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 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number: 0-25342
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Wells Financial Corp.
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(Exact name of small business issuer in its charter)
Minnesota 48-1799504
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(State or other jurisdiction of (I.R.S. employer
of incorporation or organization) identification no.)
53 First Street, S.W., Wells, Minnesota 56097
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (507) 553-3151
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of class)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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]
Registrant's revenues for the year ended December 31, 1997 were $16.4
million.
Registrant's voting stock trades on the Nasdaq National Market under
the symbol "WEFC." The aggregate market value of the voting stock held by
non-affiliates of registrant, based upon the closing price of such stock as of
March 10, 1998 ($18.50 per share), was $36.2 million.
As of March 10, 1998, registrant had 1,959,360 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Portions of Registrant's Annual Report to Stockholders for
the fiscal year ended December 31, 1997.
2. Part III -- Portions of Registrant's Proxy Statement for the 1998
Annual Meeting of Stockholders.
<PAGE>
PART I
WELLS FINANCIAL CORP. (THE "COMPANY") MAY FROM TIME TO TIME MAKE
WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING
THIS ANNUAL REPORT ON FORM 10-KSB AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS
NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
Item 1. Business
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General
Wells Financial Corp. ("Registrant" or the "Company") is a unitary
savings and loan holding company that was incorporated in December 1994 under
the laws of the State of Minnesota for the purpose of acquiring all of the
issued and outstanding common stock of Wells Federal Bank, fsb (the "Bank").
This acquisition occurred in April 1995 at the time the Bank simultaneously
converted from a mutual to a stock institution, and sold all of its outstanding
capital stock to the Company and the
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Company made its initial public offering of common stock (the "Conversion"). As
of December 31, 1997, the Company had total assets of $201.4 million, total
deposits of $145.4 million, and stockholders' equity of $29.6 million or 14.7%
of total assets under generally accepted accounting principles ("GAAP"). The
only subsidiary of the Company is the Bank.
The primary activity of the Company is directing and planning the
activities of the Bank, the Company's primary asset. At December 31, 1997, the
remainder of the assets of the Company were maintained in the form of a loan to
the Bank, a loan to an employee stock ownership plan ("ESOP") that was
established for the benefit of the Bank's employees, deposits in interest
bearing accounts with other financial institutions and selected investments. The
Company engages in no other significant activities. As a result, references to
the Company or Registrant generally refer to the Bank, unless the context
otherwise indicates. In the discussion of regulation, except for the discussion
of the regulation of the Company, all regulations apply to the Bank rather than
the Company.
The Bank is a federally chartered stock savings bank headquartered in
Wells, Minnesota. The Bank has eight full service offices located in Faribault,
Martin, Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota. The Bank
was founded in 1934 and obtained its current name in 1991. The Bank's deposits
have been federally insured by the Savings Association Insurance Fund ("SAIF")
and its predecessor, the Federal Savings and Loan Insurance Corporation
("FSLIC"), since 1934, and the Bank is a member of the Federal Home Loan Bank
("FHLB") System. The Bank is a community oriented, full service retail savings
institution offering traditional mortgage loan products. It is the Bank's intent
to remain an independent community savings bank serving the local banking needs
of Faribault, Martin, Blue Earth, Nicollet, Steele and Freeborn Counties,
Minnesota.
The Bank attracts deposits from the general public and uses such
deposits primarily to invest in residential lending on owner occupied
properties. The Bank also makes consumer loans, commercial loans, and
agricultural related loans and purchases mortgage-backed and investment
securities.
The principal sources of funds for the Registrant's lending activities
are deposits, advances from the Federal Home Loan Bank and the amortization,
repayment, and maturity of loans, mortgage-backed securities, and investment
securities. Principal sources of income are interest and fees on loans,
mortgage-backed securities, investment securities, and deposits held in other
financial institutions. The Registrant's principal expense is interest paid on
deposits.
Market Area
The Company's primary market area consists of Faribault, Martin, Blue
Earth, Nicollet, Steele and Freeborn Counties, Minnesota. Located southwest of
Minneapolis, this area is primarily rural and contains approximately 50
communities ranging in population size from 200 to 40,000. The primary lending
concentration is in the Mankato and North Mankato area, an area with a
relatively large population base. The Company has two offices in the Mankato and
North Mankato area. Historically, the economy in the Company's market area has
been dependent on agriculture and agriculture related industries. Economic
growth in the Company's market area remains dependent upon the local economy. In
addition, the deposit and loan activity of the Company is significantly affected
by economic conditions in its market area including the agriculture industry.
Lending Activities. The Company's loan portfolio predominantly consists
of mortgage loans secured by one to four-family residences. The Company also
makes consumer loans and commercial loans. For its mortgage loan portfolio, the
Company originates and retains adjustable rate loans. Currently, the Company is
selling substantially all of the conventional fixed rate mortgage loans that it
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originates into the secondary market. The Company's consumer loan portfolio
consists primarily of home equity or improvement loans secured by second liens
on real estate on which the Company has the first lien. To a lesser extent, the
consumer loan portfolio includes loans secured by vehicles and savings accounts.
The Company also originates commercial and multi-family real estate loans, the
vast majority of which are secured by farm land. In addition to loans secured by
farm real estate, the Company makes commercial business loans, the majority of
which are secured by farm operating equipment, livestock, crops on hand, growing
crops and farm real estate.
The consumer, commercial, and commercial business loan portfolios are
primarily composed of adjustable rate loans.
The Company's adjustable rate loans reprice based on a cost of funds
index that is a lagging market index. A lagging index does not adjust as rapidly
as market interest rates and may not adjust as rapidly as would other indices.
During periods of increasing interest rates, use of a lagging index results in
adjustable rate loans repricing upward at a slower rate than if a leading market
index had been used. During periods of decreasing interest rates, use of a
lagging index results in adjustable rate loans repricing downward at a slower
rate than if a leading market index had been used.
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Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Company's loan portfolio in dollar amounts and
in percentages of the total loan portfolio (before deductions for loans in
process, deferred loan origination fees and costs and allowances for losses) as
of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------- ----------------- ----------------- ---------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.............. $118,294 82.08% $137,130 82.14% $136,022 79.38% $141,067 78.20% $141,697 76.82%
Multi-family..................... 1,015 0.70 951 0.57 880 0.51 1,355 0.75 1,167 0.63
Commercial....................... 8,834 5.82 9,654 5.78 10,554 6.16 10,878 6.03 10,845 5.88
Construction..................... 1,517 1.05 2,149 1.29 2,774 1.62 2,081 1.15 1,943 1.05
----- ---- ------ ------ ------ ------ ------- ----- -------- ------
Total real estate loans...... 129,210 89.65 149,884 89.78 150,230 87.67 155,381 86.13 155,652 84.38
------- ----- ------- ------ ------- ------ ------- ----- -------- ------
Other Loans:
Consumer Loans:
Savings account.................. 531 0.37 471 0.28 436 0.25 443 0.25 349 0.19
Vehicles......................... 2,308 2.60 2,573 1.54 3,353 1.96 4,619 2.56 4,988 2.70
Home equity, home
improvement and
second mortgages................ 8,135 5.65 10,392 6.23 12,875 7.51 15,197 8.42 18,781 10.18
Other............................ 2,973 2.06 2,811 1.68 3,279 1.91 3,588 1.99 3,411 1.85
----- ---- ------ ------ ------ ------ ------ ----- ------- ------
Total consumer loans......... 13,947 9.68 16,247 9.73 19,943 11.63 23,847 13.22 27,529 14.92
Commercial business loans.......... 957 0.67 810 0.49 1,191 0.70 1,171 0.65 1,299 0.70
-------- ------ ------ ------ ------ ------ ----- ------- ------
Total other loans............ 14,904 10.35 17,057 10.22 21,134 12.33 25,018 13.87 28,828 15.62
------- ------ ------ ------ ------ ------ ------ -------- -------
Total loans.................. 144,114 100.00% 166,941 100.00% 171,364 100.00% 180,399 100.00% 184,480 100.00%
======= ====== ====== ====== ======
Less:
Loans in process................. 1,190 685 493 623 351
Deferred loan origination fees
and costs....................... 544 695 689 714 642
Allowance for loan losses........ 398 376 512 615 763
------ ------- ------- ------- --------
Total loans receivable, net.. $141,982 $165,185 $169,670 $178,447 $182,724
======= ======= ======= ======= =======
</TABLE>
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Origination, Purchase, and Repayment of Loans. The following table sets
forth the Company's loan originations, sales, and principal repayments for the
periods indicated. The Company originates loans for retention in its portfolio
and did not purchase loans during the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans receivable at
beginning of year $122,583 $144,114 $166,941 $171,364 $180,399
-------- -------- -------- -------- --------
Loans originated:
One- to four-family residential 64,043 33,854 30,609 43,411 28,035
Commercial and multi-family real
estate 1,042 1,623 1,366 1,759 2,286
Construction loans 3,627 5,114 5,522 6,776 5,182
Consumer loans 7,496 8,166 12,103 10,242 16,102
Commercial business loans 1,257 1,760 1,567 610 1,983
-------- -------- -------- -------- --------
Total loans originated 77,465 50,517 51,167 62,798 53,588
-------- -------- -------- -------- --------
Principal reductions:
Loans sold 24,552 2,971 13,584 19,209 14,735
Loan principal repayments 31,382 24,719 33,160 34,554 34,772
-------- -------- -------- -------- --------
Total principal reductions 55,934 27,690 46,744 53,763 49,507
-------- -------- -------- -------- --------
Total gross loans receivable at
end of year $144,114 $166,941 $171,364 $180,399 $184,480
======== ======== ======== ======== ========
</TABLE>
Loan Sales. During 1997, the Company sold $14.7 million of mortgage loans
into the secondary market. The Company sells the FHA and Veterans Administration
("VA") loans that it originates to another financial institution. The Company
does not retain the servicing on the FHA/VA loans. The Company also sells
conforming fixed-rate conventional loans with loan-to-value ratios of 90% or
higher to the Federal Home Loan Mortgage Corporation ("FHLMC"). The Company
retains the servicing rights on these loans. All loans sold to FHLMC ($14.3
million) were sold without recourse to the Company, except for documentation
deficiencies that may require the Company to repurchase these loans within a
limited time period following the sale to FHLMC. To a lesser extent, the Company
has sold loans with high loan to value ratios to maintain its loan quality.
