails to meet the  minimum  level  for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased  monitoring by the  appropriate  federal  banking  regulator;  (ii)
required to submit an acceptable capital  restoration plan within 45 days; (iii)
subject to asset growth  limits;  and (iv)  required to obtain prior  regulatory
approval for  acquisitions,  branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the  institution's  holding company
that the  institution  will  comply  with the plan until it has been  adequately
capitalized on average for four  consecutive  quarters,  under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution  into capital  compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized"  institution, as well as any undercapitalized institution that
did not  submit an  acceptable  capital  restoration  plan,  may be  subject  to
regulatory demands for recapitalization,  broader application of restrictions on
transactions  with  affiliates,  limitations on interest rates paid on deposits,
asset  growth  and other  activities,  possible  replacement  of  directors  and
officers,  and restrictions on capital distributions by any bank holding company
controlling the institution.  Any company controlling the institution could also
be required to divest the  institution or the  institution  could be required to
divest subsidiaries.

                                       14
<PAGE>

The federal banking regulators will generally measure a depository institution's
capital  adequacy on the basis of the  institution's  total  risk-based  capital
ratio  (the  ratio  of  its  total  capital  to  risk-weighted  assets),  Tier 1
risk-based capital ratio (the ratio of its core capital to risk-weighted assets)
and  leverage  ratio (the ratio of its core capital to adjusted  total  assets).
Under the regulations,  a savings institution that is not subject to an order or
written  directive to meet or maintain a specific  capital  level will be deemed
"well  capitalized" if it also has: (i) a total risk-based  capital ratio of 10%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a  leverage  ratio  of 5.0% or  greater.  An  "adequately  capitalized"  savings
institution is a savings  institution  that does not meet the definition of well
capitalized  and has: (I) a total  risk-based  capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater;  and (iii) a leverage
ratio of 4.0% or greater  (or 3.0% or greater if the savings  institution  has a
composite  1 CAMELS  rating).  An  "undercapitalized  institution"  is a savings
institution  that has (I) a total  risk-based  capital  ratio less than 8.0%; or
(ii) a Tier 1 risk-based  capital  ratio of less than 4.0%;  or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the  institution  has a  composite  1 CAMELS
rating). A "significantly  undercapitalized" institution is defined as a savings
institution that has: (I) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based  capital  ratio of less than 3.0%;  or (iii) a leverage
ratio of less than 3.0%. A "critically  undercapitalized" savings institution is
defined as a savings  institution that has a ratio of "tangible equity" to total
assets of less than  2.0%.  Tangible  equity is  defined  as core  capital  plus
cumulative  perpetual preferred stock (and related surplus) less all intangibles
other than  qualifying  supervisory  goodwill  and  certain  purchased  mortgage
servicing  rights.  Tier 1 capital is defined as the sum of common  stockholders
equity,  noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other  than  mortgage  servicing  rights  and  qualifying  supervisory  goodwill
eligible  for  inclusion  in  core  capital  under  OTS  regulations  and  minus
identified losses and investments in certain  securities  subsidiaries.  The OTS
may reclassify a well capitalized savings institution as adequately  capitalized
and may require an adequately  capitalized  or  undercapitalized  institution to
comply with the supervisory actions applicable to institutions in the next lower
capital  category  (but  may not  reclassify  a  significantly  undercapitalized
institution  as critically  under-  capitalized)  if the OTS  determines,  after
notice and an opportunity for a hearing,  that the savings  institution is in an
unsafe  or  unsound  condition  or that the  institution  has  received  and not
corrected a  less-than-satisfactory  rating for any CAMELS rating category.  The
Bank is classified as "well capitalized" under these regulations.

Deposit Insurance. The Bank is required to pay assessments based on a percent of
its insured  deposits to the FDIC for insurance of its deposits by the SAIF. The
SAIF  assessment rate will be a rate determined by the FDIC to be appropriate to
maintain  the  reserve  ratio of the SAIF to 1.25% of insured  deposits  or such
higher percentage as the FDIC determines to be appropriate.

Under the FDIC's risk-based deposit insurance  assessment system, the assessment
rate for an  insured  depository  institution  depends  on the  assessment  risk
classification  assigned to the institution by the FDIC,  which is determined by
the institution's capital level and supervisory  evaluations.  Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual  assessment period institutions are assigned to one of
three  capital   groups  --  well   capitalized,   adequately   capitalized   or
undercapitalized  --  using  the  same  percentage  criteria  as in  the  prompt
corrective action  regulations.  See "-- Prompt Corrective  Regulatory  Action."
Within each capital group,  institutions  are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other  information  as the FDIC  determines to be relevant to
the  institution's  financial  condition  and  the  risk  posed  to the  deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor  weaknesses.  Subgroup B consists of institutions  that  demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the  institution  and  increased  risk of loss to the  deposit  insurance  fund.
Subgroup C consists of institutions that pose a substantial  probability of loss
to the deposit  insurance fund unless effective  corrective action is taken. The
assessment  rate currently  ranges from 0.061% of deposits for well  capitalized
institutions   in  Subgroup  A  to  0.331%  of  deposits  for   undercapitalized
institutions in Subgroup C. Until December 31, 1999, SAIF-insured  institutions,
will be required to pay  assessments to the FDIC at the rate of 6.5 basis points
to help  fund  interest  payments  on  certain  bonds  issued  by the  Financing
Corporation ("FICO") an agency of the federal government  established to finance
takeovers of insolvent thrifts. During this period, BIF members will be assessed
for these obligations at the rate of 1.3 basis points.  After December 31, 1999,
both BIF and SAIF members will be assessed at the same rate for FICO payments.

The FDIC has adopted a regulation  which  provides  that any insured  depository
institution  with a ratio of Tier 1 capital to total assets of less than 2% will
be  deemed  to be  operating  in an unsafe or  unsound  condition,  which  would
constitute  grounds  for the  initiation  of  termination  of deposit  insurance
proceedings.  The FDIC,  however,  would not initiate  termination  of insurance
proceedings if the depository  institution has entered into and is in compliance
with a written agreement with its primary regulator,  and the FDIC is a party to
the  agreement,  to increase  its Tier 1 capital to such level as the FDIC deems
appropriate.  Insured  depository  institutions  with Tier 1 capital equal to or
greater  than 2% of total assets may also be deemed to be operating in an unsafe
or unsound condition  notwithstanding such capital level. The regulation further
provides  that in  considering  applications  that  must be  submitted  to it by
savings  associations,  the FDIC will  take into  account  whether  the  savings
association is meeting with the Tier 1 capital requirement for state non- member
banks of 4% of total assets for all but the most highly  rated state  non-member
banks.

Federal Reserve System.  Pursuant to regulations of the Federal Reserve Board, a
thrift institution must maintain average daily reserves equal to 3% on the first
$49.3  million  of  transaction  accounts,  plus  10%  on  the  remainder.  This
percentage  is subject to  adjustment  by the  Federal  Reserve  Board.  Because
required  reserves  must be  maintained  in the form of  vault  cash or in a non
interest-bearing  account at a Federal  Reserve Bank,  the effect of the reserve
requirement  is to  reduce  the  amount  of the  institution's  interest-earning
assets. As of June 30, 1998, the Bank met its reserve requirements.

                                       15
<PAGE>

Dividend Restrictions.  Under OTS regulations, the Bank may not pay dividends on
its capital stock if its  regulatory  capital would thereby be reduced below the
amount then required for the liquidation  account established for the benefit of
certain  depositors  of the Bank at the  time of the  Conversion.  In  addition,
savings  institution  subsidiaries  of savings and loan  holding  companies  are
required to give the OTS 30 days' prior  notice of any proposed  declaration  of
dividends to the holding company.

Federal  regulations  impose additional  limitations on the payment of dividends
and other capital  distributions  (including stock repurchases and cash mergers)
by the Bank. Under these regulations,  a savings  institution that,  immediately
prior to, and on a pro forma basis after  giving  effect to, a proposed  capital
distribution,  has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its capital  requirements (a "Tier 1 Association")
is generally  permitted,  without OTS  approval,  to make capital  distributions
during a calendar year in the amount equal to the greater of: (I) 75% of its net
income for the previous four  quarters;  or (ii) up to 100% of its net income to
date during the  calendar  year plus an amount that would reduce by one-half the
amount by which its capital-to-assets  ratio exceeded regulatory requirements at
the beginning of the calendar year. A savings  institution with total capital in
excess of current minimum capital ratio requirements (a "Tier 2 Association") is
permitted to make capital distributions without OTS approval of up to 75% of its
net income for the previous four quarters,  less dividends already paid for such
period.  A  savings  institution  that  fails to meet  current  minimum  capital
requirements  (a "Tier 3  Association")  is  prohibited  from making any capital
distributions  without the prior approval of the OTS. A Tier 1 Association  that
has been notified by the OTS that its is in need of more than normal supervision
will be treated as either a Tier 2 or Tier 3  Association.  The Bank is a Tier 1
Association.  Under the OTS' prompt corrective action  regulations,  the Bank is
also  prohibited  from  making any  capital  distributions  if after  making the
distribution,  the Bank would have: (I) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based  capital ratio of less than 4.0%; or (iii) a
leverage  ratio of less than 4.0%. The OTS,  after  consultation  with the FDIC,
however,  may  permit  an  otherwise  prohibited  stock  repurchase  if  made in
connection  with the issuance of additional  shares in an equivalent  amount and
the repurchase will reduce the institution's  financial obligations or otherwise
improve  the  institution's  financial  condition.  See  "--  Prompt  Corrective
Regulatory Action."

Furthermore,  earnings of the Bank appropriated to bad debt reserves for federal
income tax purposes  are not  available  for payment of cash  dividends or other
distributions  to the Company  without  payment of taxes at the then current tax
rate by the Bank on the amount of earnings  removed  from the  reserves for such
distributions.  See " -- Taxation." The Company intends to make full use of this
favorable  tax  treatment  afforded  to the  Bank and the  Company  and does not
contemplate  use of any  post-Conversion  earnings of the Bank in a manner which
would  limit  either  institution's  bad debt  deduction  or create  federal tax
liabilities.

Transactions with Related Parties. Transactions between savings institutions and
any affiliate  are governed by Sections 23A and 23B of the Federal  Reserve Act.
An affiliate of a savings  institution is any company or entity which  controls,
is controlled by or is under common control with the savings  institution.  In a
holding company  context,  the parent holding  company of a savings  institution
(such as the  Company) and any  companies  which are  controlled  by such parent
holding company are affiliates of the savings institution.  Generally,  Sections
23A and 23B (I)  limit  the  extent  to which  the  savings  institution  or its
subsidiaries may engage in "covered  transactions"  with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate  limit on all such  transactions  with all  affiliates to an amount
equal to 20% of such  capital  stock and surplus and (ii)  require that all such
transactions be on terms  substantially  the same, or at least as favorable,  to
the  institution  or subsidiary as those provided to a  non-affiliate.  The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee  and  similar  other  types of  transactions.  In addition to the
restrictions  imposed by Sections  23A and 23B, no savings  institution  may (I)
make a loan or otherwise extend credit to an affiliate, except for any affiliate
which  engages  only in  activities  which  are  permissible  for  bank  holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or
similar   obligations  of  any  affiliate,   except  for  affiliates  which  are
subsidiaries of the savings institution.

Savings  institutions are also subject to the restrictions  contained in Section
22(h) of the Federal Reserve Act on loans to executive  officers,  directors and
principal  stockholders.  Under Section  22(h),  loans to a director,  executive
officer  and to a greater  than 10%  stockholder  of a savings  institution  and
certain affiliated interests of such persons, may not exceed,  together with all
other   outstanding  loans  to  such  person  and  affiliated   interests,   the
institution's  loans-to-one-  borrower  limit  (generally  equal  to  15% of the
institution's  unimpaired capital and surplus) and all loans to such persons may
not exceed the institution's  unimpaired capital and unimpaired surplus. Section
22(h) also prohibits loans, above amounts prescribed by the appropriate  federal
banking  agency,  to  directors,   executive   officers  and  greater  than  10%
stockholders of a savings institution,  and their respective affiliates,  unless
such loan is approved in advance by a majority of the board of  directors of the
institution with any "interested"  director not participating in the voting. The
Federal  Reserve Board has prescribed the loan amount (which  includes all other
outstanding  loans to such  person)  as to which such  prior  board of  director
approval  is  required  as being the  greater of  $25,000  or 5% of capital  and
surplus  (up to  $500,000).  Further,  Section  22(h)  requires  that  loans  to
directors,  executive  officers  and  principal  stockholders  be made on  terms
substantially  the same as offered in comparable  transactions to other persons.
Section 22(h) also generally prohibits a depository  institution from paying the
overdrafts of any of its executive officers or directors.

                                       16
<PAGE>

Savings  institutions  are also subject to the  requirements and restrictions of
Section 22(g) of the Federal Reserve Act on loans to executive  officers and the
restrictions of 12 U.S.C.  1972 on certain tying  arrangements and extensions of
credit by correspondent banks. Section 22(g) of the Federal Reserve Act requires
that loans to executive officers of depository institutions not be made on terms
more favorable than those afforded to other borrowers,  requires approval by the
board of  directors  of a  depository  institution  for  extension  of credit to
executive  officers of the institution,  and imposes reporting  requirements for
and  additional  restrictions  on the type,  amount and terms of credits to such
officers.  Section 1972 (I) prohibits a depository  institution  from  extending
credit to or offering any other services, or fixing or varying the consideration
for such  extension  of credit or service,  on the  condition  that the customer
obtain some additional service from the institution or certain of its affiliates
or not obtain  services of a competitor of the  institution,  subject to certain
exceptions,  and (ii)  prohibits  extensions  of credit to  executive  officers,
directors,  and greater than 10% stockholders of a depository institution by any
other  institution  which  has a  correspondent  banking  relationship  with the
institution,  unless such extension of credit is on substantially the same terms
as those prevailing at the time for comparable  transactions  with other persons
and does not involve  more than the normal risk of  repayment  or present  other
unfavorable features.

Safety and Soundness Standards. Under FDICIA, as amended by the Riegle Community
Development  and  Regulatory  Improvement  Act of 1994 (the  "CDRI  Act"),  each
Federal banking agency is required to establish  safety and soundness  standards
for  institutions  under its authority.  On July 10, 1995,  the Federal  banking
agencies,  including  the  OTS,  released  Interagency  Guidelines  Establishing
Standards  for Safety and  Soundness  and  published  a final rule  establishing
deadlines for  submission and review of safety and soundness  compliance  plans.
The  final  rule and the  guidelines  go into  effect on  August  9,  1995.  The
guidelines  require  savings  institutions  to maintain  internal  controls  and
information  systems and internal  audit  systems that are  appropriate  for the
size,  nature  and scope of the  institution's  business.  The  guidelines  also
establish certain basic standards for loan documentation,  credit  underwriting,
interest rate risk exposure,  and asset growth.  The guidelines  further provide
that savings  institutions  should maintain safeguards to prevent the payment of
compensation,  fees  and  benefits  that are  excessive  or that  could  lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions.  If the OTS determines that a
savings  institution  is  not  in  compliance  with  the  safety  and  soundness
guidelines,  it may  require the  institution  to submit an  acceptable  plan to
achieve  compliance with the guidelines.  A savings  institution  must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan.  Failure to submit or implement a  compliance  plan may subject the
institution to regulatory  sanctions.  Management believes that the Bank already
meets substantially all the standards adopted in the interagency guidelines, and
therefore does not believe that  implementation  of these  regulatory  standards
will materially affect the Bank's operations.

Additionally,  under  FDICIA,  as amended by the CDRI Act,  the Federal  banking
agencies are required to establish  standards  relating to the asset quality and
earnings that the agencies  determine to be  appropriate.  On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset  quality  and  earnings.  Under  the  proposed  guidelines,  a  savings
institution  should maintain systems,  commensurate with its size and the nature
and  scope  of  its   operations,   to  identify   problem  assets  and  prevent
deterioration  in those assets as well as to evaluate  and monitor  earnings and
ensure that earnings are sufficient to maintain  adequate  capital and reserves.
Management believes that the asset quality and earnings  standards,  in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.

Regulation of the Company

General.  The  Company is a savings and loan  holding  company as defined by the
HOLA.  As such,  the  Company is  registered  with the OTS and is subject to OTS
regulation, examination, supervision and reporting requirements. As a subsidiary
of a  savings  and  loan  holding  company,  the  Bank  is  subject  to  certain
restrictions in its dealings with the Company and affiliates thereof.