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Loan Maturity Tables. The following table sets forth the maturity of the
Company's loan portfolio at December 31, 1997. The table does not include
prepayments, scheduled principal repayments or loans held for sale. All mortgage
loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
1- to 4- Other
Family Residential Commercial
Real Estate and Business and
Mortgage Commercial Construction Consumer Total
-------- ---------- ------------ -------- -----
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C> <C>
Within 1 year................. $ 376 $ 301 $1,943 $1,992 $ 4,612
1 to 3 years.................. 1,203 497 - 3,897 5,597
3 to 5 years.................. 1,729 1,120 - 5,414 8,263
5 to 10 years................. 8,578 1,376 - 15,412 25,366
Over 10 years................. 129,811 8,718 - 2,113 140,642
-------- ------ ----- ------ -------
Total amount due................ $141,697 $12,012 $1,943 $28,828 $184,480
======= ====== ===== ====== -------
Less:
Allowance for loan losses.................................................................................... 763
Loans in process............................................................................................. 351
Deferred loan fees........................................................................................... 642
--------
Loans receivable, net...................................................................................... $182,724
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1998 that have pre-determined interest rates and which have
floating or adjustable interest rates. This table does not include loans held
for sale.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One- to four-family........................ $49,356 $91,965 $141,321
Commercial and multi-family real estate.... 3,853 7,858 11,711
Construction............................... -- -- --
Commercial business and consumer........... 12,516 14,320 26,836
------ ------ ------
Total.................................... $65,725 $114,143 $179,868
====== ======= =======
</TABLE>
One- to Four-Family Residential Loans. The Company's primary lending
activity consists of the origination of single family residential mortgage loans
secured by property located in the Company's primary market area. The Company
generally originates one- to four-family residential mortgage loans without
private mortgage insurance in amounts up to 80% of the lesser of the appraised
value or selling price of the mortgaged property. The Company will not originate
any loan which exceeds 95% of the lesser of the appraised value or selling price
and typically requires private mortgage insurance on any loans at 80% or more of
the value of the mortgaged property. The Company originates adjustable rate
mortgage loans for retention in its portfolio with loan-to-value ratios of up to
95% and requires private mortgage insurance when the loan-to-value ratio exceeds
80%.
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The Company's adjustable rate loans provide for annual 1%-2% interest rate
adjustments with a maximum adjustment over the term of the loan of between 5%
and 6%. The Company also permits adjustable rate loans to be converted into
fixed-rate loans.
Loan originations are generally obtained from existing customers, members
of the local community, and referrals from realtors within the Company's lending
area. Mortgage loans originated and held by the Company in its portfolio include
due-on sale clauses which provide the Company with the contractual right to deem
the loan immediately due and payable in the event that the borrower transfers
ownership of the property without the Company's consent.
The Company primarily originates fixed and adjustable rate mortgage loans
with 15-30 year terms. The Company offers various loan programs, including low
documentation loans for loans with lower loan-to-value ratios and other loan
programs using cost of funds or one-year U.S. treasury indices for adjustable
rate loan repricing. Interest rates charged on mortgage loans are competitively
priced based on market conditions and the Company's cost of funds. Throughout
the year, origination fees for loans were generally 1% of the loan amount. The
Company's standard underwriting guideline for fixed-rate mortgage loans conform
to FHLMC guidelines and the loans may be sold in the secondary market to private
investors. The Company customarily sells all Federal Housing Administration and
Veterans' Administration ("FHA/VA") loans as well as certain conforming fixed
rate mortgage loans in the secondary market. The Company also originates
adjustable rate mortgages ("ARMs") which adjust every year based upon various
indices.
At December 31, 1997, the Company was servicing approximately $72.2 million
of loans for others, primarily long term fixed rate loans sold to FHLMC.
Generally, the Company retains all servicing on loans sold to FHLMC and does not
retain servicing on FHA/VA loans sold. Except for document deficiencies that may
occur during origination that may require a repurchase by the Company, loans are
sold without recourse.
Consumer Loans. The Company offers second mortgage loans on one- to
four-family residences which are typically offered as adjustable rate loans.
Such loans are only made on owner-occupied one- to four-family residences and
are subject to a 90% combined loan-to-value ratio. The Company holds the
majority of the underlying first mortgages on these loans. The underwriting
standards for second mortgage loans are similar to the Company's standards
applicable to one- to four-family residential loans. To a lesser extent, the
Company makes loans secured by vehicles and by savings accounts held with the
Company. Loans secured by vehicles totalled $4.99 million, or 2.70%, of the loan
portfolio at December 31, 1997.
Federal regulations permit federally chartered thrift institutions to make
secured and unsecured consumer loans up to 35% of an institution's assets. In
addition, a federal thrift has lending authority above the 35% category for
certain consumer loans, property improvement loans, and loans secured by savings
accounts. The Company originates consumer loans in order to provide a wide range
of financial services to its customers and because the shorter terms and
normally higher interest rates on such loans help maintain a profitable spread
between its average loan yield and its cost of funds. Consumer loans, however,
tend to have a higher risk of default than residential mortgage loans.
Typically, based on the Company's experience, a borrower faced with either
paying a mortgage loan to avoid foreclosure on the borrower's home or defaulting
on a consumer loan will continue paying the mortgage loan. At December 31, 1997,
the Company had approximately $22,000 in consumer loans that were more than 90
days delinquent.
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Commercial Real Estate Loans. In order to enhance yields on its assets, the
Company originates loans secured by commercial real estate. Approximately
three-quarters of this portfolio is secured by farm real estate. Most of the
remainder of the portfolio is secured by church real estate. At December 31,
1997, loans secured by farm real estate were originated in amounts up to the
lesser of 65% of the appraised value of the property or $1,000 per tillable
acre. These loans are evaluated on a cash flow basis in addition to an asset
value basis. Loans secured by church real estate are generally originated in
amounts up to 70% of the appraised value of the property. At December 31, 1997,
the Company's largest commercial real estate loan consisted of a $387,000
performing loan secured by a multi-family building in North Mankato, Minnesota.
All commercial real estate loans, excluding those secured by farm real estate,
require prior approval by the Bank's Board of Directors. As part of its
underwriting, the Company requires that borrowers qualify for a commercial loan
at the fully indexed interest rate rather than at the origination interest rate.
Loans secured by commercial real estate generally involve a greater degree
of risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. For loans secured by farm real estate, repayment
may be affected by weather conditions and government policies and subsidies
concerning farming. For loans secured by church real estate, repayment is
dependent upon the continuing financial support of the church's members.
Commercial Business Loans. The Company's commercial business loans consist
of agricultural operating loans secured primarily by farm equipment, livestock,
crops, and farm real estate. These loans are generally originated in amounts up
to 70% of the appraised value of the property. These loans typically are
adjustable rate loans with quarterly adjustments. Agricultural operating loans
generally involve a greater degree of risk than residential mortgage loans. This
increased credit risk is a result of several factors, including the effects of
general economic conditions on income producing property and the increased
difficulty of evaluating and monitoring these types of loans. Furthermore, the
repayment of agricultural operating loans is typically dependent upon the
successful operation of the related property. If the cash flow from the property
is reduced, the borrower's ability to repay the loan may be impaired.
Construction Loans. Construction loans are made on single family
residential property to the individuals who are the owners and occupants upon
completion of construction. These loans are made on a long term basis and are
classified as construction permanent loans with no principal payments required
during the first six months, after which the payments are set at an amount that
will amortize over the term of the loan. The maximum loan-to-value ratio is 80%
and is made at a variable or fixed interest rate.
The Company does not originate many speculative loans to builders and
limits the loan-to-value ratio to 70% with a maximum loan term of 18 months. In
underwriting such loans, the Company takes into consideration the number of
units that the builder has on a speculative basis that remain unsold.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. The Company's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost of construction. If the estimate of
construction cost and the marketability of the property upon completion of the
project prove to be inaccurate, the Company may
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be compelled to advance additional funds to complete the development.
Furthermore, if the estimate of value proves to be inaccurate, the Company may
be confronted, at or prior to the maturity of the loan, with a property with a
value that is insufficient to assure full repayment. For the small number of
speculative loans originated to builders, the ability of the builder to sell
completed dwelling units will depend, among other things, on demand, pricing,
and availability of comparable properties and economic conditions.
Loan Approval Authority and Underwriting. All loans, other than smaller
dollar value consumer loans, must be approved by the Company's Loan Committee. A
minimum of two committee members may approve loans on one- to four-family
residential units, non-owner occupied residential properties that do not exceed
eight units, farm real estate loans of $200,000 or less, farm operating loans of
$100,000 and less, and all consumer loans. All commercial real estate loans and
other loans that exceed the above limitations must be submitted to the Board of
Directors for prior approval.
For all loans originated by the Company, upon receipt of a completed loan
application from a prospective borrower, a credit report is generally ordered,
income and certain other information is verified and, if necessary, additional
financial information is requested. For real estate loans, an appraisal of the
real estate intended to be used as security for the proposed loan is obtained
from an independent appraiser designated and approved by the Board of Directors
of the Bank. In certain cases, an appropriate valuation is completed by Company
staff as allowed by regulation. In addition, the relationship of the loan to the
value of the collateral is considered. The Company makes construction/permanent
loans on individual properties. Funds advanced during the construction phase are
held in a loan-in-process account and disbursed based upon various stages of
completion in accordance with the results of inspection reports that are
obtained through physical inspection of the construction by an independent
contractor hired by the Company or in some cases by a loan officer. For real
estate loans, the Company will require either title insurance or a title
opinion. Borrowers must also obtain hazard or flood insurance (for loans on
property located in a flood zone, flood insurance is required) prior to the
closing of the loan.
Loan Commitments. The Company issues written commitments or verbal
commitments to prospective borrowers on all real estate approved loans.
Generally, the commitment requires acceptance within 90 days of the date of
issuance. Commitments for consumer loans are given verbally and not in writing
and generally expire in a shorter period of time. At December 31, 1997, the
Company had $12.5 million of commitments to cover originations, undisbursed
funds for loans in process and unused lines of credit. The Company estimates
that the majority of the Company's commitments are funded.
Loans to One Borrower. Loans-to-one borrower are limited in an amount equal
to 15% of unimpaired capital and unimpaired surplus and an additional amount
equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured
by readily marketable collateral (generally, financial instruments, not real
estate) or $500,000, whichever is higher. The Company's maximum loan-to-one
borrower limit was approximately $3.4 million as of December 31, 1997.
At December 31, 1997, the Company's largest amount of loans to one borrower
was $839,000, consisting of performing loans secured by multi-family buildings
and real estate for approximately 19 dwelling units, a commercial office
building, and a personal residence, all of which are located in the Company's
market area.
Loan Delinquencies. The Company's collection procedures provide that when a
mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is
still delinquent after 30 days past due the customer will receive a letter
and/or telephone call and may receive a visit from a representative of
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the Company. If the delinquency continues, similar subsequent efforts are made
to eliminate the delinquency. If the loan continues in a delinquent status for
60 days past due and no repayment plan is in effect, a notice of right to cure
default is mailed to the customer giving 30 additional days to bring the account
current before foreclosure is commenced. The loan committee meets regularly to
determine when foreclosure proceedings should be initiated and the customer is
notified when foreclosure has been commenced.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when a mortgage loan or a non-mortgage loan becomes 120 or 90
days delinquent, respectively, and, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent interest payments, if any, are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Non-accrual loans fluctuate over time due to a variety of factors. For the
Company, non-accrual loans may be affected by the payments on one large loan or
a delay in the harvesting of crops due to weather conditions. The Company's
experience has been that these fluctuations are normal and are not dependant on
any one factor over time.
10
<PAGE>
The following table sets forth information regarding non-accrual loans,
real estate owned, and certain other repossessed assets and loans. On January 1,
1995, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 114, as amended by SFAS No. 118. The adoption of this statement had no
effect on the consolidated financial statements of the Company.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1- to 4-family
residences $ 614 $ 556 $265 $164 $219
All other mortgage loans 75 168 -- 59 --
Non-mortgage loans:
Commercial -- 5 7 -- --
Consumer 71 88 26 75 18
---------- ---------- ---- ---- ----
Total $ 760 $ 817 $298 $298 $237
========== ========== ==== ==== ====
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Construction loans $ -- $ -- $-- $-- $--
Permanent loans secured by 1- to 4-family
residences -- -- -- 147 201
All other mortgage loans -- -- -- -- --
Non-mortgage loans:
Commercial -- -- -- -- --
Consumer -- -- 1 -- 4
---------- ---------- ---- ---- ----
Total $ -- $ -- $ 1 $147 $205
========== ========== ==== ==== ====
Total non-accrual and accruing loans
past due 90 days or more $ 760 $ 817 $299 $445 $442
========== ========== ==== ==== ====
Foreclosed real estate $ 160 $ 151 $ 29 $ 78 $ 35
========== ========== ==== ==== ====
Other nonperforming assets $ -- $ -- $-- $-- $--
========== ========== ==== ==== ====
Total nonperforming assets $ 920 $ 968 $328 $523 $477
========== ========== ==== ==== ====
Total non-accrual and accruing loans past
due 90 days or more to net loans 0.53% 0.50% 0.18% 0.25% 0.24%
========== ========== ==== ==== ====
Total non-accrual and accruing loans past
due 90 days or more to total assets 0.46% 0.45% 0.15% 0.22% 0.22%
========== ========== ==== ==== ====
Total nonperforming assets to total assets 0.56% 0.53% 0.17% 0.26% 0.24%
========== ========== ==== ==== ====
</TABLE>
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was immaterial for the
year ended December 31, 1997. Amounts included in the Company's interest income
on non-accrual loans for the year ended December 31, 1997 were likewise
immaterial.
Classified Assets. Office of Thrift Supervision ("OTS") regulations provide
for a classification system for problem assets of insured institutions which
covers all problem assets. Under this classification system, problem assets of
insured institutions are classified as "substandard," "doubtful," or "loss." An
asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
11
<PAGE>
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that do not
currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The following table provides further information about the Company's
problem assets as of December 31, 1997.
(In Thousands)
Special Mention............................. $196
Substandard................................. 481
Doubtful assets............................. --
Loss assets................................. 9
General loss allowance...................... $763
===
Foreclosed Real Estate. Real estate acquired by the Company as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of the
loan balance or the fair value at the date of foreclosure less estimated costs
of disposition. There may be significant other expenses incurred such as
attorney and other extraordinary servicing costs involved with foreclosures.
Foreclosed real estate, net of allowance for losses, totaled $35,000 at December
31, 1997.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in the
Company's loan portfolio. Such evaluation, which includes a review of all loans
of which full collectibility of interest and principal may not be reasonably
assured, considers the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and current
economic conditions.
12
<PAGE>
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
13
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the Company's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio. The allocation of the
allowance for loan losses is based on management's evaluation of the loans in
the respective portfolios; the Company does not attempt to manage the percentage
of the allocation between loan categories. As part of management's evaluation,
for each loan category, the allowance is determined after examination of prior
period experience but is adjusted for various factors such as delinquencies,
expected charge-offs, recoveries, amount of classified assets, amount of
non-accrual loans and any known local economic trends. As a result, the
allocation of the allowance does not reflect relative levels of historic
charge-offs between loan categories.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
-------------------- -------------------- -------------------- ------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of year allocated to:
Mortgage..................... $272 89.65% $251 89.78% $394 87.67% $484 86.13% $617 84.38%
Consumer and non-mortgage.... 126 10.35 125 10.22 118 12.33 131 13.87 146 15.62
--- ------ --- ------ --- ----- --- ------ --- ------
Total allowance.............. $398 100.00% $376 100.00% $512 100.00% $615 100.00% $763 100.00%
=== ====== === ====== === ====== === ====== === ======
</TABLE>
14
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to the Company's allowance for loan losses for the
years indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total loans outstanding $144,114 $166,941 $171,364 $180,399 $184,480
======== ======== ======== ======== ========
Average loans outstanding $130,026 $153,477 $170,395 $173,383 $183,591
======== ======== ======== ======== ========
Beginning allowance balances $ 479 $ 398 $ 376 $ 512 $ 615
Provision:
One- to four-family -- 32 166 180 180
Commercial and multi-family
real estate -- -- -- -- --
Consumer -- 81 -- -- --
Charge-offs:
One- to four-family 61 53 23 21 12
Commercial and multi-family
real estate -- -- -- -- --
Consumer 59 91 18 67 54
Recoveries:
One- to four-family 19 -- -- -- --
Commercial and multi-family
real estate -- -- -- -- --
Consumer 4 9 11 11 34
Other 16 -- -- -- --
-------- -------- -------- -------- --------
Ending allowance balance $ 398 $ 376 $ 512 $ 615 $ 763
======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans outstanding 0.28% 0.23% 0.30% 0.34% 0.41%
Net loans charged off as a percent of
average loans outstanding 0.07% 0.09% 0.02% 0.04% 0.02%
</TABLE>
15
<PAGE>
Analysis of the Allowance for Foreclosed Real Estate. The following table
sets forth information with respect to the Company's allowance for losses on
foreclosed real estate at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total foreclosed real estate and real estate
in judgment, net ............................ $ 160 $ 151 $ 29 $ 78 $35
======= ====== ======= ===== ===
Allowance balances - beginning ................ 16 -- -- -- --
Provision ..................................... -- -- -- -- --
Charge-offs ................................... -- -- -- -- --
Recoveries .................................... -- -- -- -- --
Other ......................................... (16) -- -- -- --
------- ------ ------- ----- ---
Allowance balances - ending ................... $ -- $ -- $ -- $-- $--
======= ====== ======= ===== ===
Allowance for losses on foreclosed real estate
in judgment to net foreclosed real estate and
real estate in judgment ..................... -- % -- % -- % -- % -- %
======= ====== ======= ===== ===
</TABLE>
Mortgage-Backed Securities
To supplement lending activities, the Company invests in residential
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings (although the Company has not used them as such) and, through
repayments, as a source of liquidity.
At December 31, 1997, the mortgage-backed securities portfolio had a fair
value of $86,000 and an amortized cost of $86,000. Because the portfolio is
classified as available for sale (the Company had no mortgage-backed securities
held to maturity at December 31, 1997), the portfolio is recorded at $86,000.
The mortgage-backed securities portfolio at December 31, 1997 consisted solely
of real estate mortgage investment conduits ("REMICs"), a form of collateralized
mortgage obligations ("CMOs"). The Company receives monthly interest payments on
the securities in this portfolio based on fixed coupon rates. These securities
are guaranteed as to principal by the Federal National Mortgage Association
("FNMA") and management does not believe that there is a material credit risk
associated with the repayment of principal.
To assess price volatility, the Federal Financial Institutions Examination
Council ("FFIEC") and OTS have adopted a policy that requires an annual "stress"
test of mortgage derivative securities. This policy requires the Company to
annually test its CMOs and other mortgage-related securities to determine
whether they are high-risk or non-high-risk securities. At December 31, 1997,
the Company's CMOs met the criteria established by the policy for non-high-risk
securities. If interest rates remain stable, the weighted average life of the
FNMA CMO is .2 years. According to stress tests mandated by the Company's
regulators, a 300 basis point upward shift in interest rates increases the
weighted average life of this security to .31 years. This same 300 basis point
upward shift would result in a 0.75% decrease in price. The carrying value of
this security is adjusted on a quarterly basis to reflect current market value.
16
<PAGE>
Investment Activities
The Company is required under federal regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments. The Company has maintained a liquidity portfolio
in excess of regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of future yield levels, as
well as management's projections as to the short-term demand for funds to be
used in the Company's loan origination and other activities. At December 31,
1997, the Company had an investment portfolio of approximately $7.8 million,
consisting primarily of U.S. Treasury securities and U.S. government corporate
and agency obligations. To a lesser extent, the portfolio also includes FHLMC
stock, mortgage-backed securities, certificates of deposit and FHLB stock, as
permitted by the OTS regulations. The Company classifies its investments,
including debt and equity securities, as either held to maturity or available
for sale, in accordance with SFAS 115. The Company will continue to seek high
quality investments. The primary and secondary goals of the investment portfolio
are safety of principal and rate of return, respectively.
Investment Portfolio. The following table sets forth the carrying value of
the Company's investments, including short-term investments, FHLB stock, and
mortgage-backed securities, at the dates indicated. At December 31, 1997, the
Company's securities that were classified as available for sale had an
unrealized net gain of $983,000. The Company's securities that were classified
as held to maturity had a net unrealized gain of $3,000. This unrealized gain is
not reflected in the table below because these securities are carried at
amortized cost in accordance with SFAS 115. At December 31, 1997, the market
value for the interest bearing deposits shown below approximated their cost.
At December 31,
-------------------------
1995 1996 1997
------ ------ -----
(In Thousands)
Securities available for sale:
Equity securities ................ $ 6,753 $ 7,100 $ 2,640
Securities held to maturity:
U.S. government securities ........ 800 -- --
U.S. agency securities ............ 3,399 2,049 3,198
------- ------- -------
Total investment securities ..... 10,952 9,149 5,838
Interest-bearing deposits .......... 800 200 1,850
Mortgage-backed securities available
for sale ........................ 867 428 86
------- ------- -------
Total investments ............... $12,619 $ 9,777 $ 7,774
======= ======= =======
17
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Company's investment securities portfolio.
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed Securities.... $ 86 7.0% $ -- --% $ -- --% $ -- --% $ 86 7.00% $ 86
U. S. Agency Obligations...... 800 5.34% 2,398 6.38% -- -- -- -- 3,198 6.14% 3,201
FHLB Stock.................... -- -- -- -- -- -- -- -- 1,633 -- 1,633
Equity Securities............. -- -- -- -- -- -- -- -- 1,007 -- 1,007
Interest Bearing Deposits..... 1,850 5.68% -- --% -- --% -- --% 1,850 5.68% 1,850
----- ----- ----- ----- ----- -----
Total....................... $2,736 $2,398 $ -- $ -- $7,774 $7,777
===== ===== ===== ===== ===== =====
</TABLE>
18
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Company's funds for
lending and other investment purposes. The Company derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities, borrowings and operations. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and market conditions. The Company may also borrow from the FHLB of Des
Moines as a source of funds.
Deposits. Consumer and commercial deposits are attracted principally from
within the Company's primary market area through the offering of a broad
selection of deposit instruments including regular savings accounts, NOW
accounts, and term certificate accounts. The Company also offers IRA and KEOGH
accounts. Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit and the interest rate, among
other factors.
Jumbo Certificate Accounts. The following table indicates, at December 31,
1997, the amount of the Company's certificates of deposit of $100,000 or more by
time remaining until maturity.
Maturity Period
- ---------------
(In Thousands)
Within three months................................... $4,604
Three through six months.............................. 594
Six through twelve months............................. 1,230
Over twelve months.................................... 3,543
-----
$9,971
======
Borrowings. Deposits are the primary source of funds of the Company's
lending and investment activities and for its general business purposes. Through
the Bank, the Company may obtain advances from the FHLB of Des Moines to
supplement its supply of lendable funds. Advances from the FHLB of Des Moines
are typically secured by a pledge of the Bank's stock in the FHLB of Des Moines
and a portion of the Company's first mortgage loans and certain other assets.