Activities Restrictions. The Board of Directors of the Company presently intends
to operate the Company as a unitary savings and loan holding company.  There are
generally  no  restrictions  on the  activities  of a unitary  savings  and loan
holding  company.  However,  if the Director of the OTS determines that there is
reasonable  cause to believe that the continuation by a savings and loan holding
company of an  activity  constitutes  a serious  risk to the  financial  safety,
soundness or stability of its subsidiary  savings  institution,  the Director of
the OTS may impose such  restrictions  as deemed  necessary to address such risk
including limiting:  (I) payment of dividends by the savings  institution;  (ii)
transactions  between the savings institution and its affiliates;  and (iii) any
activities of the savings  institution that might create a serious risk that the
liabilities  of the  holding  company and its  affiliates  may be imposed on the
savings institution.  Notwithstanding the above rules as to permissible business
activities  of  unitary  savings  and loan  holding  companies,  if the  savings
institution  subsidiary  of such a holding  company  fails to meet the QTL test,
then such unitary  holding  company shall also  presently  become subject to the
activities restrictions applicable to multiple holding companies and, unless the
savings  institution  requalifies as a QTL within one year thereafter,  register
as, and  become  subject  to,  the  restrictions  applicable  to a bank  holding
company. See " -- Regulation of the Bank -- Qualified Thrift Lender Test."

                                       17
<PAGE>

If the Company were to acquire  control of another  savings  institution,  other
than through  merger or other  business  combination  with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except where
such  acquisition  is  pursuant to the  authority  to approve  emergency  thrift
acquisitions and where each subsidiary  savings  institution meets the QTL test,
the activities of the Company and any of its  subsidiaries  (other than the Bank
or other subsidiary savings institutions) would thereafter be subject to further
restrictions.  Among other things,  no multiple savings and loan holding company
or  subsidiary  thereof  which is not a savings  institution  shall  commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity,  upon prior notice
to, and no objection  by, the OTS,  other than:  (i)  furnishing  or  performing
management  services for a subsidiary  savings  institution;  (ii) conducting an
insurance agency or escrow  business;  (iii) holding,  managing,  or liquidating
assets owned by or acquired from a subsidiary savings institution;  (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee  under deeds of trust;  (vi) those  activities  authorized  by
regulation as of March 5, 1987 to be engaged in by multiple  holding  companies;
or (vii) unless the Director of the OTS by  regulation  prohibits or limits such
activities for savings and loan holding companies,  those activities  authorized
by the Federal  Reserve Board as permissible for bank holding  companies.  Those
activities described in (vii) above must also be approved by the Director of the
OTS prior to being engaged in by a multiple holding company.

Restrictions on Acquisitions.  Savings and loan holding companies are prohibited
from  acquiring,  without prior  approval of the Director of OTS, (i) control of
any  other  savings   institution  or  savings  and  loan  holding   company  or
substantially  all the assets  thereof or (ii) more than 5% of the voting shares
of a savings  institution or holding  company thereof which is not a subsidiary.
Under certain  circumstances,  a registered  savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting  shares of an  under-capitalized  savings  institution  pursuant to a
"qualified  stock  issuance"  without  that  savings  institution  being  deemed
controlled  by the  holding  company.  In  order  for  the  shares  acquired  to
constitute a "qualified  stock  issuance," the shares must consist of previously
unissued  stock or treasury  shares,  the shares must be acquired for cash,  the
savings and loan holding company's other subsidiaries must have tangible capital
of at least  6-1/2% of total  assets,  there  must not be more  than one  common
director or officer between the savings and loan holding company and the issuing
savings  institution,  and transactions  between the savings institution and the
savings and loan  holding  company  and any of its  affiliates  must  conform to
Sections 23A and 23B of the Federal  Reserve Act. Except with the prior approval
of the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or  controlling  by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary savings institution,  or of any other savings and loan holding
company.

The Director of the OTS may only approve acquisitions resulting in the formation
of  a  multiple   savings  and  loan  holding  company  which  controls  savings
institutions  in more than one  state  if:  (i) the  multiple  savings  and loan
holding company involved controls a savings institution which operated a home or
branch  office in the state of the  institution  to be  acquired  as of March 5,
1987;  (ii) the  acquirer  is  authorized  to  acquire  control  of the  savings
institution  pursuant to the  emergency  acquisition  provisions  of the Federal
Deposit  Insurance  Act;  or (iii)  the  statutes  of the  state  in  which  the
institution to be acquired is located  specifically  permit  institutions  to be
acquired by  state-chartered  institutions or savings and loan holding companies
located in the state  where the  acquiring  entity is  located  (or by a holding
company that controls such state-chartered savings institutions).

Under  the  Bank  Holding  Company  Act of  1956,  bank  holding  companies  are
specifically authorized to acquire control of any savings association.  Pursuant
to rules  promulgated  by the Federal  Reserve  Board,  owning,  controlling  or
operating a savings  institution  is a  permissible  activity  for bank  holding
companies, if the savings institution engages only in deposit-taking  activities
and  lending  and  other  activities  that  are  permissible  for  bank  holding
companies.  A bank holding company that controls a savings institution may merge
or consolidate  the assets and liabilities of the savings  institution  with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate  federal banking agency and the Federal
Reserve  Board.  The  resulting  bank  will  be  required  to  continue  to  pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings  institution plus an annual growth increment.
In addition,  the  transaction  must comply with the  restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.

Taxation

General.  The  Company and its  subsidiaries  will file a  consolidated  federal
income tax return on a June 30 fiscal year basis.  Consolidated returns have the
effect of eliminating intercompany distributions,  including dividends, from the
computation  of taxable  income for the taxable year in which the  distributions
occur.

Federal Income  Taxation.  Thrift  institutions are subject to the provisions of
the Internal  Revenue Code of 1986,  as amended (the "Code") in the same general
manner as other corporations.


The Bank's  federal  corporate  income tax returns  have not been audited in the
last five years.

                                       18
<PAGE>

State Income Taxation.  The State of Minnesota imposes a corporate franchise tax
at the rate of 9.8% on income  which is  considered  Minnesota  taxable  income.
Taxable income for the State of Minnesota is  substantially  the same as federal
taxable income.

For  additional  information  regarding  taxation,  see  Note  11  of  Notes  to
Consolidated Financial Statements.
 
Item 2. Description of Properties

The following table sets forth  information  regarding the Company's  offices at
June 30, 1998.


                           Year   Owned or  Book Value at  Approx    Deposits at
                           Opened  Leased   June 30, 1998  Sq Ft   June 30, 1998
                              (Deposits in thousands)

Main Office:
501 Chestnut Street        1969   Owned    $ 255,507       12,600   $ 97,398
Virginia, Minnesota  55792
 
 
Branch Offices:
Thunderbird Mall Office    1976  Leased          N/A          500      -- (1)
Virginia, Minnesota  55792
 
102 E. Sheridan Street     1974   Owned       57,334        9,900      8,168
Ely, Minnesota 55731

The Bank does not  separately  track  deposits at the  Thunderbird  Mall office.
Deposits received at this facility are included in deposits of the main office.

The book  value of the Bank's  investment  in  premises  and  equipment  totaled
$480,000  at June  30,  1998.  See Note 8 of  Notes  to  Consolidated  Financial
Statements.

Item 3. Legal Proceedings.

From time to time, the Bank is a party to various legal proceedings  incident to
its business.  At June 30, 1998,  there were no legal  proceedings  to which the
Company or the Bank was a party,  or to which any of their property was subject,
which were expected by management to result in a material loss to the Company or
the Bank. In addition, there were no pending regulatory proceedings to which the
Company or the Bank was a party,  or to which any of their property was subject,
which were expected by management to result in a material loss to the Company or
the Bank.

Item 4. Submission of Matters to a Vote of Security Holders.

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year ended June 30, 1998.


                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The   information   contained  under  the  sections   captioned   "Stockholders'
Information" in the Company's  Annual Report to Stockholders for the Fiscal Year
Ended  June 30,  1998  (the  "Annual  Report")  filed as  Exhibit  13  hereto is
incorporated herein by reference.

Item 6. Management's Discussion and Analysis of Plan of Operation

The information contained in the section captioned "Management's  Discussion and
Analysis of Financial Condition and Results of Operations" on pages 2 through 13
in the Annual Report is incorporated herein by reference.


                                       19
<PAGE>

Item 7. Financial Statements

The  Consolidated   Financial  Statements,   Notes  to  Consolidated   Financial
Statements, Independent Auditors' Report contained on pages 14 through 39 in the
Annual Report, which are listed under Item 13 herein, are incorporated herein by
reference.

Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure

Not applicable.



                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
   
For information  concerning the Board of Directors and executive officers of the
Company,  the information  contained under the section captioned  "Proposal I --
Election of  Directors"  in the  Company's  definitive  proxy  statement for the
Company's  1998  Annual  Meeting of  Stockholders  (the  "Proxy  Statement")  is
incorporated herein by reference.

Item 10. Executive Compensation

The information  contained under the sections captioned  "Proposal I -- Election
of  Directors  --  Executive  Compensation"  " -- Director  Compensation,"  " --
Employment  Agreements" and " -- Supplemental Executive Retirement Agreement" in
the Proxy Statement is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         (a)      Security Ownership of Certain Beneficial Owners

Information  required by this item is  incorporated  herein by  reference to the
section captioned "Voting Securities and Principal Holders Thereof" in the Proxy
Statement.

         (b)      Security Ownership of Management

Information  required by this item is  incorporated  herein by  reference to the
sections  captioned  "Voting  Securities  and  Principal  Holders  Thereof"  and
"Proposal I -- Election of Directors" in the Proxy Statement.

         (c)      Changes in Control

Management of the Company knows of no arrangements,  including any pledge by any
person of securities of the Company,  the operation of which may at a subsequent
date result in a change in control of the registrant.

Item 12. Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the
section  captioned  "Proposal I -- Election of  Directors --  Transactions  with
Management" in the Proxy Statement.

Item 13. Exhibits and Reports on Form 8-K.
 
        (a)  List of Documents Filed as Part of this Report

(1) Financial Statements.  The following  consolidated  financial statements are
incorporated by reference from Item 7 hereof (see Exhibit 13):

Independent Auditors' Report

Consolidated Statements of Financial Condition - June 30, 1998 and 1997

Consolidated Statements of Income - Years ended June 30, 1998 and 1997

                                       20
<PAGE>

Consolidated Statements of Stockholders' Equity - Years ended June 30, 1998, and
1997

Consolidated Statements of Cash Flows - Years ended June 30, 1998 and 1997
              
Notes to Consolidated Financial Statements



(2) Financial Statement Schedules.  All schedules for which provision is made in
the applicable accounting  regulations of the Securities and Exchange Commission
are omitted  because of the absence of conditions  under which they are required
or because the required  information is included in the  consolidated  financial
statements and related notes thereto.

(3) Exhibits.  The following is a list of exhibits  filed as part of this Annual
Report on Form 10-KSB and is also the Exhibit Index.
No. Description

3.1     Articles of Incorporation *
3.2     Bylaws   *
4                Form of Common Stock Certificate of QCF Bancorp, Inc.        **
10.1     QCF Bancorp, Inc. 1995 Stock Option and Incentive Plan        *   +
10.2     QCF Bancorp, Inc. 1995 Management Recognition Plan   *   +
10.3(a)  Employment Agreement between QCF Bancorp, Inc.
         and Kevin E. Pietrini     *   +
10.3(b)  Employment Agreement between Queen City Federal Savings
         Bank and Kevin E. Pietrini        *   +
10.4(a)  Severance Agreements between QCF Bancorp, Inc.
         and Daniel F. Schultz, Gerald D. McKenna, Judith K.
         Kauchick and Linda Myklebust      *   +
10.4(b)  Severance Agreements between Queen City Federal
         Savings Bank and Daniel F. Schultz, Gerald D. McKenna,
         Judith K. Kauchick and Linda Myklebust    *       +
10.5     Queen City Federal Savings Bank Deferred
         Compensation Plan       *   +
10.6     Queen City Federal Savings Bank Supplemental
         Executive Retirement Agreements with Kevin E. Pietrini
         and Daniel F. Schultz   *   +
10.7     Queen City Federal Savings Bank Grantor Trust Agreement
         Relating to Employment Agreements, Severance Agreements,
         Supplemental Executive Retirement Agreements and Deferred   *   +
         Compensation Plan
10.8     QCF Bancorp, Inc. 1998 Stock Option and Incentive Plan         +
13       Annual Report to Stockholders
21       Subsidiaries of the Registrant
23       Consent of Mc Gladrey & Pullen, LLP
27       Financial Data Schedule
 
(*)  Incorporated  herein by reference from  Registration  Statement on Form S-1
filed December 6, 1994 (File No. 33- 87044).
(**) Incorporated  herein by reference from  Registration  Statement on Form 8-A
filed March 15, 1995 (File No. 0- 25700).
(+)  Management contract or compensatory plan arrangement.

(b) Reports on Form 8-K.  During the quarter ended June 30, 1998, the Registrant
did not file any Current Reports on Form 8-K.

(c) Exhibits.  The exhibits  required by Item 601 of  Regulation  S-K are either
filed as part of this Annual Report on Form 10-KSB or  incorporated by reference
herein.

(d) Financial Statements and Schedules Excluded from Annual Report. There are no
other financial statements and financial statement schedules which were excluded
from the Annual  Report to  Stockholders  pursuant  to Rule  14a-3(b)  which are
required to be included herein.


                                       21
<PAGE>





SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                QCF BANCORP, INC.

September 25, 1998
                                By:/s/Kevin E. Pietrini
                                Kevin E.Pietrini
                                Chairman of the Board,
                                President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

 
         /s/Kevin E. Pietrini                                 September 25, 1998
         Kevin E. Pietrini
         Chairman of the Board,
         President, Chief Executive Officer
           and Director
         (Principal Executive Officer)

         /s/Daniel F. Schultz                                 September 25, 1998
         Daniel F. Schultz
         Vice President, Treasurer and Director
         (Principal Financial and Accounting Officer)

         /s/Peter J. Johnson                                  September 25, 1998
         Peter J. Johnson
         Director

         /s/Craig W. Nordling                                 September 25, 1998
         Craig W. Nordling
         Director

         /s/Robert L. Muhich                                  September 25, 1998
         Robert L. Muhich
         Director

         /s/John C. Pearsall                                  September 25, 1998
         John C. Pearsall
         Director

         /s/John A. Trenti                                    September 25, 1998
         John A. Trenti
         Director





                                       22
<PAGE>




















                                   Exhibit 10.8






















                                       24
<PAGE>

                                QCF BANCORP, INC.

                             1998 Stock Option Plan

        1. Purpose of the Plan.

The purpose of this Plan is to advance  the  interests  of the  Company  through
providing select key Employees and Directors of the Bank, the Company, and their
Affiliates  with the opportunity to acquire  Shares.  By encouraging  such stock
ownership,  the Company seeks to attract, retain and motivate the best available
personnel for positions of substantial  responsibility and to provide additional
incentives  to Directors  and key  Employees of the Company or any  Affiliate to
promote the success of the business.

        2. Definitions.

As used herein, the following definitions shall apply.

"Affiliate" shall mean any "parent  corporation" or "subsidiary  corporation" of
the Company, as such terms are defined in Section 424(e) and (f),  respectively,
of the Code.

"Agreement"  shall mean a written  agreement  entered  into in  accordance  with
Paragraph 5(c).

"Bank" shall mean Queen City Federal Savings Bank.

"Board" shall mean the Board of Directors of the Company.

"Change  in  Control"  shall  mean  any  one of the  following  events:  (1) the
acquisition  of ownership,  holding or power to vote more than 25% of the Bank's
or the Company's voting stock, (2) the acquisition of the ability to control the
election  of a  majority  of the  Bank's  or the  Company's  directors,  (3) the
acquisition  of a controlling  influence  over the management or policies of the
Bank or the Company by any person or by persons acting as a "group"  (within the
meaning of Section 13(d) of the Securities Exchange Act of 1934), (except in the
case of (1),  (2),  and (3)  hereof,  ownership  or  control  of the Bank by the
Company  itself shall not  constitute a "Change in Control"),  or (4) during any
period of two consecutive years, individuals (the "Continuing Directors") who at
the beginning of such period constitute the Board of Directors of the Company or
the Bank (the  "Existing  Board")  cease for any reason to  constitute  at least
two-thirds  thereof,  provided that any individual  whose election or nomination
for  election  as a member of the  Existing  Board was  approved by a vote of at
least two-thirds of the Continuing  Directors then in office shall be considered
a Continuing Director. For purposes of this subparagraph only, the term "person"
refers to an individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate,  sole proprietorship,  unincorporated  organization or
any other form of entity not  specifically  listed  herein.  The decision of the
Committee as to whether a change in control has occurred shall be conclusive and
binding.

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Committee"  shall mean the Stock  Option  Committee  appointed  by the Board in
accordance with Paragraph 5(a) hereof.

"Common Stock" shall mean the common stock of the Company.

"Company" shall mean QCF Bancorp, Inc.

                                       1
<PAGE>


"Continuous  Service" shall mean the absence of any  interruption or termination
of service as an Employee or Director of the Company or an Affiliate. Continuous
Service shall not be considered  interrupted in the case of sick leave, military
leave or any other leave of absence  approved by the  Company,  in the case of a
Director's performance of services in an emeritus or advisory capacity.

"Director"  shall mean any  member of the Board,  and any member of the board of
directors of any Affiliate that the Board has by resolution  designated as being
eligible for participation in this Plan.

"Disability"  shall mean a physical or mental  condition,  which in the sole and
absolute discretion of the Committee, is reasonably expected to be of indefinite
duration and to  substantially  prevent a Participant from fulfilling his or her
duties or responsibilities to the Company or an Affiliate.

"Effective Date" shall mean the date specified in Paragraph 12 hereof.

"Employee"  shall mean any  person  employed  by the  Company,  the Bank,  or an
Affiliate.

"Exercise  Price" shall mean the price per Optioned Share at which an Option may
be exercised.

"ISO" means an option to purchase Common Stock which meets the  requirements set
forth in the Plan,  and which is intended to be and is  identified  as an "stock
option" within the meaning of Section 422 of the Code.

"Market  Value"  shall  mean  the fair  market  value of the  Common  Stock,  as
determined under Paragraph 7(b) hereof.

"Non-Employee Director" shall have the meaning provided in Rule 16b-3.

"Non-ISO" means an option to purchase Common Stock which meets the  requirements
set forth in the Plan but which is not intended to be and is not  identified  as
an ISO.

"Option" means an ISO and/or a Non-ISO.

"Optioned  Shares" shall mean Shares  subject to an Option  granted  pursuant to
this Plan.

"Participant" shall mean any person who receives an Option pursuant to the Plan.

"Plan" shall mean this QCF Bancorp, Inc. 1998 Stock Option Plan.

"Rule 16b-3" shall mean Rule 16b-3 of the General  Rules and  Regulations  under
the Securities Exchange Act of 1934, as amended.

"Share" shall mean one share of Common Stock.

"Year of Service" shall mean a full twelve-month period, measured from the grant
date of an Option  and each  annual  anniversary  of that date,  during  which a
Participant has not terminated Continuous Service for any reason.

        3.  Term of the Plan and Options.

Term of the Plan. The Plan shall continue in effect for a term of ten years from
the Effective Date, unless sooner terminated pursuant to Paragraph 14 hereof. No
Option shall be granted under the Plan after ten years from the Effective Date.

                                       2
<PAGE>


Term of  Options.  The term of each  Option  granted  under  the  Plan  shall be
established by the Committee, but shall not exceed 10 years; provided,  however,
that in the case of an Employee  who owns Shares  representing  more than 10% of
the outstanding Common Stock at the time an ISO is granted, the term of such ISO
shall not exceed five years.

         4.  Shares Subject to the Plan.

Except as otherwise  required under Paragraph 19, the aggregate number of Shares
deliverable pursuant to Options shall not exceed 110,000 Shares. Such Shares may
either be authorized  but unissued  Shares,  Shares held in treasury,  or Shares
held in a grantor trust created by the Company.  If any Options  should  expire,
become  unexercisable,  or be  forfeited  for any  reason  without  having  been
exercised,   the  Optioned  Shares  shall,  unless  the  Plan  shall  have  been
terminated, be available for the grant of additional Options under the Plan.

         5. Administration of the Plan.

Composition of the Committee.  The Plan shall be  administered by the Committee,
which shall  consist of at least two  Non-Employee  Directors  appointed  by the
Board. Members of the Committee shall serve at the pleasure of the Board. In the
absence  of  any  time  of  a  duly  appointed  Committee,  the  Plan  shall  be
administered by those members of the Board who are Non-Employee Directors.

Powers of the Committee. Except as limited by the express provisions of the Plan
or by  resolutions  adopted  by the  Board,  the  Committee  shall have sole and
complete authority and discretion (i) to select  Participants and grant Options,
(ii) to  determine  the form and  content of Options to be issued in the form of
Agreements under the Plan, (iii) to interpret the Plan, (iv) to prescribe, amend
and rescind rules and  regulations  relating to the Plan,  and (v) to make other
determinations  necessary or advisable for the  administration  of the Plan. The
Committee  shall have and may exercise  such other power and authority as may be
delegated  to it by the  Board  from  time to time.  A  majority  of the  entire
Committee shall  constitute a quorum and the action of a majority of the members
present at any meeting at which a quorum is present, or acts approved in writing
by a majority of the Committee without a meeting,  shall be deemed the action of
the Committee.

Agreement. Each Option shall be evidenced by a written agreement containing such
provisions  as may be  approved  by the  Committee.  Each such  Agreement  shall
constitute a binding contract between the Company and the Participant, and every
Participant,  upon acceptance of such Agreement, shall be bound by the terms and
restrictions of the Plan and of such Agreement. The terms of each such Agreement
shall be in  accordance  with the Plan,  but each  Agreement  may  include  such
additional  provisions  and  restrictions  determined by the  Committee,  in its
discretion,  provided that such additional  provisions and  restrictions are not
inconsistent with the terms of the Plan. In particular,  the Committee shall set
forth in each Agreement (i) the Exercise Price of an Option,  (ii) the number of
Shares subject to, and the expiration date of, the Option (iii) the manner, time
and rate  (cumulative  or otherwise) of exercise or vesting of such Option,  and
(iv) the  restrictions,  if any, to be placed upon such  Option,  or upon Shares
which may be issued upon exercise of such Option.

The Chairman of the Committee and such other  Directors and officers as shall be
designated  by the  Committee  are hereby  authorized  to execute  Agreements on
behalf of the Company and to cause them to be  delivered  to the  recipients  of
Options.

Effect  of  the  Committee's  Decisions.   All  decisions,   determinations  and
interpretations  of the Committee  shall be final and  conclusive on all persons
affected thereby.

Indemnification. In addition to such other rights of indemnification as they may
have,  the  members of the  Committee  shall be  indemnified  by the  Company in
connection  with any claim,  action,  suit or proceeding  relating to any action
taken or  failure  to act under or in  connection  with the Plan or any  Option,
granted hereunder to the full extent provided for under the Company's  governing
instruments with respect to the indemnification of Directors.

                                       3
<PAGE>


         6. Grant of Options.


General Rule.  The  Committee  shall have the  discretion to make  discretionary
grants  of  Options  to  Employees  and  Directors  (including  members  of  the
Committee).

Reload  Grants.  In any  Agreement  or in a  formal  or  informal  program,  the
Committee  may  establish  terms and  conditions  under  which an Option will be
granted  upon the exercise of an Option or stock option  granted  under  another
Company plan;  provided  that the Exercise  Price for the new Option shall equal
the Market Value of the underlying Shares on that date.

Automatic  Grants to  Employees.  On the Effective  Date,  each of the following
Employees  shall  receive  an  Option  (in the  form of an  ISO,  to the  extent
permissable under the Code) to purchase the number of Shares listed below, at an
Exercise  Price per Share equal to the Market Value of a Share on the  Effective
Date; provided that such grant shall not be made to an Employee whose Continuous
Service terminates on or before the Effective Date:

                                                         Percentage of Shares
                           Participant                Reserved under Paragraph 4

                           Kevin E. Pietrini                            35
                           Daniel F. Schultz                            25
                           Linda Myklebust                               6
                           Gerald D. McKenna                             6
                           Judith Kauchick                               3

Automatic Grants to non-employee Directors. Notwithstanding any other provisions
of this Plan,  each  Director  who is not an  Employee  but is a Director on the
Effective  Date shall  receive,  on said date,  Non-ISOs to purchase a number of
Shares equal to the  quotient  obtained by dividing -  twenty-five  (25%) of the
number  of  Shares  reserved  under  Paragraph  4(a)  hereof,  by the  number of
Directors entitled to receive an Option on the Effective Date,  pursuant to this
Paragraph 9(a).

The Options granted to the  Participants  hereunder (i) shall vest in accordance
with the general rule set forth in Paragraph 8(a) of the Plan, (ii) shall have a
term of ten years from the  Effective  Date,  and (iii)  shall be subject to the
general  rule set  forth in  Paragraph  8(c)  with  respect  to the  effect of a
Participant's  termination of Continuous  Service on the Participant's  right to
exercise his Options.
 

        7.  Exercise Price for Options.
 

Limits on Committee  Discretion.  The Exercise Price as to any particular Option
shall not be less than 100% of the Market  Value of the  Optioned  Shares on the
date of grant. In the case of an Employee who owns Shares representing more than
10% of the  Company's  outstanding  Shares of Common Stock at the time an ISO is
granted,  the Exercise  Price shall not be less than 110% of the Market Value of
the Optioned Shares at the time the ISO is granted.

                                       4
<PAGE>


Standards for  Determining  Exercise  Price.  If the Common Stock is listed on a
national  securities  exchange  (including the NASDAQ National Market System) on
the date in  question,  then the Market  Value per Share shall be the average of
the highest and lowest  selling price on such exchange on such date, or if there
were no sales on such date,  then the  Exercise  Price shall be the mean between
the bid and asked price on such date.  If the Common  Stock is traded  otherwise
than on a national securities exchange on the date in question,  then the Market
Value per Share shall be the mean  between the bid and asked price on such date,
or,  if there is no bid and asked  price on such  date,  then on the next  prior
business day on which there was a bid and asked price.  If no such bid and asked
price is  available,  then the Market  Value per Share  shall be its fair market
value as determined by the Committee, in its sole and absolute discretion.

         8. Exercise of Options.

Generally.  Unless the Committee specifically eliminates any vesting requirement
or imposes a different vesting schedule in an Agreement granting an Option, each
Option grant shall be vested and exercisable with respect to 50% of the Optioned
Shares on the date of the grant,  and shall become vested and  exercisable  with
respect  to the  remaining  50% on the  Optionee's  completion  of one  Year  of
Service; provided that vesting otherwise scheduled to occur prior to stockholder
approval of the Plan pursuant to Paragraph 12 hereof shall be deferred until the
date of such approval. An Option may not be exercised for a fractional Share.

Procedure  for  Exercise.  A  Participant  may  exercise  Options,   subject  to
provisions relative to its termination and limitations on its exercise,  only by
(1) written  notice of intent to exercise the Option with respect to a specified
number  of  Shares,  and (2)  payment  to the  Company  (contemporaneously  with
delivery of such notice) in cash, in Common Stock,  or a combination of cash and
Common Stock,  of the amount of the Exercise Price for the number of Shares with
respect to which the  Option is then  being  exercised.  Each such  notice  (and
payment where required) shall be delivered,  or mailed by prepaid  registered or
certified  mail,  addressed  to the  Treasurer  of the Company at its  executive
offices.  Common Stock utilized in full or partial payment of the Exercise Price
for Options shall be valued at its Market Value at the date of exercise, and may
consist of Shares subject to the Option being exercised.

Period of  Exercisability.  Except to the extent otherwise provided in the terms
of an Agreement, an Option may be exercised by a Participant only while he is an
Employee and has maintained Continuous Service from the date of the grant of the
Option, or within one year after termination of such Continuous Service (but not
later than the date on which the Option would otherwise  expire),  except if the
Employee's Continuous Service terminates by reason of -

                                       5
<PAGE>

 

"Just Cause"  which for purposes  hereof shall have the meaning set forth in any
unexpired employment or severance agreement between the Participant and the Bank
and/or  the  Company  (and,  in the  absence of any such  agreement,  shall mean
termination because of the Employee's personal dishonesty, incompetence, willful
misconduct,  breach of fiduciary duty  involving  personal  profit,  intentional
failure  to  perform  stated  duties,  willful  violation  of any  law,  rule or
regulation  (other  than  traffic  violations  or  similar  offenses)  or  final
cease-and-desist  order), then the Participant's rights to exercise such Options
shall  expire on the date of such  termination;  death,  then to the  extent the
Participant would have been entitled to exercise the Option immediately prior to
his death,  such Option of the deceased  Participant may be exercised within two
years  from the date of his  death  (but not  later  than the date on which  the
Option would otherwise expire) by the personal  representatives of his estate or
person or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution.

Effect of the Committee's  Decisions.  The Committee's  determination  whether a
Participant's  Continuous  Service has ceased,  and the effective  date thereof,
shall be final and conclusive on all persons affected thereby.

Mandatory Six-Month Holding Period. Notwithstanding any other provisions of this
Plan to be contrary,  Common Stock that is purchased  upon exercise of an Option
may not be sold within the  six-month  period  following  the grant date of that
Option,  except in the event of the Participant's  death or disability,  or such
other event as the Board may specifically deem appropriate.

   9. Change in Control; Effect of Changes in Common Stock Subject to the Plan.

Change in Control.  Upon the earlier of a Change in Control or the  execution of
an  agreement  to effect a Change in Control,  all Options  shall  become  fully
exercisable, notwithstanding any other provision of the Plan or any Agreement.

Recapitalizations; Stock Splits, Etc. The number and kind of shares reserved for
issuance  under  the  Plan,  and the  number  and  kind  of  shares  subject  to
outstanding  Options,  and the Exercise Price thereof,  shall be proportionately
adjusted  for any  increase,  decrease,  change  or  exchange  of  Shares  for a
different  number or kind of shares or other  securities  of the  Company  which
results  from  a  merger,   consolidation,   recapitalization,   reorganization,
reclassification,  stock dividend,  split-up,  combination of shares, or similar
event in which the number or kind of shares is changed  without  the  receipt or
payment of consideration by the Company.

Transactions in which the Company is Not the Surviving  Entity.  In the event of
(i)  the   liquidation  or  dissolution  of  the  Company,   (ii)  a  merger  or
consolidation  in which the Company is not the  surviving  entity,  or (iii) the
sale or disposition of all or substantially  all of the Company's assets (any of
the  foregoing  to be referred to herein as a  "Transaction"),  all  outstanding
Options,  together with the Exercise Prices thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or kind of shares or
other securities which results from the Transaction.

Conditions  and  Restrictions  on  New,  Additional,   or  Different  Shares  or
Securities.  If, by reason of any adjustment made pursuant to this Paragraph,  a
Participant becomes entitled to new, additional, or different shares of stock or
securities,  such new,  additional,  or different  shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions  which were
applicable to the Shares pursuant to the Option before the adjustment was made.

Other Issuances. Except as expressly provided in this Paragraph, the issuance by
the Company or an  Affiliate of shares of stock of any class,  or of  securities
convertible  into Shares or stock of another class,  for cash or property or for
labor or services  either  upon  direct  sale or upon the  exercise of rights or
warrants to subscribe  therefor,  shall not affect,  and no adjustment  shall be
made with  respect  to, the  number,  class,  or  Exercise  Price of Shares then
subject to Options or reserved for issuance under the Plan.

                                       6
<PAGE>


         10. Non-Transferability of Options.

Options  may  not be  sold,  pledged,  assigned,  hypothecated,  transferred  or
disposed  of in any  manner  other  than by will or by the laws of  descent  and
distribution.  Notwithstanding  the  foregoing,  or any other  provision of this
Plan, a  Participant  who holds Options may transfer such Options (but not ISOs)
to  his or her  spouse,  lineal  ascendants,  lineal  descendants,  or to a duly
established trust for the benefit of one or more of these  individuals.  Options
so  transferred  may  thereafter  be  transferred  only to the  Participant  who
originally  received  the  grant  or to an  individual  or  trust  to  whom  the
Participant  could have  initially  transferred  the  Options  pursuant  to this
Paragraph 11. Options which are transferred  pursuant to this Paragraph 11 shall
be exercisable  by the transferee  according to the same terms and conditions as
applied to the Participant.

         11. Time of  Granting Options.

The date of grant of an Option shall, for all purposes, be the later of the date
on which the Committee makes the determination of granting such Option,  and the
Effective Date. Notice of the  determination  shall be given to each Participant
to whom an Option is so granted within a reasonable  time after the date of such
grant.

         12. Effective Date.

The Plan shall be effective  September 10, 1998; provided that the effectiveness
of the Plan  and any  Option  shall be  absolutely  contingent  upon the  Plan's
approval by a favorable vote of  stockholders  owning at least a majority of the
total votes cast at a duly called meeting of the Company' s stockholders held in
accordance with applicable laws, and no Options shall become  exercisable  prior
to approval of the Plan by the stockholders of the Company.

        13.  Modifications of Options.

At any time,  and from time to time,  the Board may  authorize  the Committee to
direct  execution  of an  instrument  providing  for  the  modification  of  any
outstanding Option,  provided no such modification shall confer on the holder of
said  Option any right or benefit  which  could not be  conferred  on him by the
grant of a new Option at such time, or impair the Option  without the consent of
the holder of the Option.

         14. Amendment and Termination of the Plan.

The Board may from time to time amend the terms of this Plan and,  with  respect
to any Shares at the time not  subject to  Options,  suspend or  terminate  this
Plan. No amendment,  suspension or termination  of this Plan shall,  without the
consent of any  affected  holders  of an  Option,  alter or impair any rights or
obligations under any Option theretofore granted.

         15.Conditions Upon Issuance of Shares.