The Bank, if the need arises, may also access the Federal Reserve Bank discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At December 31, 1997, the Company had $24.5 million in advances
outstanding from the FHLB of Des Moines of which $13.5 million have fixed rates
and $11.0 million have variable rates that reprice monthly. Most of these
advances provide for a prepayment penalty. See Note 10 of the Notes to the
Company's Consolidated Financial Statements. At December 31, 1997, the Bank had
$4.0 million in borrowings (in the form of a loan) from the Company. The
interest rate on this loan adjusts quarterly. The Company expects that the use
of borrowings will continue and may increase after the Company uses available
liquid assets to fund loan originations. During recent periods, the Company has
found that obtaining wholesale funds through FHLB advances is less expensive
than increasing the interest rates on deposit accounts to increase the amount of
deposits. If, in the future, increased deposits become less expensive than FHLB
advances, the Company will likely rely more on increased deposits than on FHLB
advances.
19
<PAGE>
The following table sets forth certain information as to FHLB advances at
the dates indicated.
As of and for the Years Ended December 31,
------------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
FHLB advances ................. $18,000 $26,500 $24,500
Weighted average interest rate
of FHLB advances ............ 5.72% 5.74% 5.92%
Maximum amount of advances .... $23,650 $28,500 $29,500
Average amount of advances .... $18,938 $19,269 $26,808
Weighted average interest rate
of average amount of advances 6.14% 5.64% 5.75%
Subsidiary Activity
The Company has one wholly owned subsidiary, the Bank. The Bank has two
wholly owned subsidiaries, known as Wells Insurance Agency, Inc. ("WIA") and
Greater Minnesota Mortgage, Inc. ("GMM").
The Bank is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under the 2% limitation,
as of December 31, 1997, the Bank was authorized to invest up to approximately
$4 million in the stock of, or loans to, service corporations.
WIA was incorporated under the laws of the State of Minnesota in 1976. WIA
offers life, health, casualty, and business insurance on behalf of others and
also offers fixed-rate annuities. The Bank's investment in WIA totalled $524,000
at December 31, 1997.
GMM was incorporated under the laws of Minnesota in 1997. GMM originates
loans through referrals from community commercial banks and, primarily, sells
these loans to the secondary market. At December 31, 1997, the Bank's investment
in GMM totalled $101,000.
Personnel
As of December 31, 1997, the Bank had 57 full-time and 6 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Company, with no employees of its own, utilizes those of
the Bank.
Competition
The competition for deposit products includes banks ranging in size from
larger, Minneapolis- based regional banks with branches in the Company's market
area to local independent community banks. Deposit competition also includes a
number of insurance products sold by local agents and investment products sold
by local and regional sales people.
Loan competition varies depending upon market conditions. Loan competition
includes branches of large Minneapolis-based commercial banks and thrifts,
credit unions, mortgage bankers with local sales
20
<PAGE>
staff and local banks. The Company believes that it is one of the few area
lenders that has consistently offered a variety of loans throughout all types of
economic conditions.
The Company has traditionally maintained a leadership position in mortgage
loan volume and market share throughout its service area by virtue of its local
presence. The Company believes that it has been able to effectively market its
larger variety of loan and other financial products and services when compared
to other local-based institutions and its superior customer service when
compared to branches of larger institutions based outside of the Company's
market area.
Regulation
Set forth below is a brief description of certain laws that relate to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "--
Regulation of the Bank -- Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes
21
<PAGE>
a comprehensive framework of activities in which an institution can engage and
is intended primarily for the protection of the SAIF and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulations, whether by the OTS, the FDIC, or the Congress could
have a material adverse impact on the Company, the Bank, and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator. The FDIC may also prohibit an insured depository institution
from engaging in any activity the FDIC determines to pose a serious threat to
the SAIF.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup assignment.
In addition, the FDIC is authorized to increase deposit insurance rates on a
semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC.
On January 1, 1997, deposit insurance assessments for SAIF members were
reduced to approximately .064% of deposits on an annual basis; this rate may
continue through the end of 1999. During this same period, members of the Bank
Insurance Fund ("BIF"), predominantly commercial banks, are expected to be
annually assessed approximately .013% of deposits. Thereafter, assessments for
BIF and SAIF members should be the same and the SAIF and BIF may be merged. It
is expected that these continuing assessments for both SAIF and BIF members will
be used to repay outstanding Financing Corporation bond obligations. As a result
of these changes, beginning January 1, 1997, the rate of deposit insurance
assessed the Bank substantially declined.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets. The Bank exceeded these minimum standards at
December 31, 1997. The Bank's capital ratios are set forth in Note 12 to the
Company's Consolidated Financial Statements.
Savings associations with a greater than "normal" level of interest rate
exposure may, in the future, be subject to a deduction for an interest rate risk
("IRR") component may be from capital for purposes of calculating their
risk-based capital requirement.
Dividend and Other Capital Distribution Limitations. Current OTS
regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Company, and the OTS has the authority
under its supervisory powers to prohibit the payment of dividends to the
Company. In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the effect
22
<PAGE>
thereof would be to reduce the regulatory capital of the Bank below the amount
required for the liquidation account established in connection with the
Conversion.
Current OTS regulations impose limitations upon all capital distributions
by savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. At
December 31, 1997, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. Finally, a savings association is
prohibited from making a capital distribution if, after making the distribution,
the savings association would be undercapitalized (not meet any one of its
minimum regulatory capital requirements).
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution, and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
the capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. Under certain
other circumstances, savings associations will be required to file a notice with
OTS prior to making the capital distribution. The OTS proposed limitations on
capital distributions are similar to the limitations imposed upon national
banks. The Bank is unable to predict whether or when the proposed regulation
will become effective.
During 1997, the Company paid two $0.12 per share quarterly dividends to
its shareholders. The Company's dividend payout ratio for 1997 was 20.34%.
Qualified Thrift Lender Test. Savings institutions must meet a QTL test. If
the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Des Moines. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 20% of total assets). Certain assets
23
<PAGE>
are subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. As of December 31, 1997, the Bank was in compliance with its
QTL requirement with 93.84% of its assets invested in QTIs.
Loans-to-One Borrower. See "Business -- Loans-to-One Borrower."
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS.
Proposed Legislation. Bills have been introduced to congressional
committees that would consolidate the OTS with the Office of the Comptroller of
the Currency ("OCC"). The resulting agency would regulate all federally
chartered commercial banks and thrift institutions. In the event that the OTS is
consolidated with the OCC, it is possible that the thrift charter could be
eliminated and thrifts could be forced to convert to commercial banks. Under
current law and regulations, a unitary savings and loan holding company, such as
the Company, which has only one thrift subsidiary such as the Bank, has
essentially unlimited investment authority. Legislation has also been proposed
which, if enacted, would limit the non-banking related activities of savings and
loan holding companies to those activities permitted for bank holding companies.
Item 2. Description of Properties
The Company does not own any real property but utilizes the offices of the
Bank. The Bank operates from its main office located at 53 First Street, S.W.,
Wells, Minnesota and eight full service branch offices. The Bank owns the
offices in Wells and one branch facility, and leases the remaining locations. In
the opinion of the Bank's management, the physical condition of each of the
offices is good and is adequate for the conduct of the Bank's business.
Item 3. Legal Proceedings
There are various claims and lawsuits in which Registrant is periodically
involved, such as claims to enforce liens, condemnation proceedings on
properties in which Registrant holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to
Registrant's business. In the opinion of management, no material loss is
expected from any of such pending claims or lawsuits.
24
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" on pages 1 and 2 of the Company's 1997 Annual Report to
Stockholders (the "Annual Report"), is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The following financial statements and the report of independent
accountants of Registrant included in Registrant's Annual Report to Stockholders
are incorporated herein by reference.
Independent Auditor's Report.
Consolidated Statements of Financial Condition as of December 31, 1997 and
1996.
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996, and 1995.
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
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
- ----------------------------------------------------------------------
The information contained under the section captioned "Information with
Respect to Nominees for Director and Directors Continuing in Office" in the
Registrant's definitive proxy statement for Registrant's 1998 Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference. The
information contained under the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is also incorporated
herein by reference.
25
<PAGE>
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Officer Compensation" 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 first table under "Information with Respect
to Nominees for Director and Directors Continuing in Office"
in the Proxy Statement.
(c) Management of Registrant knows of no arrangements, including
any pledge by any person of securities of Registrant, the
operation of which may at a subsequent date result in a change
in control of Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
PART IV
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) The following exhibits are included in this Report or
incorporated herein by reference:
<TABLE>
<CAPTION>
<S> <C>
3(i) Articles of Incorporation of Wells Financial Corp.*
3(ii) Bylaws of Wells Financial Corp.*
10.1 1995 Stock Option Plan of Wells Financial Corp.**
10.2 Management Stock Bonus Plan and Trust Agreements**
10.3 Change in Control Severance Agreement with James D. Moll***
10.4 Change in Control Severance Agreement with Gerald D. Bastian***
13 Annual Report to Stockholders for the fiscal year ended December 31, 1997
21 Subsidiaries of Registrant***
23 Consent of McGladrey & Pullen, LLP
27 Financial Data Schedule (in electronic filing only)
</TABLE>
(b) No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
26
<PAGE>
- ---------------------
* Incorporated by reference to the registration statement on Form S-1 (File
No. 33-87922) declared effective by the SEC on February 13, 1995.
** Incorporated by reference to the proxy statement for a special meeting of
stockholders held on November 15, 1995 and filed with the SEC on October 2,
1995 (File No. 0-25342).
*** Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1995.
27
<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 as of March 27, 1998.
WELLS FINANCIAL CORP.
By: /s/ Lawrence H. Kruse
Lawrence H. Kruse
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement 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 indicated as of March 27, 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ Lawrence H. Kruse /s/ James D. Moll
- ------------------------------------------ ------------------------------------
Lawrence H. Kruse James D. Moll
President, Chief Executive Officer Treasurer and Principal Financial and
and Director (Principal Executive Officer) Accounting Officer
(Principal Financial and Accounting Officer)
/s/ Wallace J. Butson /s/ Gerald D. Bastion
- ------------------------------------------ ------------------------------------
Dr. Wallace J. Butson Gerald D. Bastion
Secretary and Director Vice President and Director
/s/ Richard A. Mueller
- ------------------------------------------ ------------------------------------
Joseph R. Gadola Richard A. Mueller
Director Director
</TABLE>
EXHIBIT 13
[** LOGO **]
WELLS
FINANCIAL
CORP.
1997 ANNUAL REPORT
<PAGE>
WELLS FINANCIAL CORP.
ANNUAL REPORT
<TABLE>
<CAPTION>
WELLS SAVINGS BANK fsb TABLE OF CONTENTS
<S> <C> <C>
MAIN OFFICE: Profile and Stock Market Information. . . . . . . . . . . . . 1-2
Wells
53 First Street S.W. Selected Consolidated Financial and Other Data. . . . . . . . 3
Wells, Minnesota 56097
Letter to Stockholders. . . . . . . . . . . . . . . . . . . . 4
BRANCH OFFICES:
Blue Earth Management's Discussion and Analysis of Financial
303 South Main Street Condition and Results of Operations. . . . . . . . . . . . . 5-16
Blue Earth, Minnesota 56013
Mankato - Madison East Independent Auditor's Report . . . . . . . . . . . . . . . . . 17
Madison East Center
1400 Madison Avenue Consolidated Statements of Financial Condition . . . . . . . . 18
Mankato, Minnesota 56001
Consolidated Statements of Income . . . . . . . . . . . . . . 19
Mankato - Riverfront
1300 South Riverfront Drive
Mankato, Minnesota 56002 Consolidated Statements of Stockholders' Equity . . . . . . . 20
Fairmont Consolidated Statements of Cash Flows . . . . . . . . . . . . 21-23
Five Lakes Centre
300 South State Street Notes to Consolidated Financial Statements . . . . . . . . . . 24-47
Fairmont, Minnesota 56031
Office Location and Other Corporate Information . . . . . . . 48
Albert Lea
Skyline Mall
1710 West Main Street
Albert Lea, Minnesota 56007
St. Peter
120 South Minnesota Avenue
St. Peter, Minnesota 56082
Owatonna
496 North Street
Owatonna, Minnesota 55060
</TABLE>
<PAGE>
Wells Financial Corp.
Profile
Wells Financial Corp. (the "Company") is a Minnesota corporation organized in
December 1994 at the direction of the Board of Directors of Wells Federal Bank,
fsb (the "Bank") to acquire all of the capital stock that the Bank issued upon
its conversion from mutual to stock form of ownership. The Company is a unitary
savings and loan holding company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage provided
that the Bank retains a specified amount of its assets in housing-related
investments. At the present time, because the Company does not conduct any
active business, the Company does not intend to employ any persons other than
officers of the Bank but utilizes the support staff of the Bank from time to
time.
The Bank is a federally chartered stock savings bank headquartered in Wells,
Minnesota. The Bank has eight full service offices located in Faribault, Martin,
Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota. The Bank was
founded in 1934 and its deposits have been federally insured by the Savings
Association Insurance Fund ("SAIF") and its predecessor, the Federal Savings and
Loan Insurance Corporation ("FSLIC"), since 1934. The Bank is a member of the
Federal Home Loan Bank ("FHLB") System. The Bank is a community oriented, full
service retail savings institution offering traditional mortgage loan products.
The Bank attracts deposits from the general public and uses such deposits
primarily to invest in residential lending on owner occupied properties. The
Bank also makes consumer, commercial and agricultural real estate, agricultural
operating and multi-family loans and purchases investment securities.
Stock Market Information
Since its issuance on April 11, 1995, the Company's common stock has been traded
on the Nasdaq National Market under the symbol "WEFC." The following table
reflects high and low bid information during the periods shown. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission,
and may not represent actual transactions.
HIGH LOW
-------- --------
January 1, 1996 - March 31, 1996 $11.50 $10.125
April 1, 1996 - June 30, 1996 $11.875 $ 9.875
July 1, 1996 - September 30, 1996 $12.25 $11.375
October 1, 1996 - December 31, 1996 $13.25 $12.50
January 1, 1997 - March 31, 1997 $16.00 $12.875
April 1, 1997 - June 30, 1997 $15.50 $14.00
July 1, 1997 - September 30, 1997 $17.00 $15.00
October 1, 1997 - December 31, 1997 $19.00 $16.50
The number of stockholders of record of common stock as of the record date of
March 2, 1998, was approximately 576. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At February 13, 1998, there were 1,959,360 shares outstanding.
1
<PAGE>
The Company paid quarterly cash dividends of $0.12 per share on August 21, 1997
and November 12, 1997. No dividends were paid during 1995 or 1996.
The Company's ability to pay dividends to stockholders is subject to the
requirements of Minnesota law. No dividend may be paid by the Company unless its
board of directors determines that the Company will be able to pay its debts in
the ordinary course of business after payment of the dividend. In addition, the
Company's ability to pay dividends is dependent, in part, upon the dividends it
receives from the Bank. The Bank may not declare or pay a cash dividend on any
of its stock if the effect thereof would cause the Bank's regulatory capital to
be reduced below (1) the amount required for the liquidation account established
in connection with the Bank's conversion from mutual to stock form, or (2) the
regulatory capital requirements imposed by the Office of Thrift Supervision
("OTS").
2
<PAGE>
WELLS FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Financial Condition
- ------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
December 31, 1993 1994 1995 1996 1997
- ------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $ 165,188 $ 182,716 $ 195,158 $ 201,326 $201,436
Loans held for sale 775 114 1,944 1,791 2,012
Loans receivable, net 141,982 165,185 169,760 178,447 182,724
Mortgage-backed securities 1,023 - - - -
Mortgage-backed securities available for sale - 961 867 428 86
Securities available for sale - 5,951 6,753 7,100 2,640
Investment securities 14,759 5,991 4,199 2,049 3,198
Certificates of deposit 424 100 800 200 1,850
Cash and cash equivalents 3,480 1,480 8,192 8,301 5,971
Deposits 153,769 146,412 146,686 145,010 145,378
Borrowed funds - 23,650 18,000 26,500 24,500
Equity 10,181 11,506 28,852 28,202 29,641
</TABLE>
<TABLE>
<CAPTION>
Summary of Operations
- ------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
Years Ended December 31, 1993 1994 1995 1996 1997
- ------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 11,164 $ 11,573 $ 13,489 $ 14,669 $15,325
Interest expense 6,726 6,510 8,165 8,146 8,522
Net interest income 4,438 5,063 5,324 6,523 6,803
Provision for loan losses - 113 166 180 180
Noninterest income 999 737 809 1,014 1,109
Noninterest expense (1) 3,356 3,574 3,855 5,245 3,987
Income before cumulative effect of change
in accounting principle 1,179 1,283 1,270 1,200 2,220
Net income 1,248 1,283 1,270 1,200 2,220
</TABLE>
<TABLE>
<CAPTION>
Other Selected Data
- ------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
Years Ended December 31, 1993 1994 1995 1996 1997
- ------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Return on average assets before cumulative effect 0.70% 0.74% 0.67% 0.61% 1.10%
Return on average assets after cumulative effect 0.74% 0.74% 0.67% 0.61% 1.10%
Return on average equity before cumulative effect 12.40% 11.66% 5.50% 4.24% 7.71%
Return on average equity after cumulative effect 13.12% 11.66% 5.50% 4.24% 7.71%
Average equity to average assets 5.62% 6.31% 12.11% 14.40% 14.24%
Equity to assets 6.16% 6.30% 14.78% 14.01% 14.71%
Net interest rate spread (2) 2.61% 2.80% 2.29% 2.72% 2.75%
Nonperforming assets to total loans (3) 0.56% 0.53% 0.17% 0.29% 0.26%
Allowance for loan losses to total loans 0.28% 0.23% 0.30% 0.34% 0.41%
Allowance for loan losses to nonperforming loans (3) 52.37% 45.85% 171.24% 138.20% 172.62%
Basic earnings per share (4) N/A N/A $0.50 $0.61 $1.18
Diluted earnings per share (4) N/A N/A $0.50 $0.61 $1.16
</TABLE>
(1) For 1996, includes a special SAIF recapitalization assessment of $1,085.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest- bearing
liabilities.
(3) Nonperforming loans are loans over 90 days past due. Nonperforming assets
include nonperforming loans and foreclosed real estate.
(4) Does not include earnings prior to April 11, 1995, the date of conversion
to stock form.
3
<PAGE>
[Wells Financial Letterhead]
To Our Stockholders:
We are pleased to present our third annual stockholder's report.
The first annual report covered operations from our conversion on April 11, 1995
to December 31, 1995. The 1996 annual report reflected the impact of the special
assessment on the industry to recapitalize the Savings Association Insurance
Fund (SAIF) and the non-recurring cost in connection with the installation of
new data processing equipment and software. Absent the factors that affected the
1995 and 1996 annual reports, the current report is more reflective of a
"normal" year of operation.
We hope you share our satisfaction in the operating results of 1997 with its
record net income of $2,220,000. We are pleased to have begun the distribution
of quarterly dividends in 1997.
The conversion from a loan origination office to a full service branch in
Owatonna was completed with its move to a new office facility in September. The
installation of new data processing equipment and software (completed in 1996)
not only allowed us to improve our customer service, it allows us to be more
competitive in the year 2000 and thereafter.
A new wholly owned subsidiary of Wells Federal Bank, Greater Minnesota Mortgage,
Inc., began operation in late 1997. Greater Minnesota Mortgage specializes in
originating loans through referrals from community commercial banks as well as
developing other banking relationships that will mutually benefit the community
banks and our Company. We continue to work on enhancing the value of your stock
with stock buy backs when appropriate.
Your Board of Directors, the management team and the staff look forward to
providing quality service to our customers and enhancing the value of your
investment in Wells Financial Corp. Thank you for your continued confidence and
support.
Best Regards,
/s/Lawrence H. Kruse
Lawrence H. Kruse
President and Chief Executive Officer
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
General
The Company's business activities to date have been limited to its
investment in and loan to the Bank and a loan made to the Bank's Employee Stock
Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the Company's
common stock and, to a lesser degree, investing in securities and deposits in
other financial institutions. The Company's investment securities consist of
obligations issued by agencies of the U.S. government. As a result of the
limited operations of the Company, this discussion primarily relates to the
Bank. The principal business of the Bank consists of attracting deposits from
the general public and using such deposits, together with borrowings, primarily
to invest in residential lending on owner occupied properties. The Bank also
makes consumer loans and agricultural related loans and purchases investment
securities. The Bank's investment securities consist of U.S. government and
agency obligations, mortgage-backed securities, equity securities and FHLB
stock. The Bank's loans consist primarily of loans secured by residential real
estate located in its market area and, to a lesser extent, commercial real
estate loans and consumer loans.
The Bank's net earnings are dependent primarily on its net interest
income, which is the difference between interest income earned on its investment
and loan portfolios and interest paid on interest-bearing liabilities. Net
interest income is determined by (i) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. The Bank's interest rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. To a lesser extent, the Bank's net earnings also
are affected by the level of noninterest income, which primarily consists of
service charges and other fees. In addition, net earnings are affected by the
level of noninterest (general and administrative) expenses.
The operations of the Bank and the entire thrift industry are
significantly affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of the federal government and governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates, and the
availability of funds. Deposit flows and costs of funds are influenced by
prevailing market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings in the Bank's market
area.
Asset/Liability Management
Net interest income, the primary component of the Bank's net earnings,
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 rates by matching more closely the
effective maturities or repricing 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 its net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Bank's
assets mature or reprice 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
5
<PAGE>
(Dollars in Thousands)
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. These strategies include obtaining longer term fixed rate
borrowings at favorable rates and, due to the lower rates currently available,
the sale of all newly originated fixed rate mortgage loans to the secondary
market.
The Bank's lending strategy is focused on the origination of
traditional one to four-family mortgage loans primarily secured by single family
residences in the Bank's primary market area. In the Bank's market area, loan
demand has exceeded deposits and the Bank has not found it necessary or
desirable to purchase mortgage backed securities to any significant extent.
During recent periods, the Bank has utilized borrowings as a way of
accommodating loan demand, consistent with its goal of maintaining asset
quality. The Bank also invests a portion of its assets in consumer and
commercial business and commercial real estate loans and investment securities
as a method of reducing interest rate risk. These loans typically have
adjustable interest rates and are for shorter terms than residential first
mortgage loans. The Bank's entire commercial business loan portfolio and most of
the commercial real estate portfolio are secured by equipment or real estate
used for farming. These loans typically have higher interest rates than one- to
four-family loans but have not historically resulted in greater losses for the
Bank. Historically, the Bank sells higher loan to value ratio fixed rate
mortgage loans and mortgage loans with original maturities of fifteen years or
less into the secondary market and retains adjustable rate mortgage loans and
lower loan to value ratios fixed rate loans with original maturities greater
than fifteen years. However, due to the current low rate environment the Bank is
currently selling all fixed rate loans that it originates, regardless of the
loan to value ratio or the contractual maturity. In addition, the Bank retains
servicing on most of the loans that it sells, enabling it to generate additional
income and maintain certain economies of scale in loan processing.