Compliance with Securities Laws. Shares of Common Stock shall not be issued with
respect to any Option  unless the  issuance  and  delivery of such Shares  shall
comply with all relevant provisions of law, including,  without limitation,  the
Securities  Act of 1933,  as  amended,  the  rules and  regulations  promulgated
thereunder,  any applicable  state  securities law, and the  requirements of any
stock exchange upon which the Shares may then be listed.

Special Circumstances.  The inability of the Company to obtain approval from any
regulatory body or authority deemed by the Company's  counsel to be necessary to
the lawful  issuance and sale of any Shares  hereunder shall relieve the Company
of any  liability in respect of the  non-issuance  or sale of such Shares.  As a
condition  to the  exercise  of an Option,  the  Company  may require the person
exercising  the Option to make such  representations  and  warranties  as may be
necessary  to assure the  availability  of an  exemption  from the  registration
requirements of federal or state securities law.

                                       7
<PAGE>


Committee  Discretion.  The Committee shall have the discretionary  authority to
impose in Agreements such  restrictions on Shares as it may deem  appropriate or
desirable, including but not limited to the authority to impose a right of first
refusal,  or  to  establish  repurchase  rights,  or  to  pay  an  Optionee  the
in-the-money  value of his Option in consideration for its cancellation,  or all
of these restrictions.


         16. Reservation of Shares.

The  Company,  during the term of the Plan,  will  reserve and keep  available a
number of Shares sufficient to satisfy the requirements of the Plan.

         17. Withholding Tax.

The  Company's  obligation  to deliver  Shares upon exercise of Options shall be
subject to the Participant's  satisfaction of all applicable federal,  state and
local income and employment tax withholding  obligations.  The Committee, in its
discretion, may permit the Participant to satisfy the obligation, in whole or in
part, by irrevocably electing to have the Company withhold Shares, or to deliver
to the Company  Shares that he already owns,  having a value equal to the amount
required to be withheld. The value of the Shares to be withheld, or delivered to
the  Company,  shall be based on the Market  Value of the Shares on the date the
amount of tax to be withheld is to be determined. As an alternative, the Company
may retain,  or sell without notice, a number of such Shares sufficient to cover
the amount required to be withheld.

         18. No Employment or Other Rights.

In no event shall an Employee's  or Director's  eligibility  to  participate  or
participation  in the Plan  create or be deemed to crate any legal or  equitable
right of the Employee, Director, or any other party to continue service with the
Company,  the Bank, or any Affiliate of such corporations.  Except to the extent
provided in Paragraphs 6(b) and 9(a), no Employee or Director shall have a right
to be granted an Option or,  having  received  an Option,  the right to again be
granted an Option.  However,  an employee or  Director  who has been  granted an
Option may, if otherwise eligible, be granted an additional Option or Options.

         19. Governing Law.

The Plan shall be governed by and construed in  accordance  with the laws of the
State of  Minnesota,  except to the extent  that  federal law shall be deemed to
apply.


                                       8


 



 




<PAGE>
                                       













                                   EXHIBIT 13











<PAGE>
To Our Shareholders, Customers and Friends:

The directors,  officers and staff of QCF Bancorp,  Inc. and Queen City Federal
Savings   Bank proudly  present our annual report to  shareholders.  This report
represents  another  exciting  and  productive  year at Queen City Federal and a
record  year in terms  of  earning.  We ended  the  year  with a net  income  of
$2,653,000.  This  represents a return on average assets of 1.72%. We also ended
the year with record earnings per share of $2.30.

The record  earnings are a result of the  continuation  of our transition from a
traditional  thrift  to a  community  bank.  Increases  from  last year in both
consumer  and  commercial  lending  are helping us  position  ourselves  as our
community's  "local Bank".  This focus on commercial  and consumer  lending has
allowed us to increase our asset yields and provide  added fee income as well as
giving us the opportunity to attract low-cost commercial deposits.  This has all
been  accomplished  while  cutting the ratio of  non-performing  assets to total
assets  in half.  We  encourage  you to read the  "Management's  Discussion  and
Analysis"  section  of  this  report  for a more  complete  explanation  of your
company's financial performance.

In the ensuing year,  Queen City Federal will continue to pursue its  philosophy
of being our region's "local" financial institution.,  Although we will continue
providing  traditional  thrift services,  we will move ahead with our plan to be
more "bank like".  We will continue our  commitment to the local  community bank
concept  by  promoting  local  involvement  in the  community  and  keeping the
decision process in the hands of our local board and management.

The  directors,  officers  and staff of Queen City Federal want to thank all of
our   stockholders  and  customers  for  their  confidence  and  support  in our
organization as we endeavor to enhance  shareholder value in the year to come. I
would also like to thank our  employees  for their hard work and  dedication  in
making this another successful year at Queen City Federal.


                                           Sincerely,


                                           Kevin E. Pietrini
                                           Chairman of the Board,
                                           President and
                                           Chief Executive Officer

                                       
<PAGE>


                              FINANCIAL HIGHLIGHTS
                  (Dollars in Thousands, Except Per Share Data)

                                               At or For the Year Ended
                                                             June 30

                                                        1998          1997

Operating Results
    Net interest income                    $            6,467        6,029
    Non interest income                                   691          566
    Non interest expense                                2,869        3,276
    Net Income                                          2,653        2,011

Per Share Data
    Net income (Diluted)                   $             2.30         1.65
    Book value                                          19.93        19.23
 
Balance Sheet Data
    Total assets                           $          150,486      156,727
    Investment Securities                              78,112       83,098
    Net loans                                          65,194       61,202
    Deposits                                          105,566      103,681
    Short-term borrowings                              16,081       22,140
    Stockholders' equity                               26,328       27,423

Financial Ratios
    Return on average assets                             1.72%        1.34
    Return on average equity                             9.82         7.44
    Net interest margin                                  4.31         4.12
    Average equity to average assets                    17.54        18.03
    Non-performing assets to total assets                 .08          .17
    Total regulatory capital to risk-adjusted assets    29.90        27.58


Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

The following discussion is provided to assist readers in their understanding of
the  consolidated   financial  statements  of  QCF  Bancorp,  Inc.  (QCF).  This
discussion  should  be read  in  conjunction  with  the  consolidated  financial
statements and other financial information presented elsewhere in this report.

QCF is the unitary  savings  and loan  holding  company  for Queen City  Federal
Savings Bank (the Bank).  The Bank converted from a federally  chartered  mutual
savings bank to a federally chartered stock savings bank on March 31, 1995.



                                       1
<PAGE>



<TABLE>

                                      FIVE-YEAR SELECTED FINANCIAL SUMMARY(1)

(Dollars in Thousands,                                                                                        Year Ended June 30
  Except per Share Data)
 
Operating Results                                1998        1997       1996        1995       1994
<S>                                        <C>             <C>        <C>          <C>        <C>  
  Interest income                          $   11,243      10,703     10,658       8,867      7,558
  Interest expense                              4,776       4,674      4,585       4,018      3,947
  Net interest income                           6,467       6,029      6,073       4,849      3,611
  Provision for loan losses                         0           0          0           0         60
  Non-interest income                             691         566        480         411        416
  Non-interest expense                          2,869       3,276      2,687       2,378      2,164
  Income tax expense                            1,636       1,308      1,533       1,166        734
  Income before cumulative effect
     of change in accounting principle          2,653       2,011      2,333       1,715      1,069
  Net income                                    2,653       2,011      2,333       1,715      1,588

Per Share Data (diluted)
  Net income (1995 - March 31-June 30)    $      2.30        1.65       1.46        0.35
  Pro forma net income                                                              1.04
  Book value                                    19.93       19.23      18.47       17.17

Balance Sheet Data
  Total Assets                             $  150,486     156,727    150,430     146,548    133,135
  Investment securities                        78,112      83,098     89,183      88,503     85,412
  Net loans                                    65,194      61,202     52,361      45,964     40,810
  Deposits                                    105,566     103,681     88,832     113,544    113,091
  Short-term borrowings                        16,081      22,140     29,264           0      4,190
  Stockholders' equity                         26,328      27,423     29,685      30,602     13,991

Financial Ratios
  Return on average assets                       1.72%       1.34       1.56        1.27       0.80  (2)
  Return on average equity                       9.82        7.44       8.06       10.09       8.02
  Average equity to average assets              17.54      18.03       19.33      12.62        9.94
<FN>

(1) QCF Bancorp, Inc. (QCF) completed a public stock offering on March 31, 1995,
which generated net proceeds of $17.0 million. QCF purchased all of the stock of
Queen City  Federal  Savings  Bank (the  Bank) with a portion of the  conversion
proceeds. The information reflected above represents the financial condition and
the results of  operations  for the  consolidated  QCF for 1995 through 1998 and
only the Bank for 1994

(2) Ratio is based on income  before  cumulative  effect of change in accounting
principle.  After including cumulative effect of change in accounting principle,
the return on average assets would be 1.18%.
</FN>
</TABLE>

Results of Operations

QCF's net income of $2.7  million,  or $2.30 per diluted  share,  in fiscal 1998
increased  $642,000,  or 31.9%, from fiscal 1997 net income. The increase in net
income for fiscal 1998 as compared  to the prior year was due  primarily  to the
absence of any special assessment by the FDIC during fiscal year 1998. In fiscal
year 1997, the Bank was required to pay a special  assessment of $416,000 net of
taxes to help recapitalize the SAIF. The improvement in fiscal 1998 was also due
to an increase in net interest income.

Return on average  assets was 1.72% for fiscal 1998 compared to 1.34% for fiscal
1997.


                                       
                                       2
<PAGE>




Net Interest Income
QCF's net income is dependent primarily on its net interest income, which is the
difference   between   interest   earned   on   securities,   loans   and  other
interest-earning  assets  (interest  income) and  interest  paid on deposits and
short-term  borrowings (interest expense).  Net interest margin is calculated by
dividing  net  interest  income by the  average  interest-earning  assets and is
normally expressed as a percentage.  Net interest income and net interest margin
are  affected  by  changes  in  interest  rates,  the  volume  and  the  mix  of
interest-earning  assets and  interest-  bearing  liabilities,  and the level of
non-performing assets.

The  following  table  presents the total dollar  amount of interest  income and
expense from average  interest-earning  assets and interest-bearing  liabilities
and the results and yields.

<TABLE>


                                                                               Year Ended June 30

                                                  1998                           1997                              1996  
 
                                       Average                Rate/    Average               Rate/    Average                 Rate/
                                       Balance    Interest    Yield    Balance   Interest    Yield    Balance    Interest     Yield
(Dollars in Thousands)
Interest-Earning Assets (1)
<S>                                 <C>           <C>          <C>      <C>        <C>        <C>      <C>         <C>         <C> 
     Loans receivable, net (2)      $   64,020    5,758        8.99     57,087     5,144      9.01     48,671      4,439       9.12
     Investment securities              79,186    5,159        6.52     84,388     5,385      6.38     90,373      6,011       6.65

     Other including cash equivalents    6,841      327        4.78      4,749       174      3.66      4,408        208       4.72

     Total interest-earning assets  $  150,047   11,244        7.49    146,244    10,703      7.32    142,909     10,658       7.46


Interest-Bearing Liabilities
     NOW accounts                   $    8,746      107        1.22      8,835       118      1.34      9,255        127       1.37
     Passbooks                          25,268      632        2.50     23,939       598      2.50     26,084        652       2.50
     Money market accounts               9,418      240        2.55      8,765       224      2.55      9,228        235       2.55
     Certificate accounts               55,749    2,978        5.34     52,008     2,925      5.62     52,208      2,900       5.55
     Short-term borrowings              19,528      819        4.19     21,956       809      3.68     11,980        671       5.60

Total interest-bearing liabilities  $  118,709    4,776        4.02    115,503     4,674      4.05    108,755      4,585       4.22

Net Interest Income                              $6,468                            6,029                           6,073

Net Earning Assets                   $  31,338                          30,721                         34,154

Net Yield on Interest-Earning Assets                           4.31%                           4.12                            4.25 
  Average Interest-Earning Assets to
  Average Interest-Bearing Liabilities                       126.40%                         126.60                          131.40

<FN>
(1)  Tax exempt income was not significant; therefore, was not presented on a tax equivalent basis.
(2)  Calculated net of deferred loan fees, loan discounts, loans in process and allowance for loan losses.
     Average balance includes non-performing loans.  Loan fee income is not significant.
</FN>
</TABLE>

Net interest income was $6.5 million for the fiscal year ended June 30, 1998, up
from $6.0  million in fiscal  1997.  This  represents  an  increase of 7.3% from
fiscal 1997.  The increase in net interest  income was due to an increase in the
Bank's net interest margin and average net-earning assets.

The following  schedule  presents the dollar amount of change in interest income
and  interest  expense  for major  components  of  interest-earning  assets  and
interest- bearing liabilities.  It distinguishes  between the  increase/decrease
related to higher outstanding balances and that due to the levels and volatility
of  interest   rates.   For  each  category  of   interest-earning   assets  and
interest-bearing liabilities, information is provided on changes attributable to
(i)  change  in volume  multiplied  by old rate and (ii)  change in rate  (i.e.,
changes in rate  multiplied  by old volume) . The change in interest due to both
volume and rate has been  allocated to volume and rate changes in  proportion to
the relationship of the absolute dollar amounts of the change in each.


                                       3
<PAGE>


<TABLE>

                               Year Ended June 30

                                                         1998 vs 1997                   1997 vs 1996


(Dollars in thousands)                                           Increase(Decrease) Due to
                                               Volume       Rate       Total    Volume      Rate        Total              

Interest-earning assets:
<S>                                        <C>               <C>        <C>       <C>        <C>         <C>
Loans receivable, net                      $      625        (11)       614       760        (55)        705
Investment securities                            (341)       115       (226)     (388)      (238)       (626)
Other including cash
     equivalents                                   91         62        153        15        (49)        (34)
Total interest-earning assets                     375        166        541       387       (342)         45
Interest-bearing liabilities:
NOW accounts                               $       (1)       (10)       (11)       (6)        (3)         (9)
Passbooks                                          34          0         34       (54)         0         (54)
Money market accounts                              16          0         16       (11)         0         (11)
Certificate accounts                              204       (151)        53       (11)        36          25
Short-term borrowings                             (95)       105         10       424       (286)        138
  Total interest-bearing
  liabilities                              $      158        (56)       102       342       (253)         89

Change in net interest income              $      217        222        439        45       ( 89)        (44)

</TABLE>

In fiscal  1998 the yield on average  interest-earning  assets  increased  by 17
basis  points  which  increased  interest  income as  compared  to fiscal  1997.
Interest  income  also  increased  due to a $ 3.8  million  increase  in average
interest-earning  assets between fiscal years 1998 and 1997. The combined impact
(interest rate increase and volume  increase)  caused interest income for fiscal
1998 to increase  $541,000 or 5.1%.  Interest  expense  increased  $102,000 from
fiscal  1997  to  1998.   The  increase  was  due  to  an  increase  in  average
interest-bearing  liabilities of $3.2 million or 2.8%,  partially  offset by a 3
basis point decrease in interest rates. The increase in average interest-bearing
liabilities was due to a $2.4 million decrease in average short-term  borrowings
partially offset by a $5.6 million increase in deposit accounts.

Provision for Loan Losses

The Bank made no  provision  for loan losses in fiscal 1998 or 1997.  Provisions
for loan losses are charged to earnings to maintain the total allowance for loan
losses at a level considered adequate by management to provide for probable loan
losses, based on prior loss experience,  volume and type of lending conducted by
the Bank, past due loans in the Bank's loan portfolio and national, regional and
local economic conditions.

Non-interest Income
 
Non-interest income was $691,000 for fiscal 1998 compared to $566,000 for fiscal
1997. The following table presents major components of non-interest income.
 
                                                        Year Ended June 30
(Dollars in thousands)                           1998                    1997 

Fees and service charges        $                 476                    489
Other                                             103                     77
Gain On Sale of Securities                       112                      0
Total non-interest income       $                 691                    566
             
The increase of $125,000 or 22.1% in total  non-interest  income  between fiscal
year 1998 and 1997 was primarily due to gain on sale of securities.

                                       4
<PAGE>

Non-interest Expense

Non-interest  expense was $2.9 million for fiscal 1998  compared to $3.3 million
for  fiscal  1997.  The  following  Table  presents  the  major   components  of
non-interest expense.

                                            Year Ended June 30

(Dollars in thousands)                      1998          1997

Compensation and benefits                  $2,033         1,865
Occupancy                                     244           214
Federal deposit insurance premiums             67           675
Advertising                                    58            74
Other                                         467           448
  Total non-interest expense               $2,869         3,276

Total  non-interest  expense  decreased  $407,000  or 12.4% from  fiscal 1997 to
fiscal 1998. The primary cause of the decrease was a decrease in Federal deposit
insurance premiums. Such decrease was due to a special assessment by the FDIC in
fiscal 1997.

Income Taxes

QCF recorded  income tax expense of $1.6 million in fiscal 1998 compared to $1.3
million in fiscal 1997. The increase in income tax expense between 1997 and 1998
is primarily the result of changes in taxable income between the years.

Financial Condition

QCF's  total  assets at June 30,  1998 were  $150.5  million  compared to $156.7
million  at June 30,  1997.  The  decrease  of $6.2  million  from  1998 to 1997
reflects fluctuations in levels of deposits and short-term borrowings, which are
responsive to market conditions.

Investment Securities

Investment  securities  decreased  by $5.0  million or 6.0% from  fiscal 1997 to
fiscal  1998.  The decrease was due to an increase in loan demand and a decrease
in short-term  borrowings.  During fiscal 1998,  QCF purchased  $57.2 million of
investment  securities and collected  principal from maturities or repayments of
$62.8 million.

Cash and Cash Equivalents

Cash and cash  equivalents  decreased  by $3.8 million from $7.8 million at June
30, 1997 to $4.0 million at June 30, 1998. The Bank's cash and cash  equivalents
fluctuate from period to period  depending on liquidity  needs and the timing of
purchases of investment securities.

Loans Receivable, Net

Net loans receivable,  increased $4.0 million or 6.5% from $61.2 million at June
30, 1997 to $65.2  million at June 30, 1998.  The increase  reflected  increased
mortgage demand,  consumer demand for installment  loans and business demand for
commercial loans.

                                       5
<PAGE>


Allowance for Loan Losses

In originating loans, the Bank recognizes that credit losses will be experienced
and that the risk of loss will vary with, among other things,  the type of loans
being made,  the  creditworthiness  of the  borrower  over the term of the loan,
general  economic  conditions and, in the case of a secured loan, the quality of
the security  for the loan.  It is  management's  policy to maintain an adequate
allowance  for loan losses based on, among other things,  the Bank's  historical
loan loss  experience,  evaluation of economic  conditions,  regular  reviews of
delinquencies and loan portfolio  quality.  The Bank increases its allowance for
loan losses by charging provisions for loan losses against the Bank's income.

Management  will  continue to  actively  monitor  the Bank's  asset  quality and
allowance  for loan  losses.  Management  will  charge off loans and  properties
acquired in settlement of loans against the  allowances for losses on such loans
and such properties when  appropriate and will provide  specific loss allowances
when  necessary.  Although  management  believes  it uses the  best  information
available  to make  determinations  with  respect to the  allowance  for losses,
future adjustments may be necessary if economic conditions differ  substantially
from the  economic  conditions  in the  assumptions  used in making the  initial
determinations.

Non-Performing Assets

Non-performing  assets totaled $119,000 at June 30, 1998 compared to $263,000 at
June 30, 1997.

Non-performing assets are summarized in the following table.
 
                                                           June 30

(Dollars in thousands)                       1998   1997    1996   1995    1994

Non-accrual loans                       $      15    225     297    182     43
Foreclosed assets                             104     38       6      0      4
  Total non-performing assets           $     119    263     303    182     47

  Non-performing assets to year-end assets    .08    .17     .20    .13    .04 
  Non-performing loans to year-end loans      .18    .43     .58    .40    .11
  Allowance for loan losses to
  Non-performing assets                     1,070    501     439    755  2,955
 
The  non-performing  assets  reflected  above  primarily  consist of one-to-four
family mortgage loans or consumer loans.

Deposits and Short-term Borrowings

The Bank's deposits increased $1.9 million, or 1.8%, from $103.7 million at June
30,  1997 to $105.6  million  at June 30,  1998.  Short-term  borrowings,  which
consist  of  sales  of  securities  under  agreements  to  repurchase  identical
securities  remained stable between fiscal years at approximately $14.1 million.
Federal Home Loan Bank advances decreased $6.1 million from $8.1 million at June
30, 1997 to $2.0 million at June 30, 1998.

Capital Adequacy

Stockholders'  equity was $26.3 million at June 30, 1998 down from $27.4 million
at June 30,  1997.  The  decrease  was due to the  repurchase  of stock  for the
treasury of $3.5 million and for the stock  option trust of $1.0 million  offset
primarily by earnings of $2.6 million.

Federal savings institutions are required to satisfy their capital requirements:
(i) a requirement that "tangible capital" equal or exceed 1.5% of adjusted total
assets,  (ii) a requirement  that core capital" equal or exceed 3.0% of adjusted
total assets, and (iii) a requirement that "risk-based  capital" equal or exceed
8.0% of  risk-weighted  assets.  At June 30, 1998 and 1997, the Bank met each of
the three capital requirements.

Liquidity Management

The Bank is required to maintain  average daily  balances of liquid assets equal
to 4% of its net withdrawable savings deposits plus short-term  borrowings.  The
Bank  has  maintained  an  average  daily  liquidity  ratio in  excess  of these
requirements.

                                       6
<PAGE>

The primary  investing  activities are the origination of loans and the purchase
of  securities.  During the year ended June 30, 1998,  net loans  increased $4.0
million while maturities and principal collected on investment  securities,  net
of purchases totaled $5.6 million.

The primary  financing  activity is the  attraction  of deposits and  short-term
borrowings.  During  the year  ended  June 30,  1998,  deposits  and  short-term
borrowings decreased $4.2 million.

QCF's most liquid assets are cash and cash equivalents,  represented by cash and
interest-bearing  deposits with banks. The level of these assets is dependent on
the operating, financing, and investing activities during any given period. Cash
and cash  equivalents  decreased  $3.8 million to $4.0  million  during the year
ended June 30, 1998.

Asset/Liability Management and Market Risk

The Bank's primary market risk is interest rate risk. Net interest  income,  the
primary  component of the Bank's net income,  is derived from the  difference or
"spread"  between  the  yield  on  interest-earning   assets  and  the  cost  of
interest-bearing  liabilities.  The Bank has  sought to reduce its  exposure  to
changes in interest rate by matching  more closely the  effective  maturities or
re-pricing  characteristics of its interest-earning  assets and interest-bearing
liabilities.  The matching of the Bank's assets and  liabilities may be analyzed
by examining  the extent to which its assets and  liabilities  are interest rate
sensitive and by monitoring the expected effects of interest rate changes on net
portfolio value.

An asset or liability is interest rate  sensitive  within a specific time period
if it will mature or  re-price  within that time  period.  If the Bank's  assets
mature or re-price more quickly or to a greater extent than its liabilities, the
Bank's net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates.  If the Bank's assets mature or reprice more slowly or to a lesser extent
than its  liabilities,  the Bank's net portfolio  value and net interest  income
would tend to decrease  during  periods of rising  interest  rates but  increase
during periods of falling interest rates. The Bank's policy has been to mitigate
the interest rate risk inherent in the historical savings  institution  business
of originating long term loans funded by short term deposits by pursuing certain
strategies  designed to decrease the  vulnerability  of its earnings to material
and prolonged  changes in interest rates.  The Bank has established an Asset and
Liability  Management  Committee  which  currently is comprised of the executive
officers of the Bank. This Committee reviews the maturities of the Bank's assets
and liabilities and establishes policies and strategies designed to regulate the
Bank's flow of funds and to  coordinate  the  sources,  uses and pricing of such
funds.  The first priority in  structuring  and pricing the Bank' s a assets and
liabilities is to maintain an acceptable interest rate spread while reducing the
effects of changes in interest rates.

Management's  principal  strategy in managing the Bank's  interest rate risk has
been to maintain short- and intermediate-term assets in its portfolio, including
locally originated  adjustable rate mortgage loans. In addition, in managing its
portfolio  of  investment  securities,  the Bank  seeks to  purchase  investment
securities  that mature on a basis that  approximates as closely as possible the
estimated maturities of the Bank's liabilities.

In addition to shortening the average  re-pricing period of its assets, the Bank
has sought to lengthen the average  maturities of its  liabilities by adopting a
tiered pricing  program for its  certificates  of deposits which provides higher
rates of  interest  on its  longer  term  certificates  in  order  to  encourage
depositors to invest in them.


Dividends

QCF has not paid any  dividends to  stockholders  since its  incorporation.  The
Board  of  Directors  may  consider  a  policy  of  paying  cash   dividends  to
stockholders  in the future.  The  declaration of dividends are subject to among
other  things,  QCF's  financial  condition and  earnings,  tax  considerations,
economic conditions, regulatory restrictions and other factors.

                                       7
<PAGE>


Effects of Inflation

Because QCF's asset and  liabilities  are, for the most part,  liquid in nature,
they are not  significantly  affected by inflation.  Interest  rates have a more
significant  impact  on Queen  City  Federal's  performance  than the  effect of
inflation.  However,  the rate of inflation affects operating expenses,  such as
employee  salaries and  benefits,  occupancy and  equipment  changes,  and other
overhead expenses.

Year 2000 Compliance

The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format,  as opposed to four digits,  to indicate the year. Such computer systems
will be unable to  interpret  dates  beyond the year 1999,  which  could cause a
system failure or other computer  errors,  leading to disruptions in operations.
The Bank has been identifying  potential problems  associated with the Y2K issue
and has  implemented  a plan  designed  to  ensure  that  all  software  used in
connection  with the Bank's  business will manage and manipulate  data involving
the  transition  with  data  from  1999  to  2000  without  functional  or  data
abnormality  and without  inaccurate  results related to such data. In addition,
the Bank  recognizes  that its ability to be Y2K compliant is dependent upon the
cooperation of its vendors.  The Bank is requiring its vendors to represent that
their  products  are or will be Y2K  compliant  and has  planned a  program  for
testing compliance. All Y2K issues for the Bank, including testing, are expected
to be addressed by December 31, 1998 and any problems would be remedied by March
31, 1999.  The Bank will also prepare  contingency  plans in the event there are
system  interruptions.  The Bank  believes that its costs related to Y2K will be
approximately  $700,000,  primarily related to replacing the bank's core inhouse
computer software and hardware systems.





                                       8
<PAGE>
MCGLADREY & PULLEN,LLP                                     RSM
Certified Public Accountants and Consultants               international

                
                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
QCF Bancorp, Inc.
Virginia, Minnesota

We have audited the accompanying  consolidated statements of financial condition
of QCF Bancorp,  Inc. and subsidiary (the Company) as of June 30, 1998 and 1997,
and the related consolidated statements of income, stockholders'equity, and cash
flows  for  the  years  then  ended.   These   financial   statements   are  the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.


We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also  includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of QCF Bancorp,  Inc.
and  subsidiary as of June 30, 1998 and 1997, and the results of its  operations
and its cash  flows  for the  years  then  ended in  conformity  with  generally
accepted accounting principles.




                                                         Mcgladrey & Pullen, llp

Duluth, Minnesota
August 14,1998

                                       9
<PAGE>

<TABLE>

                        QCF BANCORP, INC. AND SUBSIDIARY
                 Consolidated Statements of Financial Condition


Assets                                                           June 30, 1998          June 30, 1997

<S>                                                        <C>                               <C>    
Cash                                                       $        764,128                  747,733
Interest-bearing deposits with banks                              3,194,241                7,026,683
   Cash and cash equivalents                                      3,958,369                7,774,416
Securities available for sale
  (amortized cost of $25,359,674
   at June 30, 1997)8                                                     0               24,985,627
Securities held to maturity
 (estimated market value of $78,384,31458,334,591 and
 $58,334,591 at June 30, 1998  and 1997, respectively)           78,111,850               58,112,799
Loans receivable, net                                            65,194,321               61,202,301
Federal Home Loan Bank stock, at cost                               425,200                  553,900
Accrued interest receivable                                       1,274,412                1,310,779
Premises and equipment                                              480,169                  424,609
Deferred tax asset                                                  479,200                  519,300
Prepaid expenses and other assets                                   562,812                1,843,672
         Total Assets                                          $150,486,333              156,727,403

Liabilities and Stockholders' Equity

Deposits                                                      $ 105,566,338              103,68l,490
Short-term borrowings                                            14,081,081               14,039,794
Federal Home Loan Bank advances                                   2,000,000                8,100,000
Accrued interest payable                                          1,129,347                1,071,313
Advance payments made by borrowers
  for taxes and insurance                                            66,831                   61,675
Accrued expenses and other liabilities                            1,314,640                2,349,845

         Total Liabilities                                      124,158,237              129,304,117

Commitments and Contingencies

Stockholders' equity:
  Serial preferred stock; authorized 1,000,000 shares;
     issued and outstanding none
  Common stock ($.01 par value): authorized 7,000,000 shares;
     issued 1,782,750; outstanding 1,321,034 shares in 1998
     and 1,426,200 in 1997.                                          17,828                   17,828
  Additional paid-in capital                                     16,375,783               16,665,625
  Retained earnings, subject to certain restrictions             22,704,864               20,051,443
  Net unrealized loss on securities available for sale                    0                (222,745)
  Unearned employee stock ownership plan shares                  (1,022,230)             (1,080,710)
  Unearned management recognition plan shares                      (526,123)               (746,292)
  Deferred compensation payable in common stock                     541,339                        0
  Shares in stock option trust, at exercise price                (2,349,884)             (1,872,071)
  Treasury stock, at cost, 533,484 shares in 1998
   and 356,550 in at June 30, 1997                               (9,413,481              (5,389,792)
 
         Total Stockholders' Equity                              26,328,096              27,423,286  
 
         Total Liabilities and Stockholders' Equity            $150,486,333             156,727,403
 
See accompanying notes to consolidated financial statements.

</TABLE>


                                       10
<PAGE>

                        QCF BANCORP, INC. AND SUBSIDIARY
                        Consolidated Statements of Income



                                                    Year Ended June 30
                                                 1998                 1997


Interest income:
 Loans                                       $5,756,593            5,143,815
 Securities                                   5,486,860            5,558,735

    Total interest income                    11,243,453           10,702,550

Interest expense:
 Deposits                                     3,956,865            3,864,147
 Short-term borrowings                          819,001              809,248

    Total interest expense                    4,775,866            4,673,395

    Net interest income                       6,467,587            6,029,155
Provision for loan losses                             0                    0

    Net interest income after provision
         for loan losses                      6,467,587            6,029,155
 
Non-interest income:
  Fees and service charges                      475,935              489,517
  Other                                         103,156               76,584
  Gain on sale of securities                    112,218                    0

    Total non-interest income                   691,309              566,101

Non-interest expense:
  Compensation and benefits                   2,033,453            1,865,372
  Occupancy                                     243,982              213,910
  Federal deposit insurance premiums             67,200              675,361
  Advertising                                    58,409               73,683
  Other                                         466,431              447,676  
 
     Total non-interest expense               2,869,475            3,276,002

 
 
   Income before income tax expense           4,289,421            3,319,254

Income tax expense                            1,636,000            1,308,000

   Net income                                 2,653,421           $2,011,254

Basic earnings per common share                   $2.51                 1.71

Diluted earnings per common share                 $2.30                 1.65

See accompanying notes to consolidated financial statements.