In order to improve the Bank's interest rate sensitivity, improve asset
quality, and provide diversification in the asset mix, the Bank maintains a
percentage of its assets in investment securities, which generally have either
adjustable rates or shorter terms to maturity. The Bank's purchase of investment
securities is designed primarily for safety of principal and secondarily for
rate of return.
On a weekly basis, the Bank monitors the interest rates of its
competitors and sets its interest rates such that its rates are neither the
highest or lowest in its market area. The Bank intends for its rates to be
competitive and perhaps slightly above the average rates being paid in its
market area. The Bank has sought to remain competitive in its market by offering
a variety of products. The Bank attempts to manage the interest rates it pays on
deposits while maintaining a stable deposit base and providing quality services
to its customers.
6
<PAGE>
(Dollars in Thousands)
Net Portfolio Value
To encourage associations to reduce their interest rate risk, the OTS
adopted a rule incorporating an interest rate risk ("IRR") component into the
risk-based capital rules. This rule in not yet in effect. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its net portfolio value ("NPV") to changes in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. An
institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated market value of its assets will require
the institution to deduct from its capital 50% of that excess change. The rule
provides that the OTS will calculate the IRR component quarterly for each
institution. The Bank, based on asset size and risk-based capital, has been
informed by the OTS that it is exempt from this rule. Nevertheless, the
following table presents the Bank's NPV at December 31, 1997, as calculated by
the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
Percent of Change in
Change Interest Estimated Amount of Estimated NPV NPV Ratio(4)
Rates (basis points) NPV Change(1) NPV(2) Ratio(3) (basis points)
-------------------- --- --------- ------ -------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+400 $14,633 $(13,787) (49)% 7.75% -612 bp
+300 18,723 (9,697) (34)% 9.67% -419 bp
+200 22,566 (5,853) (21)% 11.40% -246 bp
+100 25,832 (2,587) (9)% 12.80% -106 bp
-- 28,420 13.87%
-100 30,179 1,760 6% 14.56% 69 bp
-200 31,247 2,827 10% 14.95% 108 bp
-300 32,513 4,093 14% 15.41% 155 bp
-400 34,348 5,928 21% 16.09% 223 bp
</TABLE>
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
7
<PAGE>
(Dollars in Thousands)
At
December 31,
1997
-----------------
*** Risk Measures: 200 bp rate shock ***
Pre-Shock NPV Ratio: NPV as % of PV of Assets 13.87%
Exposure Measure: Post-Shock NPV Ratio 11.40%
Sensitivity Measure: Change in NPV Ratio (246) bp
Although the OTS has informed the Bank that it is not subject to the
IRR component discussed above, the Bank is still subject to interest rate risk
and, as can be seen above, rising interest rates will reduce the Bank's NPV. If
the Bank were subject to the IRR component at December 31, 1997, a deduction
from capital would have been required.
Also, during periods of increasing interest rates, the Bank's interest
rate sensitive liabilities would reprice faster than its interest rate sensitive
assets (repricing periods on adjustable-rate loans affect the repricing of
interest rate sensitive assets, with longer repricing periods delaying the
repricing of such assets more than shorter repricing periods would delay the
repricing of such assets), causing a decline in the Bank's interest rate spread
and margin. In times of decreasing interest rates, the value of fixed rate
assets could increase in value and the lag in repricing of interest rate
sensitive assets could be expected to have a positive effect on the Bank.
8
<PAGE>
Average Balance Sheet (Dollars in Thousands)
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. The yields for the periods presented include loan origination
fees that are considered adjustments to yield. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily average balances has caused any material difference in
the information presented.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------- ---------------------------------- ---------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- ------------ -------- ------------ ------------ -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) 170,395 12,571 7.38% 173,383 13,617 7.85% 183,591 14,570 7.94%
Mortgage-backed securities 949 55 5.80% 661 45 6.81% 250 18 7.20%
Investments (2) 15,618 863 5.53% 18,281 1,007 5.51% 14,426 737 5.11%
---------- ------------ ------------ ----------- ------------ ----------
Total interest-
earning assets 186,962 13,489 7.22% 192,325 14,669 7.63% 198,267 15,325 7.73%
------------ ------------ ----------
Noninterest earning assets 3,847 4,163 3,979
---------- ------------ ------------
Total assets 190,809 196,488 $ 202,246
========== ============ ============
Interest bearing liabilities:
Savings, NOW and money
market accounts 36,553 937 2.56% 36,578 949 2.59% 37,010 966 2.61%
Certificates of deposit 110,169 6,066 5.51% 110,139 6,111 5.55% 107,394 6,014 5.60%
Borrowed funds 18,938 1,162 6.14% 19,269 1,086 5.64% 26,808 1,542 5.75%
---------- ------------ ------------ ------------ ------------ ----------
Total interest bearing
liabilities 165,660 8,165 4.93% 165,986 8,146 4.91% 171,212 8,522 4.98%
------------ ------------ ----------
Noninterest bearing
liabilities 2,050 2,199 2,232
---------- ------------ ------------
Total liabilities 167,710 168,185 173,444
Equity 23,099 28,303 28,802
---------- ------------ ------------
Total liabilities
and equity 190,809 196,488 $ 202,246
========== ============ ============
Net interest income 5,324 6,523 6,803
============ ============ ==========
Interest rate spread (3) 2.29% 2.72% 2.75%
Net yield on interest
earning assets (4) 2.85% 3.39% 3.43%
Ratio of average
interest earning assets
to average interest
bearing liabilities 1.13X 1.16X 1.16X
liabilities ========== ============ ============
</TABLE>
(1) Average balances include non-accrual loans and loans held for sale.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as
a percentage of average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis (Dollars in Thousands)
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the years indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------- --- ---------------------------------------
1996 vs. 1995 1997 vs. 1996
---------------------------------------- ---------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
--------- -------- ---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable $ 220 $ 811 $ 15 $ 1,046 $ 801 $ 156 $ (4) $ 953
Mortgage-backed securities (17) 10 (15) (22) (28) 3 (2) (27)
Investments 147 (3) 12 156 (212) (73) 15 (270)
--------- -------- ---------- ---------- --------- --------- --------- ---------
Total interest-earning assets 350 818 12 1,180 561 86 9 656
--------- -------- ---------- ---------- --------- --------- --------- ---------
Interest expense:
Deposit accounts - 57 - 57 (141) 62 (1) (80)
Borrowed funds 19 (94) (1) (76) 425 21 10 456
--------- -------- ---------- ---------- --------- --------- --------- ---------
Total interest-bearing
liabilities 19 (37) (1) (19) 284 83 9 376
--------- -------- ---------- ---------- --------- --------- --------- ---------
Net change in interest income $ 331 $ 855 $ 13 $ 1,199 $ 277 $ 3 $ - $ 280
========= ======== ========== ========== ========= ========= ========= =========
</TABLE>
10
<PAGE>
11
(Dollars in Thousands)
Financial Condition
Total assets remained relatively constant for the year ended December
31, 1997 when compared to the year ended December 31, 1996. An increase of
$4,277 in loans receivable, from $178,447 at December 31, 1996 to $182,724 at
December 31, 1997, was offset by a decrease in securities available for sale and
mortgage backed securities available for sale. The increase in loans receivable
primarily resulted from a $4,084 increase in the Bank's home equity line of
credit loan portfolio at December 31, 1997 when compared to December 31, 1996.
This increase in the Bank's home equity line of credit loan portfolio was the
result of management's decision to aggressively originate and retain home equity
line of credit loans due to the higher interest rates the home equity line of
credit loans generally produce. The $4,460 decease in securities available for
sale was due to the sale of investments in mutual funds and Federal Home Loan
Mortgage Corp. stock. Mortgage backed securities that are available for sale
decreased by $342 due to the repayment of principal.
In accordance with the Bank's internal classification of assets policy,
management evaluates the loan portfolio on a quarterly basis to identify and
determine the adequacy of the allowance for loan losses. As of December 31, 1996
and December 31, 1997 the balance in the allowance for loan losses and the
allowance for loan losses as a percentage of total loans was $615 and $763 and
0.34% and 0.41%, respectively.
Loans on which the accrual of interest has been discontinued amounted
to $298 and $237 at December 31, 1996 and 1997, respectively. The effect of
nonaccrual loans was not significant to the results of operations. The Company
includes all loans considered impaired under FASB Statement No. 114 in
nonaccrual loans. The amount of impaired loans was not material at December 31,
1996 and 1997.
Deposits increased by $368 from $145,010 at December 31, 1996 to
$145,378 at December 31, 1997. Borrowed funds decreased by $2,000 at year end
1997 when compared to year end 1996 as income from operations and cash received
from the sale of securities available for sale were used to fund loan growth and
reduce borrowings.
Equity increased by $1,439 from $28,202 at December 31, 1996 to $29,641
at December 31, 1997. The increase in equity was the result of net income for
1997 of $2,209, the allocation of $245 of employee stock ownership plan shares,
the amortization of $129 of unearned compensation and a $236 increase in the
unrealized appreciation on securities available for sale, being partially offset
by the payment of $470 in cash dividends and by the repurchase of 64,500 shares
of treasury stock at a cost of $921.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
General. Net income for the year ended December 31, 1997 was $2,220, an
increase of $1,020 when compared to net income for the year ended December 31,
1996. The increase in net income for 1997 when compared to 1996 was primarily
the result of legislation that was passed on September 30, 1996 which required
savings institutions insured by the Savings Association Insurance Fund (SAIF) to
pay a one time special assessment on September 30, 1996 to recapitalize the
SAIF. The Bank's assessment amounted to $1,085, $640 net of tax affects. Net
interest income and noninterest income increased by $280 and $95, respectively,
for 1997 when compared to 1996. Noninterest expense decreased by $1,258,
primarily due to the legislation mentioned above, and income taxes increased by
$624 for 1997 when compared to 1996.
11
<PAGE>
(Dollars in Thousands)
Interest Income. Interest income increased by $656 for the year ended
December 31, 1997 when compared to the year ended December 31, 1996. This
increase is primarily the result of an increase in the average size of the loan
portfolio during 1997 when compared to 1996 and also, to a lesser extent, due to
an increase in interest rates on the loan portfolio.
Interest Expense. During 1997, average borrowed funds increased by
$7,539 when compared to average borrowed funds during 1996 and average deposits
decreased by $2,313 during 1997 when compared to average deposits during 1996.
The increase in average borrowed funds during 1997 when compared to average
borrowed funds during 1996 is the primary reason for the $376 increase in
interest expense for the year ended December 31, 1997 when compared to the year
ended December 31, 1996. To a lesser extent, an increase in the interest rates
paid on deposits and borrowings also increased interest expense for 1997 when
compared to 1996.
Net Interest Income. Net interest income increased by $280 for the year
ended December 31, 1997 when compared to the year ended December 31, 1996.