                                       11
<PAGE>


<TABLE>

                        QCF BANCORP, INC. AND SUBSIDIARY
                 Consolidated Statement of Stockholders' Equity

                                                     Net Unrealized Unearned
                                 Addt'l              Gain (loss) on Employee  Unearned
                         Common  Paid-in             Securities     Stock     Management  Deferred           Stock      Total
                          Stock  Capital   Retained  Available      Ownership Recognition Comp     Treasury  Option     Stockholders
                                 Stock     Earnings  For Sale       Plan      Plan        Payable  Stock     Trust      Equity      
<S>                      <C>    <C>        <C>        <C>       <C>         <C>       <C>       <C>         <C>          <C>
Balance, June 30, 1996   17,828 17,003,711 18,040,189 (636,750) (1,183,330) (944,177)         0 (2,612,675)            0 29,684,796

Net Income                                  2,011,253                                                                     2,011,253

Purchase of treasury stock                                                                      (2,777,117)              (2,777,117)

Purchase of stock for
 stock option trust               (366,969)                                                                  (1,872,071) (2,239,040)

Amortization of manage-
 ment recognition plan                                                       197,885                                        197,885

Change in net unrealized
 loss on securities avail-
 able for sale                                         414,005                                                              414,005
                 
Earned employee stock
 ownership plan shares              28,883                         102,620                                                  131,503

Balance, June 30, 1997  l7,828  16,665,625 20,051,443 (222,745) (1,080,710) (746,292)         0 (5,389,792)  (1,872,071) 27,423,286

Net Income                                  2,653,421                                                                     2,653,421

Purchase of treasury stock                                                                      (3,482,350)              (3,482,350)

Reclassification of stock to
 deferred comp. payable                                                                 617,840   (617,840)                       0 

Settlement of deferred comp payable
 in stock                           45,942                                              (76,501)    76,501                   45,942

Purchase of stock for
 stock option  trust              (529,957)                                                                    (601,495) (1,131,452)

Exercise of stock options           51,086                                                                      123,682     174,768

Amortization of manage-
 ment recognition plan              83,106                                   220,169                                        303,275

Change in unrealized
 loss on securities avail-
 able for sale                                          222,745                                                             222,745

Earned employee stock
 ownership plan shares              59,981                        58,480                                                    118,461

Balance, June 30, 1998  17,828  16,375,783 22,704,864         0 (1,022,230) (526,123)  541,339 (9,413,481)  (2,349,884)  26,328,096
 
See accompanying notes to consolidated financial statements.
</TABLE>


                                       12
<PAGE>

                                            QCF BANCORP, INC. AND SUBSIDIARY
                                          Consolidated Statements of Cash Flows
<TABLE>

                                                                      Year ended June 30
                                                                         1998              1997
Operating activities:
<S>                                                                   <C>               <C>      
Net income                                                            $2,653,421        2,011,254
Adjustments to reconcile net income to net cash
  provided by operating activities:
   Depreciation                                                          108,406           91,524
   Gain on sale of securities                                           (112,218)               0
   Amortization of net (discounts) premiums on securities                (97,718)          52,777
   Decrease(increase)  in accrued interest receivable                     36,367         (87,066)
   Increase in accrued interest payable                                   58,034           57,945
   (Decrease)Increase in accrued expenses & other liabilities           (277,565)         229,422
   Increase(decrease)  in deferred income taxes                         (111,200)       (105,100)
   Amortization of unearned ESOP shares                                  158,795          175,503
   Amortization of MRP                                                   220,169          197,885
   Decrease(increase) in other assets                                    729,159          (68,842)
 
                       Net cash provided by operating activities      $3,365,650        2,555,302
 
Investing activities:
 Proceeds from sales of securities available for sale                    599,600                0
 Proceeds from sale of Federal Home Loan Bank stock                      128,700                0
 Proceeds from maturities and principal collected
  on securities held to maturity                                      54,568,400       22,597,122
 Proceeds from maturities and principal collected
  on securities available for sale                                     7,617,805        7,873,050
 Purchases of securities held to maturity                            (57,215,248)     (23,751,337)
 Net increase in loans                                                (3,992,020)      (8,841,080)
 Net increase in real estate owned                                       (66,140)         (32,302)
 Purchases of premises and equipment                                    (163,966)         (75,397)

   Net cash provided by ( used in) investing activities                1,477,131       (2,229,944)

Financing activities:
  Net increase  in deposits                                            1,884,848       14,849,066
  Net increase(decrease)  in short-term borrowings                        41,287      (12,223,942)
  Net (decrease) increase in Federal Home Loan
      Bank advances                                                   (6,100,000)       5,100,000
  Purchase of treasury stock                                          (3,482,350)      (2,777,117)
  Purchase of stock  for stock option trust                           (1,131,452)      (2,239,040)
  Proceeds from exercise of stock options                                123,682                0
  Increase in advance payments made by
    borrowers for taxes and insurance                                     5,1576            5,098

  Net cash (used in) provided  for  financing activities              (8,658,828)       2,714,065

                 Decrease(increase)  in cash and cash equivalents     (3,816,047)       3,039,423

Cash and cash equivalent at beginning of year                          7,774,416        4,734,993

Cash and cash equivalents at end of year                              $3,958,369        7,774,416

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
   Income taxes                                                       $1,696,547        1,311,807
   Interest                                                            4,717,832        4,615,450

Supplemental schedule of non-cash operating and
    Investing activities:
 Securities transferred to securities held to maturity                17,352,203                0
 Deferred compensation obligation and related stock in Grantor
    trust reclassified to stockholder's equity                           617,840                0

See accompanying notes to consolidated financial statements.
</TABLE>



                                       13
<PAGE>

                                       
                        QCF BANCORP, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

(1) Description of the Business

Description of the Business

QCF Bancorp,  Inc.  (the  Company) is the holding  company of Queen City Federal
Savings Bank (the Bank) with operations in Virginia and Ely, Minnesota. The Bank
provides retail and commercial loan and deposit services  primarily to customers
within a 30-mile radius of Virginia and Ely, Minnesota.  QCF Bancorp,  Inc. (the
Company)  was  incorporated  under  the laws of the State of  Minnesota  for the
purpose of becoming the savings and loan  holding  company of Queen City Federal
Savings  Bank  (the  Bank) in  connection  with  the  Bank's  conversion  from a
federally  chartered mutual savings bank to a federally  chartered stock savings
bank. The Company  commenced on February 10, 1996, a Subscription  and Community
Offering  of its  stock in  connection  with  the  conversion  of the Bank  (the
Offering).  The  Offering  was closed on March 17, 1996 and the  conversion  was
consummated on March 31, 1996.

The consolidated  financial  statements included herein are for the Company, the
Bank and the Bank's wholly-owned subsidiary, Queen City Service Corporation. All
significant  inter-company  accounts and  transactions  have been  eliminated in
consolidation.

(2) Significant Accounting Policies

The accounting and reporting  policies of the Company and its subsidiary conform
to generally accepted  accounting  principles and to general practice within the
savings  and  loan  industry.  The  following  is  a  description  of  the  more
significant  of those  policies  which the  Company  follows  in  preparing  and
presenting its consolidated financial statements.

Consolidation

The consolidated  financial  statements included herein are for the Company, the
Bank and the Bank's wholly-owned subsidiary, Queen City Service Corporation. All
significant  inter-company  accounts and  transactions  have been  eliminated in
consolidation.


Material Estimates

In preparing the financial statements,  management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance  sheet and revenues and expenses for the period.  Actual
results could differ  significantly  from those estimates.  A material  estimate
that is particularly  susceptible to significant change in the near-term relates
to the determination of the allowance for loan losses.

Management  believes  that the  allowance  for loan  losses is  adequate.  While
management  used  available  information  to recognize  losses on loans,  future
additions  to the  allowance  may be  necessary  based on  changes  in  economic
conditions.  In addition,  various regulatory  agencies,  as an integral part of
their examination  process,  periodically  review the allowance for loan losses.
Such  agencies may require  additions to the allowance  based on their  judgment
about information available to them at the time of their examination.

Securities

Securities  available  for sale are carried at fair value at June 30, 1997.  Net
unrealized  gains and  losses,  net of tax  effect,  are  credited or charged to
stockholders equity.  Securities held to maturity are carried at amortized cost.
Gains and losses on sales of securities  are  recognized at the time of sale and
are  calculated  based  on the  specific  identification  method.  Transfers  of
securities into the held-to-maturity  classification from the available-for-sale
classification are made at fair value on the date of transfer.

Premiums and discounts are amortized  using the interest method over the term of
the securities.

Loans Receivable

Loans are stated at the amount of unpaid principal,  reduced by an allowance for
loan  losses.

Discounts on loans  originated  or purchased  are  amortized to income using the
interest method over the estimated average loan life.

The allowance for loan losses is maintained at an amount considered  adequate to
provide for probable losses.  The allowance for loan losses is based on periodic
analysis  of the loan  portfolio  by  management.  In this  analysis  management
considers factors including,  but not limited to, specific occurrences,  general
economic conditions, loan portfolio composition and historical experience. Loans
are charged off to the extent they are deemed to be uncollectible.




                                       14
<PAGE>





                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued

Management  believes  that the  allowance  for loan  losses is  adequate.  While
management  used  available  information  to recognize  losses on loans,  future
additions  to the  allowance  may be  necessary  based on  changes  in  economic
conditions.  In addition,  various regulatory  agencies,  as an integral part of
their examination  process,  periodically  review the allowance for loan losses.
Such  agencies may require  additions to the allowance  based on their  judgment
about  information  available  to them  at the  time  of  their  examination
                              
The Company  defines a loan as impaired  when it is probable the Company will be
unable to collect  principal and interest  payments due in  accordance  with the
terms  of the  loan  agreement.  Impaired'  loans  that  have  been  separately
identified  for  evaluation  are measured based on the present value of expected
future cash flows or, alternatively, the observable market price of the loans or
the fair value of the collateral.  However,  for those loans that are collateral
dependent  (that is, if  repayment  of those  loans is  expected  to be provided
solely by the  underlying  collateral)  and for which  management has determined
foreclosure is probable, the measure of impairment of those loans is to be based
on the fair value of the collateral.

Interest on loans is  recognized  over the terms of the loans and is  calculated
using the simple interest method on principal amounts outstanding.  For impaired
loans,  accrual of interest is  generally  stopped  when a loan is greater than
three months past due.  Interest on these loans is recognized only when actually
paid by the borrower if collection of the principal is likely to occur.  Accrual
of interest is generally  resumed when the customer is current on all  principal
and interest payments.

Foreclosed Real Estate

Real estate  acquired in the  settlement of loans is carried at the lower of the
unpaid loan balance plus  settlement  costs or estimated  fair market value less
selling  cost.  The carrying  value of  individual  properties  is  periodically
evaluated  and  reduced to the extent  cost  exceeds  estimated  fair value less
selling  costs.   Costs  of  developing   and  improving  such   properties  are
capitalized.  Expenses  related to holding such real  estate,  net of rental and
other income, are charged against income as incurred.

Premises and Equipment

Land  is  carried  at  cost.  Office  buildings,  improvements,  furniture,  and
equipment are carried at cost less accumulated depreciation.

Depreciation is computed  using  straight-line  and accelerated  methods 
over the  estimated  useful  lives of 7 to 33 years  for  office  buildings  and
improvements, and 5 to 7 years for furniture and equipment.

Cash Equivalents and Cash Flows

Cash  equivalents  primarily  represent  amounts on  deposit at other  financial
institutions and highly liquid financial instruments with original maturities at
the date of purchase of three months or less.  Cash flows from loans,  deposits,
short term borrowings and FHLB advances are reported net.

Earnings per Share and Accounting Change

The FASB has issued Statement No. 128, Earnings per Share,  which supersedes APB
Opinion No. 15.  Statement  No. 128  requires the  presentation  of earnings per
share by all entities that have common stock or potential common stock,  such as
options, warrants and convertible securities, outstanding that trade in a public
market.  Those entities that have only common stock  outstanding are required to
present basic earnings per share amounts.  Basic per-share  amounts are computed
by dividing net income (the numerator) by the weighted-average  number of common
shares outstanding (the denominator). All other entities are required to present
basic and  diluted  per-share  amounts.  Diluted  per-share  amounts  assume the
conversion,  exercise or  issuance of all  potential  common  stock  instruments
unless the effect is to reduce the loss or increase  the income per common share
from continuing operations.


                                       15
<PAGE>


                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued

The  Company  initially  applied  Statement  No. 128 for the year and six months
ended June 30, 1998 and (as  required by the  Statement),  has  restated all per
share information for the prior periods to conform to the Statement.

Following is  information  about the  computation of the earnings per share data
for the Years ended June 30, 1998 and 1997.
<TABLE>
                            
                                 Year Ended June  30, 1998                        Year Ended June 30, 1997
                                                          Net                                                  Net
                                                          Income                                               Income
                                                          Per                                                  Per
                          Numerator      Denominator      Share            Numerator         Denominator       Share
Basic earnings per
  share
Income available
  to common
<S>                       <C>              <C>             <C>             <C>                <C>              <C>  
  stockholders            $2,653,421       1,055,186       $2.51           $2,011,254         1,173,936        $1.71
Effect of dilutive
  securities:
Stock options                     -           76,710                           -                 31,320
Management recog-
  nition plan                     -           22,358                           -                 11,732
Diluted earnings per
  share
Income available to
  common stockholders     $2,653,421       1,154,254       $2.30           $2,011,254         1,216,988        $1.65   
</TABLE>
 
 Income taxes

Deferred taxes are provided on an asset and liability  method  whereby  deferred
tax assets are  recognized for deductible  temporary  differences  and operating
loss or tax credit carry  forwards and deferred tax  liabilities  are recognized
for taxable  temporary  differences.  Temporary  differences are the differences
between  the  amounts  of assets  and  liabilities  recorded  for income tax and
financial  reporting  purposes.  Deferred  tax assets are reduced by a valuation
allowance when  management  determines that it is more likely than not that some
portion or all of the  deferred  tax assets will not be  realized.  Deferred tax
assets and  liabilities  are adjusted for the effects of changes in tax laws and
rates on the date of enactment.

Impact  on Recently Issued Statements of Financial Accounting Standards

The   Financial   Accounting   Standards   Board  (FASB)  has  issued  SFAS  No.
125."Accounting   for   Transfers   and   Servicing  of  Financial   Assets  and
Extinguishment  of Liabilities" and SFAS No. 127 "Deferral of the Effective Date
of Certain  Provisions of Statement No. 125.  "SFAS No. 123 provides  accounting
and reporting  standards  for  transfers  and servicing of financial  assets and
extinguishment  of  liabilities  based on  control of the  underlying  financial
assets.  The  provisions  of SFAS No.  125  including  those  applicable  to the
servicing of financial  assets were  effective as of January 1, 1997. The impact
of these provisions on the consolidated  financial  statements are not material.
Other  provisions of SFAS No. 125,  including  those  applicable to transfers of
financial assets and extinguishment of liabilities,  are effective as of January
1, 1999. The impact of these provisions on the consolidated financial statements
are not expected to be material.

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
130,  "Reporting  Comprehensive  Income"  ("SFAS No. 130") SFAS No. 130 requires
that all items that are  components  of  comprehensive  income  (defined as "the
change in equity  {net  assets} of a business  enterprise  during a period  from
transactions  and other  events and  circumstances  from non owner  sources.  It
includes  all changes in equity  during a period  except  those  resulting  from
investments by owners and  distributions to owners",  be reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.   Companies  will  be  required  to  (a)  classify  items  of  other
comprehensive  income by its this nature in a financial statement and (b)display
the accumulated balance of other  comprehensive  income separately from retained
earnings and additional  paid-in capital in the equity section of a statement of
financial  position.  SFAS No. 130 is effective for fiscal years beginning after
December 13, 1997 and requires  reclassification of prior periods presented.  As
the requirements of SFAS No. 130 are disclosure-related, its implementation will
have  had  no  impact  on  the  Company's  financial  condition  or  results  of
operations.






                                       16
<PAGE>





                        QCF BANCORP, INC. AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued

Reclassifications

Certain  prior year  amounts  have been  reclassified  to conform  with the 1998
presentation.   These   reclassifications   had  no  effect  on  net  income  or
Stockholders' equity.

(3) Securities Available for Sale

Securities available for sale at June 30, 1997 are  summarized as follows:

                                                       June 30, 1997
                                          Gross          Gross
                           Amortized   unrealized      unrealized        Fair
                             Cost         gains          losses         value

Collateralized mortgage
      obligations        $14,969,882     11,397        (343,326)     14,637,953
U.S. government and
      agency securities    8,000,000          0         (83,700)      7,916,300
Corporate bonds and
      notes                1,152,410      2,365          (6,526)      1,148,249
Preferred stocks           1,237,382     46,993          (1,250)      1,283,125
                        $25, 359,674     60,755        (434,802)     24,985,627


Collateralized  mortgage obligations presented in the table above aggregating to
$992,361 (cost) at June 30, 1997 have been issued by private issuers and are not
guaranteed or insured by the U.S. government.
 

Proceeds from the sale of securities  available for sale for the year ended June
30, 1998 were  $599,600.  There were no sales of  securities  available for sale
during the year  ended  June 30,  1997.  Gross  realized  gains from the sale of
securities  available  for sale for the year ended June 30, 1998 were  $112,218.
There were no gross  realized  losses from the sale of securities  available for
sale for the year  ended  June  30,  199798..  Accrued  interest  receivable  on
securities  available for sale  aggregated to $201,005 at June 30, 1997.  During
1998,  available-for-sale  securities with an amortized cost of $17,352,203 were
transferred  to the  held-to-maturity  classification.  The transfer was made at
amortized cost which approximated fair value.

(4)  Securities Held to Maturity

Securities held to maturity at June 30, 1998 and June 30, 1997 are summarized as
follows:

                                                 June 30, 1998

                                                    Gross     Gross
                                      Amortized   unrealized unrealized   Fair
                                        Cost        gains     losses      value

Mortgage backed securities           $9,524,274     56,481   (20,019)  9,560,738
Collateralized mortgage obligations  38,972,039    167,134   (77,784) 39,061,390
U.S. government & agency obligations 27,193,044    115,918    (8,650) 27,300,312
Corporate bonds & notes               2,422,493     39,384         0   2,461,875
                                    $78,111,850    378,917  (106,453) 78,384,314





                                       17
<PAGE>




                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued
 
                                                              June 30, 1997

                                                      Gross      Gross
                                          Amortized unrealized unrealized Fair
                                            cost      gains      losses   value
 
  Mortgage backed  securities           $3,598,753   27,836  (16,054)  3,610,535
  Collateralized mortgage  obligations  26,139,503  195,842  (66,947) 26,268,389
  U.S. government & agency obligations  26,413,704   91,188  (56,733) 26,448,159
  Corporate bonds  and notes             1,960,839   46,669       (0)  2,007,508
                                       $58,112,799  361,535 (139,743) 58,334,591


Collateralized  mortgage  obligations  presented in the tables above aggregating
$819,817 and $2,022,092  (cost) at June 30, 1998 and 1997 respectively have been
issued  by  private  issuers  and are not  guaranteed  or  insured  by the  U.S.
government.