Again, this change is the result of the changes in interest income and interest
expense that are discussed above.
Provision for Loan Losses. The provision for loan losses remained
constant for 1997 when compared to 1996. Management monitors the allowance for
loan loss in relation to the size and quality of the loan portfolio and adjusts
the provision for loan losses to adequately provide for loan losses. While the
Company maintains its allowance for loan losses at a level that is considered to
be adequate to provide for potential losses, there can be no assurance that
further additions will not be made to the loss allowance and that losses will
not exceed estimate amounts.
Noninterest Income. Noninterest income increased by $95 from $1,014 for
the year ended December 31, 1996 to $1,109 for the year ended December 31, 1997.
This increase is primarily due to an increase in loan origination and commitment
fees and an increase in fees and service charges.
Noninterest Expense. Noninterest expense decreased by $1,258 from
$5,245 for the year ended December 31, 1996 to $3,987 for the year ended
December 31, 1997. As described above, the legislation that was signed into law
on September 30, 1996 resulted in a one time special assessment to the Bank of
$1,085. This assessment is the primary reason for the increased noninterest
expense during 1996 when compared to 1997. As a result of his legislation, the
Bank's annual SAIF assessment was reduced from twenty three basis points per
dollar of deposits to approximately six basis points per dollar of deposits.
Data processing expense decreased by $114 from $359 for the year ended December
31, 1996 to $245 for the year ended December 31, 1997. As part of management's
commitment to provide competitive products and excellent service to the Bank's
customers, the Bank converted to a new data processing software system during
the second quarter of 1996. The software conversion during 1996 resulted in a
non-recurring expense of approximately $132 that was recorded during 1996.
Income Tax Expense. Income tax expense increased by $613 from $912 for
the year ended December 31, 1996 to $1,525 for the year ended December 31, 1997.
This increase resulted from the $1,633 increase in income before income taxes
for the year ended December 31, 1997 when compared to the year ended December
31, 1996. Income tax expense as a percentage of income before taxes for the
years ended December 31, 1997 and 1996 was 40.72% and 43.18%, respectively.
12
<PAGE>
(Dollars in Thousands)
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
General. For the year ended December 31, 1996, net interest income
increased by $1,199 when compared to the same period in 1995. This increase in
net interest income would normally result in an increase in income before income
taxes. However, on September 30, 1996, a law was enacted which required savings
institutions insured by the Savings Association Insurance Fund (SAIF) to pay a
one time special assessment to recapitalize the SAIF. The Bank's assessment
amounted to $1,085, which was recorded as an expense during the third quarter of
1996. This special SAIF assessment was the primary reason for income before
income taxes for fiscal year 1996 being equal to income before income taxes for
fiscal year 1995. Income tax expense for the year ended December 31, 1996 was
$70 higher than income tax for the year ended December 31, 1995 primarily due to
an increase in nondeductible expenses incurred by the Company, which resulted in
a reduction in net income of $70 from $1,270 for the year ended December 31,
1995 to $1,200 for the year ended December 31, 1996.
Interest Income. The Company's interest income increased by $1,180 for
the year ended December 31, 1996 when compared to the year ended December 31,
1995. This is primarily the result of an upward repricing of the Bank's
adjustable rate loan portfolio and the increase in loans receivable. To a lesser
extent, the increase in interest income was the result of an increase in the
average balance of investment securities.
Interest Expense. The average amount of deposits during 1996 remained
approximately equal to the average amount of deposits during 1995. An increase
in the interest rates paid on deposits caused interest expense on deposits to
increase by $57, from $7,003 for the year ended December 31, 1995 to $7,060 for
the year ended December 31, 1996. The average amount of borrowed funds during
1996 increased by $331 when compared to 1995. This increase in the average
amount of borrowed funds was offset by a decrease in the interest rates paid on
borrowed funds, which resulted in a decrease in interest expense on borrowed
funds. The decrease in the interest paid on borrowed funds offset the increase
in interest paid on deposits and resulted in a $19 decrease in interest expense
for fiscal year 1996 when compared to fiscal year 1995.
Net Interest Income. Net interest income increased by $1,199 for the
year ended December 31, 1996 when compared to the year ended December 31, 1995.
Again, this is primarily the result of the increase in loans receivable and the
result of the repricing of the Bank's adjustable rate loan portfolio as
described above, and to a lesser extent, the result of the decrease in interest
expense.
Provision for Loan Losses. The provision for loan losses increased by
$14 for 1996 when compared to 1995. Management monitors the allowance for loan
loss in relation to the size and quality of the loan portfolio and adjusts the
provision for loan losses to adequately provide for loan losses. While the
Company maintains its allowance for loan losses at a level that is considered to
be adequate to provide for potential losses, there can be no assurance that
further additions will not be made to the loss allowance and that losses will
not exceed estimate amounts.
13
<PAGE>
(Dollars in Thousands)
Noninterest Income. Noninterest income increased by $205 from $809 for
the year ended December 31, 1995 to $1,014 for the year ended December 31, 1996.
This increase is primarily due to increases in the gain on sale of loans
originated for sale and insurance commissions. The increase in the gain on the
sale of loans originated for sale resulted primarily from the recording of
mortgage servicing rights on loans sold during the year due to the adoption of
FASB Statement No. 122 during the period. The increase in insurance commissions
was the result of the acquisition of additional local accounts by the Bank's
insurance subsidiary.
Noninterest Expense. Noninterest expense increased by $1,390 from
$3,855 for the year ended December 31, 1995 to $5,245 for the year ended
December 31, 1996. As described above, the legislation that was signed into law
on September 30, 1996 resulted in a one time special assessment to the Bank of
$1,085. This assessment is the primary reason for the increase in noninterest
expense. As a result of this legislation, the Bank's annual assessment was
reduced from twenty three basis points per dollar of deposits to approximately
six basis points per dollar of deposits. Also, as part of management's
commitment to provide competitive products and excellent service to the Bank's
customers, the Bank converted to a new data processing software system during
the second quarter of 1996. The decision to convert the data processing software
was based upon management's desire to improve marketing of the Bank's products
to current as well as potential customers. The software conversion resulted in a
non-recurring expense of approximately $132 that was recorded during 1996. In
addition, approximately $498 in hardware and software costs were capitalized and
will be depreciated over their useful lives.
Income Tax Expense. While income before income taxes was the same for
the years ended December 31, 1996 and 1995, income tax expense increased during
1996 primarily due to an increase in nondeductible expenses incurred by the
Company. Income tax expense as a percentage of income before taxes for the years
ended December 31, 1996 and 1995 was 43.18% and 39.87%, respectively.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. At December 31, 1997, the Bank's
liquidity, as measured for regulatory purposes, was 5.02%. The Bank adjusts
liquidity as appropriate to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of investment securities and funds provided from
operations. While scheduled loan repayments are a relatively predictable source
of funds, deposit flows and loan prepayments are significantly influenced by
general interest rates, economic conditions and competition. If needed, the
Bank's primary source of funds can be supplemented by wholesale funds obtained
through additional advances from the Federal Home Loan Bank system. The Bank
invests excess funds in overnight deposits, which not only serve as liquidity,
but also earn interest as income until funds are needed to meet required loan
funding.
The Bank's most liquid asset is cash including investments in interest
bearing accounts at the FHLB of Des Moines that have no withdrawal restrictions.
The level of these assets are dependent on the Bank's operating, financing and
investing activities during any given period. At December 31, 1997, the Bank's
cash totaled $5,902. This compares to the Bank's cash at December 31, 1996 of
$6,675.
14
<PAGE>
(Dollars in Thousands)
Also available to the Bank to meet liquidity requirements are
borrowings from the Federal Home Loan Bank. At December 31, 1997, the Bank had
$24,500 in outstanding advances from the FHLB of Des Moines, which have been
used to fund loan originations. At December 31, 1997, the Bank had the ability
to borrow approximately 3.7 times its then outstanding advances.
In 1996, the Company approved stock buy back programs in which up
to 317,188 shares of the common stock of the Company may be acquired. An
additional 126,813 shares may be purchased in the future in accordance with
these programs.
The Bank is required to maintain specified amounts of capital. The
capital standards generally require the maintenance of regulatory capital
sufficient to meet a tangible capital requirement, a core capital requirement
and a risk-based capital requirement. At December 31, 1997, the Bank's tangible
capital totaled $22.8 million, or 11.41% of adjusted total assets, and core
capital totaled $22.8 million, or 11.41% of adjusted total assets, which
substantially exceeded the respective 1.5% tangible capital and 3.0% core
capital requirements at that date by $19.8 million and $16.8 million,
respectively, or 9.91% and 8.41% of adjusted total assets, respectively. The
Bank's risk-based capital totaled $23.5 million at December 31, 1997 or 20.0% of
risk-weighted assets, which exceeded the current requirements of 8.0% of
risk-weighted assets by $14.1 million or 12.0% of risk-weighted assets.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
Impact of New Accounting Standards
Effective January 1, 1996, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 122, Accounting for Mortgage
Servicing Rights. This Statement requires that a mortgage banking enterprise
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and then sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans based on their relative fair
values if it is practicable to estimate those fair values.
Effective January 1, 1997, the Company adopted FASB Statement No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement establishes the basic principles
that an entity should recognize only assets it controls and liabilities it has
incurred. Assets should be "derecognized" only when they have been extinguished,
and recognition of financial assets and liabilities should not be affected by
the sequence of transactions unless the effect of the transactions is to
15
<PAGE>
(Dollars in Thousands)
maintain effective control over a transferred financial asset. Statement No. 125
also continues the recognition of mortgage servicing rights on loans sold and
supersedes Statement No. 122 for transactions after January 1, 1997.
In accordance with the provisions of Statements No. 122 and 125,
mortgage servicing rights in the amounts of $107 and $105 were capitalized
during the years ended December 31, 1997 and 1996, respectively. The Company
recognized amortization of the cost of mortgage servicing rights in the amounts
of $30 and $17 for the years ended December 31, 1997 and 1996, respectively. The
effect of adopting Statements No. 122 and 125 was to increase net income by $77
and $88 for the years ended December 31, 1997 and 1996, respectively.
In June 1997, the FASB issued Statement No. 130, Reporting
Comprehensive Income. This Statement requires an entity to include a statement
of comprehensive income in its full set of general-purpose financial statements.
Comprehensive income consists of the net income or loss of the entity plus or
minus the change in equity of the entity during the period from transactions,
other events, and circumstances resulting from nonowner sources. Statement No.
130 is effective for years beginning after December 15, 1997 and will require
financial statements of earlier periods that are presented for comparative
purposes to be reclassified.
Year 2000 Issue
The Company is aware of the issues associated with the programming
code in existing computer systems as the year 2000 approaches. The "year 2000"
problem will affect virtually every computer operation by the rollover of the
two digit year value to 00. The issue is whether computer systems will recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. To date, confirmations have been received from the Company's primary
processing vendors that plans are being developed to address processing of
transactions in the year 2000. Management has not yet assessed the year 2000
compliance expense and related potential effect on the Company's earnings.
16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Wells Financial Corp. and Subsidiary
Wells, Minnesota
We have audited the accompanying consolidated statements of financial condition
of Wells Financial Corp. and Subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 audits.