The carrying  amount and fair value of  securities  held to maturity at June 30,
1998,  by  maturity,  are shown  below.  Expected  maturities  will  differ from
contractual  maturities  because  borrowers may have the right to call or prepay
obligations  with or without call or  prepayment  penalties.  The  allocation of
mortgage-backed securities and collateralized mortgage obligations is based upon
the  anticipated  average  lives  of the  securities  using  estimated  mortgage
prepayment speeds.






                                              June 30, 1998
 
                                         Amortized         Fair
                                           cost            value

Due within one year                    $17,553,051    17,580,450
Due after one year through
  five years                            56,757,052    56,982,116
Due after five years
  through ten years                      3,801,748     3,821,749
Due after ten years                              0             0
                                       $78,111,850    78,384,314

 
There were no sales of securities  held to maturity  during the years ended June
30, 1998 and 1997.

Accrued interest  receivable on securities held to maturity  aggregated $788,536
and  $661l,685  at  June  30,  1998  and  1997,  respectively.  Held-to-maturity
securities  with carrying values of $16,630,189 and $15,631,513 at June 30, 1998
and 1997, respectively, were pledged to secure public deposits.

 
(5) Loans Receivable

Loans receivable at June 30, 1998 and 1997 are summarized as follows:





                                       18
<PAGE>





                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued
                                                          June 30
                                              1998            1997

   Residential one-to-four family
      mortgage loans                       $33,174,947     31,815,328
   Multifamily and
      commercial mortgage loans              2,096,809      2,343,198
   Consumer loans                           19,827,147     18,291,160
   Commercial loans                         11,368,603     10,066,789         
                                            66,467,506     62,516,475
Less:
      Allowance for losses                  (1,273,185)   (1,314,174)
                                           $65,194,321     61,202,301

The weighted  average annual  contractual  interest rate for all loans was 8.76%
and 8.82% at June 30, 1998 and 1997, respectively.

Non-accrual  loans  totaled  $15,312  and  $224,842  at June 30,  1998 and 1997,
respectively. There were no restructured loans at June 30, 1998 and 1997.

Non-accrual  loans are the only loans that are  considered to be impaired  under
the criteria established by SFAS No. 114 and SFAS No. 118. The related allowance
for credit losses as of June 30, 1998 was $0. The average investment in impaired
loans during fiscal 1998 was $237,000.

The effect of  impaired  loans on  interest  income for the years ended June 30,
1998, and 1997 was insignificant.

There are no material  commitments to lend  additional  funds to customers whose
loans were classified as non-accrual.

The aggregate  amount of loans to directors  and executive  officers of the Bank
were  $70,670 and $50,329 at June 30,  1998 and 1997,  respectively.  Such loans
were made in the ordinary  course of business on normal credit terms,  including
interest rate and  collateralization  and do not represent more than normal risk
of collection.

Accrued  interest  receivable on loans  receivable at June 30, 1998 and 1997 was
$485,876 and $448,089, respectively.

The Bank grants loans to customers who live primarily in northeastern Minnesota.
Although the Bank has a diversified loan portfolio a substantial  portion of its
debtors'  ability to honor their contracts is dependent upon local economy which
is concentrated in the iron mining and wood products industries.


At June 30, 1998 and 1997 Bank was  servicing  loans for others  with  aggregate
unpaid   principal   balances  of   approximately   $2,039,010  and  $2,899,003,
respectively.

(6) Allowance for Loan Losses

    Activity in the allowance for loan losses is summarized as follows

   Balance at June 30, 1996                                 $ 1,331,352

    Provision for losses                                              0
    Charge-offs                                                (44,013)
    Recoveries                                                   26,835
 


                                       19
<PAGE>


                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued


Balance at June 30, 1997                                      1,314,174

    Provision for losses                                              0
    Charge offs                                                (67,389)
    Recoveries                                                   26,400

Balance at June 30, 1998                                     $1,273,185

(7) Foreclosed Real Estate

Foreclosed real estate, included in other assets, consisted of the following:


                                                        June 30

                                               1998                  1997

   Real estate in judgment                   $104,527              38,387

   Less allowance for losses                        0                   0

                                             $104,527              38,387

(8) Premises and Equipment

   A summary of premises and equipment at June 30, 1998 and 1997 is as follows:

                                                          June 30
                                                  1998              1997

   Land                                   $      90,800           90,800
   Office buildings and improvements          1,083,340        1,085,715
   Furniture and equipment                    1,037,690          873,724
                                              2,211,830        2,050,239
  Less accumulated depreciation              (1,731,661)      (1,625,630)
                                           $    480,169          424,609
 
 (9) Deposits

   Deposits and weighted-average interest rates at June 30, 1998 and 1997 are
   summarized as follows (dollar amounts in thousands)


                                                            June 30
                                 1998                  1997

                                     Weighted               Weighted
                                      Average               Average
                         Amount        Rate       Amount      Rate

   Passbook             $25,372        2.50%      25,317       2.50
   Demand deposits       14,101        0.78       13,506       0.61
   Money market          10,252        2.55        9,320       2.55
   Certificates          55,841        5.25       55,538       5.28        

                       $105,566     103,681
  

                                       20
<PAGE>
  
                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued

At June 30, 1998 and 1997, the Bank had $5,903,000 and $5,023,000  respectively,
of deposit accounts with balances of $100,000 or more.  Deposit balances greater
than  $100,000 are not insured.  The Bank did not have any brokered  deposits at
June 30, 1998 or 1997.
 
   Interest expense on deposits is summarized as follows:

                                      Year ended June 30
                                  1998              1997
   Passbook                     $631,695           598,475
   Demand deposits               107,380           117,637
   Money market                  240,166           223,508
   Certificates                2,977,624         2,924,527

                               $3,956,86         3,864,147

Certificates had the following remaining maturities (dollar amounts in thousands

                                      June 30, 1998
                                               Weighted
                                                Average
                                  Amount         rate

   Less than 3 months     $        9,021         4.04%
   3-12 months                    20,483         4.98
   13-36 months                   19,723         6.22
   Over 36 months                  6,614         5.89

                               $  55,841         5.25%

At June 30, 1998 and 1997 no securities were pledged as collateral for deposits.


(10) Short-term Borrowings

Short-term  borrowings  consist  of  sales of  securities  under  agreements  to
repurchase the identical securities.  The agreements generally mature within 180
days and bear a weighted average interest rate of 3.56% at June 30, 1998.

The  agreements  are treated as financings  with the  obligations  to repurchase
securities  reflected  as a liability  and the dollar  amount of the  securities
collateralizing the agreements  remaining in the asset accounts.  The securities
collateralizing  the agreements are in safekeeping at the Federal Home Loan Bank
of Des Moines in the Bank's  account.  At June 30,  1998,  the  agreements  were
collateralized  by  securities  with a  carrying  value  of  $16,630,189  and an
approximate  market value of  $16,776,474.  At June 30, 1997 the agreements were
collateralized  by  securities  with a  carrying  value  of  $15,631,513  and an
approximate market value of $15,670,527

Federal Home Loan Bank advances  totaled  $2,000,000  and $8,100,000 at June 30,
1998 and 1997,  respectively.  The advances have an average maturity of 2 months
and 14 months and an average  rate of 5.74% and 5.81% at June  30,1998 and 1997,
respectively.  The advances are  collateralized  by the Bank's Federal Home Loan
Bank  stock and a blanket  pledge of  residential  one-to-four  family  mortgage
loans.




                                       21
<PAGE>





                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued

(11) Income Taxes

    Federal and state income tax expense is as follows:

                                                 Year ended June 30

 
                                             1998                    1997   
    Current:
        Federal                          $1,314,000               1,075,100
        State                               433,000                 338,000
            Total current                 1,747,000               1,413,100   
 
    Deferred:
        Federal                             (82,300)                (78,900)
        State                               (28,700)                (26,200)
             Total deferred                (111,000)               (105,100)   
                                          $1,636,000              1,308,000


The actual  income tax expense  differs from the  "expected"  income tax expense
computed by applying the U.S. federal  corporate tax rate to income before taxes
as follows:



                                                              Year Ended June 30
                                                          1998           1997

     Federal "expected" income tax expense             $1,458,403     1,128,546
     Items affecting federal income tax:
        Preferred stock dividends                          (7,875)      (22,696)
        State income taxes, net of federal
           income tax benefit                             267,911       206,010
        Low income housing tax credits                    (52,433)            0
        Other, net                                        (30,006)       (3,860)

                                                       $1,636,000     1,308,000 

    Effective income tax rate                               38.1%          39.4%

The tax effects of  temporary  differences  that give rise to the  deferred  tax
assets and deferred tax liabilities at June 30, 1998 and 1997 are as follows:

                                                            Year Ended June, 30
                                                          1998           1997
   Deferred tax assets:
      Allowance for unrealized losses on securities
         available for sale                       $          0           151,191
      Allowance for loan losses                         89,871            86,793
      Deferred compensation                            186,682           205,985
      Supplemental executive retirement plan           272,724           183,172
      Limited partnership                               12,361                 0
      Other                                              7,569                 0
                                      $                569,207           627,141

   Deferred tax liabilities:
      Federal Home Loan Bank stock                $     55,128            76,225
      Premises and equipment                            34,879            18,847


                                       22
<PAGE>

                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued



      Other                                                  0            12,769
                                                        90,007           107,841

           Net deferred tax asset                     $479,200           519,300

No valuation  allowance was required for deferred tax assets at June 30, 1998 or
1997.
 
Retained earnings at June 30, 1998 includes  approximately  $2,270,000 for which
no  provision  for  federal  income tax has been made.  This  amount  represents
allocations of income to bad debt deductions for tax purposes.  Reduction of the
amount so allocated for purposes  other than to absorb losses will create income
for tax purposes,  which will be subject to the then- current  corporate  income
tax rate.

(12) Commitments and Contingencies

The Bank is a party to financial  instruments with off balance sheet risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments  include commitments to extend credit and standby letters
of credit.  These  instruments  involve to varying degrees,  elements of credit,
interest  rate and  liquidity  risk in excess of the  amount  recognized  in the
accompanying statements of financial condition.

The Bank's exposure to credit loss in the event of  nonperformance  by the other
party to the financial  instrument for  commitments to extend credit and standby
letters of credit  written is  represented  by the  contractual  amount of those
instruments.  The Bank uses the same credit  policies in making  commitments and
conditional obligations as it does for on-balance sheet instruments.


Commitments to extend credit are agreements to lend to a customer provided there
is no  violation  of any  condition  established  in the  contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since certain of the  commitments  may expire without
being drawn upon,  the total  commitment  amounts do not  necessarily  represent
future cash requirements. The Bank evaluates each customers' creditworthiness on
a case-by-case basis. The amount of collateral obtained,  if deemed necessary by
the Bank upon extension of credit, is based on the loan type and on management's
evaluation of the borrower.  Collateral  consists  primarily of residential real
estate and personal  property.  The Bank had  outstanding  commitments to extend
credit of $1,450,024 and $2,113,765 at June 30, 1998 and 1997, respectively.

Standby  letters  of  credit  are  conditional  commitments  issued  by the Bank
guaranteeing the performance of a customer to a third party. The standby letters
of credit are primarily issued to support private  borrowing  arrangements,  and
expire within the next fiscal year. The credit risk involved in issuing  standby
letters of credit is  essentially  the same as that  involved in making loans to
customers.  The amount of collateral the Bank obtains to support standby letters
of credit is based on management's credit evaluation of the borrower.  Since the
conditions  under which the Bank is required to fund  standby  letters of credit
may not  materialize,  the cash  requirements  are  expected to be less than the
total  outstanding  commitments.  The Bank had  outstanding  standby  letters of
credit of $171,500 and $247,000 at June 30, 1998 and 1997, respectively.

(13)  Regulatory Capital Requirements

The Bank as a member of the Federal  Home Loan Bank System is required to hold a
specified  number of shares of capital  stock,  which is carried at cost, in the
Federal  Home Loan Bank of Des  Moines.  In  addition,  the Bank is  required to
maintain cash and liquid assets in an amount equal to 5% of its deposit accounts
and other obligations due within one year. The Bank has met these requirements.

Federal savings institutions are required to satisfy three capital requirements:
(i) a requirement that "tangible capital" equal or exceed 1.5% of adjusted total
assets, (ii) a requirement that "core-capital" equal or exceed


                                       23
<PAGE>


                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued


3% of adjusted total assets,  and (iii) a risk-based  capital  standard of 8% of
"risk-adjusted  assets".   Failure  to  meet  these  requirements  can  initiate
mandatory and possibly additional  discretionary  actions by regulators that, if
undertaken,  could  have  a  direct  material  affect  on the  Bank's  financial
statements.  The Bank's capital amounts and  classification  are also subject to
qualitative judgements by the regulators about components,  risk weighting,  and
other  factors.  As of June 30,  1998,  the most  recent  notification  from the
Federal Deposit Insurance  Corporation  categorized the Bank as well capitalized
under the  regulatory  framework  for  prompt  corrective  action.  There are no
conditions  or events since that  notification  that  management  believes  have
changed the Bank's category.

The  following  table sets forth the Bank's  calculation  of tangible,  core and
risk-based  capital and applicable  percentages  of adjusted  assets at June 30,
1998 together with the excess over the minimum capital requirements.

<TABLE>

                                            Actual                    Required                  Excess

(Dollars in thousands)                Amount        Percent     Amount      Percent       Amount     Percent

<S>                                  <C>             <C>         <C>          <C>        <C>            <C>   
Tangible capital                     $19,169         13.43%      $2,141       1.50%      $17,028        11.93%
Core capital                          19,169         13.43        4,281       3.00        14,888        10.43

Plus allowed portion of general
allowance for loan losses              1,273
Risk-based capital                   $20,442         29.90      $ 5,469       8.00       $14,973        21.90
</TABLE>


(14) Employee Benefits

The Company  adopted an Employee Stock Ownership Plan (the ESOP) which meets the
requirements  of Section  4975(e)(7)  of the  Internal  Revenue Code and Section
407(d)(6) of the Employee  Retirement  Income  Security Act of 1974,  as amended
(ERISA),  and as such the  ESOP is  empowered  to  borrow  in  order to  finance
purchases of the common stock of the Company.  The ESOP borrowed $1,426,200 from
the Company to purchase 142,620 shares of common stock of the Company.  The Bank
has committed to make annual  contributions  to the ESOP  necessary to repay the
loan including interest.  The Bank contributed $161,147 and $212,078 to the ESOP
for the years ended June 30, 1998 and 1997, respectively.

As the debt is repaid,  ESOP shares which were  initially  pledged as collateral
for its debt, are released from  collateral  and allocated to active  employees,
based on the proportion of debt service paid in the year.  The Company  accounts
for  its  ESOP  in  accordance  with  Statement  of  Position  93-6,  "Employers
Accounting for Employee Stock Ownership Plans". Accordingly,  the shares pledged
as collateral are reported as unearned ESOP shares in stockholders'  equity.  As
shares are  determined  to be ratably  released  from  collateral,  the  Company
reports  compensation  expense equal to the current  market price of the shares,
and the shares  become  outstanding  for earnings per share  computations.  ESOP
compensation  benefit  expense  for 1998 and 1997  was  $158,795  and  $175,503,
respectively.

All  employees  of the Bank are eligible to  participate  in the ESOP after they
attain age 21 and complete one year of service during which they worked at least
1,000 hours.  In 1998,  the company  committed to release 5,848 shares of common
stock which were allocated to eligible  participants subject to the restrictions
of the ESOP.

   Shares released and allocated                                37,909
   Unreleased shares                                           102,223

      Total ESOP shares                                        140,132

   Fair value of unreleased shares at June 30, 1998         $3,117,802


                                       24
<PAGE>

                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued


The  Bank has  individual  deferred  compensation  and  supplemental  retirement
agreements  with certain  directors  and officers.  The cost of such  individual
agreements is being  accrued over the period of actual  service from the date of
the respective agreement.  The cost of such agreements was $221,292 and $205,047
for the years ended June 30,  1998  and1997  respectively.  The  agreements  are
funded  through a grantor trust with assets which match the  investment  options
selected by the directors and officers.  The agreements  allow the individual to
select among two  investment  options,  bank  certificates  of deposit or common
stock of the Company.  Earnings are credited to the  individual  accounts  based
upon the investment option selected.  Investment elections are irrevocable.  The
value of an  individual's  account that is measured by the value of common stock
will be distributed solely in shares of the Company's common stock. In 1998, the
Company  adopted the provisions of the FASB Emerging Issues Task Force Issue No.
97-14  relating  to  the  deferred  compensation  and  supplemental   retirement
agreements.  Accordingly, the cost of common stock held in the grantor trust has
been  reclassed to treasury  stock and the cost of the  compensation  obligation
payable in common  stock has been  reclassed  as a  component  of  stockholders'
equity.

The Company has established the Management  Recognition Plan (MRP) for directors
and key  officers.  Under the plan,  78,441  shares are  available for grant and
71,310 were  granted to directors  and officers in 1996.  The cost of the shares
awarded  under the plan is recorded as unearned  compensation,  a contra  equity
account,  and is being  recognized as an expense in accordance  with the vesting
requirements  under the plan.  For the fiscal year ended June 30, 1998 and 1997,
the  amount  included  in  compensation   expense  was  $220,169  and  $197,885,
respectively.

The Company has  established  a stock  option plan for  directors,  officers and
employees.  In  accordance  with the terms of the plan,  the exercise  price was
established  at the fair  market  price on the date of  shareholder  approval of
$13.875 per share.  Awards made under the plan may be incentive stock options as
defined by Section 422 of the  Internal  Revenue Code of 1986 or options that do
not qualify. Under the plan 178,275 options were available for grant and 160,448
options were granted in 1996. 51,698 options were eligible to be exercised as of
June 30, 1998. 8,914 options had been exercised as of June 30, 1998. All options
expire on October 11, 2005.
 
As permitted under generally accepted  accounting  principles,  grants under the
plan are accounted  for  following the  provisions of APB Opinion No. 25 and its
related interpretations.  Accordingly,  no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method  prescribed in the FASB Statement No. 123,  reported net income and
earnings per share would have been reduced to:

         Year ended June 30               Net income               Per share

              1998                        $2,531,021                  2.20

              1997                         1,888,854                  1.55

In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the fair value method  prescribed  in Statement No. 123,
with  the  following  weighted-average   assumptions  for  grants  in  1996:  No
dividends;  risk-free  interest  rate of 6.0%,  expected  life of 10 years,  and
expected price volatility of 14.57%.
 
(15) Stockholders' Equity

The Company was  incorporated  for the purpose of becoming  the savings and loan
holding  company of the Bank in  connection  with the Bank's  conversion  from a
federally  chartered mutual savings bank to a federally  chartered stock savings
bank, pursuant to a Plan of Conversion adopted on October 25, 1995.

The Company  commenced  on February  10,  1995,  a  Subscription  and  Community
Offering  of its  shares  in  connection  with the  conversion  of the Bank (the
Offering).  The  Offering  was closed on March 17, 1995 and the  conversion  was
consummated on March 31, 1995, with the issuance of 1,782,750 shares of the

                                       25
<PAGE>


                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued

Company's  common  stock at a price of $10 per share.  Total  proceeds  from the
conversion of  $16,998,000  net of costs relating to the conversion of $829,500,
have been recorded as common stock and additional  paid-in capital.  The Company
purchased  all of the capital  stock of the Bank in exchange  for 50% of the net
proceeds of the conversion.

The  Company's  articles  of  incorporation  authorized  the  issuance  of up to
1,000,000 shares of preferred stock but to date no shares have been issued.

In order to grant a priority to eligible  account holders in the event of future
liquidation,  the Bank,  at the time of  conversion  established  a  liquidation
account equal to its regulatory capital as of December 31, 1994. In the event of
future  liquidation  of the Bank,  an eligible  account  holder who continues to
maintain their deposit account shall be entitled to receive a distribution  from
the liquidation  account.  The total amount of the  liquidation  account will be
decreased as the balance of eligible  account holders are reduced  subsequent to
the conversion, based on an annual determination of such balance.

The Bank may not declare or pay a cash dividend to the Company in excess of 100%
of its net income to date during the current  calendar year plus the amount that
would reduce by one-half the Bank's  surplus  capital  ratio at the beginning of
the  calendar  year  without  prior  notice to the Office of Thrift  Supervision
(OTS).  Additional  limitations on dividends declared or paid on, or repurchases
of, the Bank's capital stock are tied to the Bank's level of compliance with its
regulatory capital requirements.

(16) Stockholders' Equity and Subsequent Events

Subsequent  to the  Companys  fiscal year end,  the Company  purchased  156,490
shares of its stock at an average  price of $30.57 per share.  These shares were
placed into treasury stock by the Company.

(17) Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," requires
disclosures  of  estimated  fair  values of the  Bank's  financial  instruments,
including  assets,  liabilities  and off-  balance  sheet  items for which it is
practicable to estimate fair value. The fair value estimates are made as of June
30, 1998 and 1997 based upon relevant market information, if available, and upon
the characteristics of the financial instruments  themselves.  Because no market
exists for a significant portion of the Bank's financial instruments, fair value
estimates are based upon judgments  regarding  future expected loss  experience,
current  economic   conditions,   risk   characteristics  of  various  financial
instruments,  and other  factors.  The  estimates  are  subjective in nature and
involve  uncertainties and matters of significant  judgment and therefore cannot
be determined with precision.  Changes in assumptions could significantly affect
the estimates.

Fair value estimates are based only on existing  financial  instruments  without
attempting to estimate the value of anticipated  future business or the value of
assets  and  liabilities  that  are not  considered  financial  instruments.  In
addition,  the tax  ramifications  related to the  realization of the unrealized
gains and losses can have a significant  effect on the fair value  estimates and
have not been considered in any of the estimates.

The estimated fair value of the Bank's  financial  instruments  are shown below.
Following the table, there is an explanation of the methods and assumptions used
to estimate the fair value of each class of financial instruments.  June 30 1998
1997
 
                                Carrying     Estimated     Carrying   Estimated
(in thousands)                   Amount     Fair Value      Amount   Fair Value
Financial assets:
  Cash and cash equivalents   $   3,958        3,958        7,774          7,774
  Securities available
     for sale                         0            0       24,986         24,986
  Securities held to maturity    78,112       78,384       58,113         58,335
  Loans receivable, net          65,194       65,761       61,202         60,989



                                       26
<PAGE>




                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued


  Federal Home Loan
     Bank Stock                    425          425          554            554
Accrued accounts receivable      1,274        1,274        1,311          1,311
Financial liabilities:
  Deposits                     105,566      105,727      103,681        103,366
  Short-term borrowings         16,081       16,076       22,140         22,076
  Accrued interest payable       1,129        1,129        1,071          1,071
 
Cash and Cash Equivalents

The carrying amount of cash and cash equivalents approximates their fair value.

Securities Available for Sale and Securities Held to Maturity

The fair value of securities are based upon quoted market prices.


Loans Receivable

The fair  value of loans  receivable  were  estimated  for  groups of loans with
similar characteristics. The fair value of the loan portfolio, was calculated by
discounting  the  scheduled  cash flows  through the  estimated  maturity  using
anticipated  prepayment  speeds and using discount rates that reflect the credit
and interest  rate risk inherent in each loan  portfolio.  The fair value of the
adjustable  loan  portfolio  was  estimated  by grouping  the loans with similar
characteristics  and comparing the  characteristics  of each group to the prices
quoted for similar types of loans in the secondary market.
 
Federal Home Loan Bank Stock

The carrying amount at FHLB stock approximates its fair value.

Accrued Interest Receivable

The carrying amount of accrued interest  receivable  approximates its fair value
since it is  short-term  in nature  and does not  present  unanticipated  credit
concerns.

Deposits

The fair value of deposits with no stated maturity such as checking, savings and
money market accounts,  is equal to the amount payable on demand. The fair value
of certificates of deposit is based on the discounted  value of contractual cash
flows using as discount rates the rates that were offered by the Bank as of June
30,  1998  and  1997 for  deposits  with  maturities  similar  to the  remaining
maturities of the existing certificates of deposit.
 
The fair value  estimate for deposits  does not include the benefit that results
from the low cost funding provided by the Bank's existing deposits and long-term
customer  relationships  compared to the cost of obtaining  different sources of
funding. This benefit is commonly referred to as the core deposit intangible.

Short-term Borrowings

The fair value of short-term  borrowings  due on demand,  is equal to the amount
payable on demand. The fair value of other short-term borrowings is based on the
discounted  value of  contractual  cash flows using as discount  rates the rates
that  were  available  to the Bank as of June 30,  1998 and 1997 for  short-term
borrowings with maturities  similar to the remaining  maturities of the existing
short-term borrowings.



                                       27
<PAGE>



                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued
 
Accrued Interest Payable

The carrying  amount of accrued  interest  payable  approximates  its fair value
since it is short-term in nature.

Off-balance Sheet Instruments

Since the  majority  of the  Bank's  off-balance  sheet  instruments  consist of
non-fee  producing,  variable rate commitments,  the Bank has determined they do
not have a distinguishable fair value.


(18) QCF Bancorp, Inc. Financial Information (Parent Company Only)

The parent  company's  principal  assets are its  investment in the Bank and its
savings  deposits  at the  Bank.  The  following  are  the  condensed  financial
statements for the parent company only as of June 30, 1998 and 1997.


                                                    June 30
   Condensed Balance Sheets                    1998          1997
  Assets:
         Cash and cash equivalents $        3,119,061      1,826,158
         Securities available for sale              0      8,484,571
         Securities held to maturity        3,798,098              0

         Investment in subsidiary          19,169,233     16,783,814
         Other assets                         241,704        372,743
            Total assets                $  26,328,096     27,467,286
 
   Liabilities:                                     0              0

  Stockholders' equity:                    26,328,096     27,467,286
 
            Total liabilities and
               stockholders' equity       $26,328,096      27,467,286

 
                                                           Year Ended June 30
                                                          1998           1997
Condensed Statements of Income
     Interest income                               $     598,497        722,139
     Equity in earnings of subsidiary                  2,252,721      1,610,787
     Other                                               (69,797)      (140,672)
     Income before income tax expense                  2,781,421      2,192,254
     Income tax expense                                  128,000        181,000
         Net income                                $   2,653,421      2,011,254

Condensed Statements of Cash Flows
Operating activities:
     Net income                                    $   2,653,421      2,011,254
     Equity in earnings of subsidiary                 (2,252,721)    (1,610,787)
     Distributions of earnings of subsidiary                   0      6,000,000
     Amortization of Unearned ESOP shares                158,795        175,503
     Amortization of MRP                                 220,169        197,885
 
 
 

                                       28
<PAGE>
 
 
 
                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued

 
     Decrease in liabilities                                  0        (945,668)
     Decrease (increase) in other assets               (165,740)        (56,914)
     Net cash provided by operating activities          945,402       5,771,273
Investing activities:
       Principal collected from securities held
           to maturity                                 2,386,916              0
     Principal collected from securities
        available for sale                             2,450,704      1,071,042
     Net cash  provided by
        investing activities                           4,837,620      1,071,042
Financing activities:
     Purchase of stock
        into stock option trust                       (1,131,452)    (2,239,040)
     Proceeds from exercise of stock options             123,682              0
     Purchase of treasury stock                       (3,482,350)    (2,777,117)
     Net cash (used in)
        financing activities                          (4,490,119)    (5,016,157)
     Increase in cash and
        cash equivalents                               1,292,903      1,826,158
     Cash and cash equivalents, beginning
        of period                                      1,826,158              0
     Cash and cash equivalents, end
        of period                                     $3,119,061      1,826,158

 
(19) Quarterly Financial Data (Unaudited)

Summarized  quarterly  financial  data (in  thousands of dollars  except for per
share amounts) for fiscal 1998 and 1997 are as follows:

                                              Three Months Ended
   Selected Operations Data          6/30/98   3/31/98    12/31/97    9/30/97

   Interest income                    $2,785     2,761      2,868      2,829
   Interest expense                    1,161     1,151      1,235      1,229
      Net interest income              1,624     1,610      1,633      1,600
   Non-interest income                   217       185        148        141
   Non-interest expense                  736       719        735        679
   Income tax expense                    428       393        393        422
        Net income                      $677         682     654      640
   Diluted earnings per common share     .60       .60        .57        .52
   High stock price                    33.00     29.38      29.75      26.25
   Low stock price                     27.25     27.25      26.50      2l.25

                                     6/30/97    3/31/97   12/31/96    9/30/96

   Interest income                   $ 2,726     2,627      2,692      2,657
   Interest expense                    1,196     1,137      1,175      1,165
      Net interest income              1,530     1,490      1,517      1,492
   Non-interest income                   169       128        134        135
   Non-interest expense                  678       674        544      1,381
   Income tax expense                    402       370        436        100
      net income                         619       574        671        147
   Diluted  Earnings per common share    .51       .48        .57        .11
   High stock price                    20.25     19.75      18.25      15.75
   Low stock price                     20.38     18.75      16.25      15.00




                                       29
<PAGE>



                        QCF BANCORP, INC. AND SUBSIDIARY
              Notes to Consolidated Financial Statements, Continued
 
  Selected Financial Condition Data    6/30/98    3/31/98   12/31/97   9/30/97

   Total assets                       $150,486    154,089   152,668    158,192
   Investment securities                78,112     77,899    76,918     82,357
   Net loans                            65,194     64,525    64,819     63,673
   Deposits                            105,566    105,239   103,693    104,549
   Short-term borrowings                14,081     13,862    14,158     14,253
   Stockholders' equity                 26,328     27,275    26,820     26,020

                                       6/30/97    3/31/97   12/31/96   9/30/96

Total assets                         $ 156,727    149,637   146,922    148,321
   Investment securities                83,098     81,889    80,493     87,278
   Net loans                            61,202     58,465    57,665     55,744
   Deposits                            103,681    104,946   102,842     81,794
   Short-term borrowings                14,040     15,850    15,746     37,905
   Stockholders' equity                 27,423     27,070    26,760     26,161


                                                       

                                       30
<PAGE>





                            STOCKHOLDERS' INFORMATION

Annual Meeting                          Stock Listing
The annual meeting of shareholders      QCF's common stock is listed on
will be held on Wednesday,              the NASDAQ National Market System with
October 14, 1998 at 9:00 A. M. at       a ticker symbol of QCFB.
the executive office of the Company.    Stockholders of record:  344

Executive Office                        Form 1O-KSB
QCF Bancorp, Inc.                       QCF's Form 1OKSB is filled with the
501 Chestnut Street                     Securities and Exchange Commission and
Virginia, MN 55792-1147                 is available without charge upon request
(218) 741-2O4O                          from: QCF Bancorp, Inc.
                                              Attn: Investor Relations
Independent Auditors                          P.O. Box 1147
McGladrey & Pullen, LLP                       Virginia, MN 55792
227 West First Street
Duluth, MN 55802                        Transfer Agent & Registrar
                                        Inquiries regarding change of address,
QCF Bancorp, Inc.                       transfer requirements, and certificates
Investor Relations                      should he directed to the transferagent:
P.O. Box 1147                           Registrar and Transfer Company
Virginia, MN 55802                      10 Commerce Drive
                                        Cranford, New Jersey 07016
                                        1-800-368-5948

Directors and Officers:
  Directors:                            Executive Officers:
  Kevin E. Pietrini                     Kevin E. Pietrini
  President and Chief                   President
  Executive Officer
                                        Daniel F. Schultz
  Robert A. Muhich                      Vice President and Treasurer
  Computer Consultant
  Culbert Realty & Appraisal Service    Linda M. Myklebust
                                        Vice President
  John A. Trenti
  Attorney at the Trenti Law Firm       Gerald D. McKenna
                                        Vice President
  Peter J. Johnson
  President of Hoover Construction      Branch Offices:
                                        Thunderbird Mall
  Craig W. Nordling                     Virginia, Mn. 55792
  Line Department Manager
  Lake Country Power                    102 East Sheridan Street
                                        Ely, MN 5573l
  John C. Pearsall
  Partner with Mesabi Dental Service

  Daniel F. Schultz
  Vice President/Treasurer
 

                                       31
<PAGE>


                                                       








                                   Exhibit 21






<PAGE>








Subsidiaries of the Registrant

                                                    State or Other
                                                    Jurisdiction of   Percentage
                                                    Incorporation     Ownership
                                                    Parent   

QCF Bancorp, Inc.                                      Minnesota


Subsidiary (1)

Queen City Federal Savings Bank                        United States     100%

Subsidiaries of Queen City Federal Savings Bank (1)

Queen City Service Corporation                         Minnesota         100%
 

         ________________
(1) The assets,  liabilities and operations of the  subsidiaries are included in
the  consolidated  financial  statements  contained  in  the  Annual  Report  to
Stockholders attached hereto as an exhibit.


<PAGE>
 





                                   Exhibit 23



1

<PAGE>
   
McGLADREY&PULLEN,LLP                                               RSM
Certified Public Accoutants and Consultants                        international


                       CONSENT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
QCF Bancorp, Inc.
Virginia, Minnesota

We hereby consent to the incorporation by reference of our report,  dated August
14,  1998,  included in this Form 10-KSB In the  previously  filed  Registration
Statement of QCF Bancorp, Inc. on Form S-8 (No. 33-98154).





                                          McGLADREY & PULLEN, LLP


Duluth, Minnesota
September 25, 1998                            

<PAGE>


                                   Exhibit 27

<PAGE>