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 Wells Financial
Corp. and Subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Rochester, Minnesota
February 9, 1998
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash, including interest-bearing accounts
1997 $4,838; 1996 $7,560 $ 5,971 $ 8,301
Certificates of deposit (Note 2) 1,850 200
Securities available for sale (Notes 3 and 10) 2,640 7,100
Securities held to maturity (Note 4) 3,198 2,049
Mortgage-backed securities available for sale (Note 3) 86 428
Loans held for sale, net of unrealized losses (Note 5) 2,012 1,791
Loans receivable, net (Notes 5, 10, 16 and 17) 182,724 178,447
Accrued interest receivable 1,106 1,060
Premises and equipment (Note 8) 1,425 1,519
Foreclosed real estate (Note 7) 35 78
Other assets (Note 6) 389 353
----------------------------------
Total assets $ 201,436 $ 201,326
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------
Liabilities
Deposits (Note 9) $ 145,378 $ 145,010
Borrowed funds (Note 10) 24,500 26,500
Advances from borrowers for taxes and insurance 1,080 1,020
Income taxes (Note 11):
Current 111
Deferred 474 358
Accrued interest payable 139 126
Accrued expenses and other liabilities 113 110
----------------------------------
Total liabilities 171,795 173,124
----------------------------------
Commitments, contingencies and credit risk (Notes 15, 16, and 17)
Stockholders' Equity (Notes 12, 13, 14 and 19)
Common stock, $.10 par value; 7,000,000 shares
authorized; 2,187,500 shares issued 219 219
Additional paid-in capital 16,694 16,588
Retained earnings, substantially restricted 15,736 13,986
Unrealized appreciation on securities
available for sale, net of related taxes 584 348
Unearned Employee Stock Option Plan shares (757) (896)
Unearned compensation-restricted stock awards (151) (280)
Less cost of treasury stock, 1997 228,140 shares;
1996 163,640 shares (2,684) (1,763)
----------------------------------
Total stockholders' equity 29,641 28,202
----------------------------------
Total liabilities and stockholders' equity $ 201,436 $ 201,326
----------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
Loans receivable
First mortgage loans $ 12,112 $ 11,558 $ 10,854
Consumer and other loans 2,458 2,059 1,717
Investment securities and other interest-
bearing deposits 755 1,052 918
--------------------------------------------------
Total interest income 15,325 14,669 13,489
--------------------------------------------------
Interest Expense
Deposits 6,980 7,060 7,003
Borrowed funds 1,542 1,086 1,162
--------------------------------------------------
Total interest expense 8,522 8,146 8,165
--------------------------------------------------
Net interest income 6,803 6,523 5,324
Provision for loan losses (Note 5) 180 180 166
--------------------------------------------------
Net interest income after
provision for loan losses 6,623 6,343 5,158
--------------------------------------------------
Noninterest Income
Gain on sale of loans 81 102 31
Loan origination and commitment fees 174 81 60
Loan servicing fees 198 202 186
Insurance commissions 313 318 247
Fees and service charges 296 246 225
Other 47 65 60
--------------------------------------------------
Total noninterest income 1,109 1,014 809
--------------------------------------------------
Noninterest Expenses
Compensation and benefits (Note 14) 2,037 1,911 1,890
Occupancy and equipment (Note 15) 681 644 535
Federal insurance premiums and
assessment (Note 9) 94 1,406 336
Data processing 245 359 263
Advertising 175 150 144
Other 755 775 687
--------------------------------------------------
Total noninterest expenses 3,987 5,245 3,855
--------------------------------------------------
Income before income taxes 3,745 2,112 2,112
Income tax expense (Note 11) 1,525 912 842
--------------------------------------------------
Net income $ 2,220 $ 1,200 $ 1,270
--------------------------------------------------
Earnings per share (Note 13):
Basic earnings per share $ 1.18 $ 0.61 $ 0.50
--------------------------------------------------
Diluted earnings per share $ 1.16 $ 0.61 $ 0.50
--------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
WELLS FINANCIAL CORP. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Years Ended December 31,
1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Unrealized Unearned
Appreciation
(Depreciation)Employee Unearned
on Stock Compensation-
Additional Securities Ownership Restricted Total
Common Paid-In Retained Available Plan Stock Treasury Stockholders'
Stock Capital Earnings for Sale, Shares Awards Stock Equity
net
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 $ $ $ 11,516 $ (10) $ $ $ $ 11,506
Proceeds from sale of
2,187,500 shares,
net of offering costs
of $775 (Note 19) 219 16,506 (1,120) 15,605
Net income 1,270 1,270
Net changes in unrealized
appreciation on
securities available
for sale, net of
related taxes 328 328
Allocated ESOP shares 31 112 143
------------------------------------------------------------------------------------------------
Balances, December 31, 1995 219 16,537 12,786 318 (1,008) 28,852
Net income 1,200 1,200
Net changes in
unrealized appreciation
on securities
available for sale,
net of related taxes 30 30
Treasury stock purchases,
163,640 shares (Notes (1,763) (1,763)
12 & 14)
Purchase of common stock
for restricted stock
awards (Note 14) (539) (539)
Amortization of unearned
compensation 259 259
Allocated ESOP shares 51 112 163
------------------------------------------------------------------------------------------------
Balances, December 31, 1996 219 16,588 13,986 348 (896) (280) (1,763) 28,202
Net income 2,220 2,220
Net changes in
unrealized appreciation
on securities
available for sale,
net of related taxes 236 236
Treasury stock purchases,
64,500 shares (Note 12) (921) (921)
Cash dividends declared
($.24 per share) (470) (470)
Amortization of unearned
compensation 129 129
Allocated ESOP shares 106 139 245
------------------------------------------------------------------------------------------------
Balances, December 31, 1997 $ 219 $ 16,694 $ 15,736 $ 584 $ (757) $ (151) $ (2,684) $ 29,641
------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,220 $ 1,200 $ 1,270
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 180 180 166
Gain on sale of loans (81) (102) (31)
Amortization of mortgage servicing rights 30 17
FHLB stock dividends (32)
Compensation on allocation of ESOP shares 218 163 143
Amortization of unearned compensation 129 228
Write-down of foreclosed real estate 12 8 18
Gain on sale of foreclosed real estate (12) (17) (16)
Unrealized loss (gain) on loans held for sale (16) 30
Loss on disposal of equipment 7
Deferred income taxes (48) (8) 34
Depreciation and amortization on premises
and equipment 273 264 192
Amortization of deferred loan origination fees (151) (145) (136)
Amortization of excess servicing fees 13 14 14
Amortization of securities premiums and discounts (2) 1
Loans originated for sale (14,914) (19,057) (15,414)
Proceeds from the sale of loans held for sale 14,709 19,207 13,615
Changes in assets and liabilities:
Accrued interest receivable (46) 60 (208)
Other assets (52) 67 52
Income taxes payable, current 111 (54) 119
Accrued expenses and other liabilities 16 (276) 158
---------------------------------------------------
Net cash provided by (used in)
operating activities 2,591 1,784 (55)
---------------------------------------------------
</TABLE>
(Continued)
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 , 1996 A ND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Investing Activities
Net increase in loans $ (4,252) $ (8,999) $ (4,624)
Certificates of deposit:
Maturities 200 800 100
Purchases (1,850) (200) (800)
Purchase of securities available for sale (171) (287) (280)
Proceeds from sales of securities available for sale 5,033
Securities held to maturity:
Maturities and calls 3,649 5,900 3,795
Purchases (4,798) (3,749) (1,994)
Proceeds from principal repayments of
mortgage-backed securities available for sale 340 436 138
Purchase of premises and equipment (179) (552) (36)
Proceeds from the sale and redemption of
foreclosed real estate 102 117 229
Investment in foreclosed real estate (32)
---------------------------------------------------
Net cash used in investing activities (1,958) (6,534) (3,472)
---------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits 368 (1,337) 274
Net increase (decrease) from advances from
borrowers for taxes and insurance 60 (2) 10
Proceeds from borrowed funds 13,500 35,000 18,000
Repayments on borrowed funds (15,500) (26,500) (23,650)
Proceeds from issuance of common stock 15,605
Purchase of treasury stock (921) (1,763)
Purchase of common stock for
restricted stock awards (539)
Dividends paid (470)
---------------------------------------------------
Net cash provided by (used in)
financing activities (2,963) 4,859 10,239
---------------------------------------------------
Net increase (decrease) in cash (2,330) 109 6,712
Cash
Beginning 8,301 8,192 1,480
---------------------------------------------------
Ending $ 5,971 $ 8,301 $ 8,192
---------------------------------------------------
</TABLE>
(Continued)
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 , 1996 A ND 1995
( DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest on deposits $ 6,982 $ 7,164 $ 6,901
Interest on borrowed funds 1,527 1,076 1,172
Income taxes 1,450 981 723
---------------------------------------------------
Supplemental Schedule of Noncash Investing and
Financing Activities
Transfers from loans to foreclosed real estate $ 27 $ 157 $ 109
Issuance of shares to ESOP in conjunction with
conversion from mutual to stock form -- -- 1,120
Allocation of ESOP shares to participants 139 112 112
Net change in unrealized appreciation
on securities available for sale 236 30 328
---------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
Nature of operations: Operations of Wells Financial Corp. (Company) primarily
consist of banking services through its subsidiary, Wells Federal Bank, fsb
(Bank). One of the Bank's subsidiaries, Wells Insurance Agency, Inc. is a
property and casualty insurance agency. The other subsidiary of the Bank,
Greater Minnesota Mortgage, Inc. is a mortgage banking company that originates
loans through referrals from commercial banks. The Company serves its customers
through the Bank's eight locations in South Central Minnesota.
Basis of financial statement presentation: The consolidated financial statements
have been prepared in conformity with generally accepted accounting principles.
In preparing the consolidated 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 statements of financial condition and revenues
and expenses for the reporting period. Actual results could differ 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 allowances for losses on loans are adequate. While
management uses available information to recognize losses on loans, future
additions to the allowances 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 Company's allowances for losses on
loans. Such agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of Wells Financial Corp., its wholly owned subsidiary,
Wells Federal Bank, fsb, and the Bank's wholly owned subsidiaries, Wells
Insurance Agency, Inc. and Greater Minnesota Mortgage, Inc. All significant
intercompany transactions and balances are eliminated in consolidation.
Securities held to maturity: Debt securities for which the Company has both the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Amortization of premiums and accretion
of discounts, computed by the interest method over their contractual lives, is
included in interest income.
Securities available for sale: Securities classified as available for sale are
those debt securities that the Company intends to hold for an indefinite period
of time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized gains
or losses reported as a separate component of stockholder's equity, net of the
related deferred tax effect. Amortization of premiums and accretion of
discounts, computed by the interest method over their contractual lives, is
recognized in interest income.
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Declines in the fair value of individual securities classified as either held to
maturity or available for sale below their amortized cost that are determined to
be other than temporary result in write-downs of the individual securities to
their fair value with the resulting write-downs included in current earnings as
realized losses.
Loans held for sale: Loans held for sale are those loans that the Company may
sell or intends to sell prior to maturity. They are carried at the lower of
aggregate cost or market value. Gains and losses on sales of loans are
recognized at settlement dates and are determined by the difference between the
sales proceeds and the carrying value of the loans. All sales are made without
recourse.
Loans receivable: Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are stated at the
amount of unpaid principal, reduced by an allowance for loan losses and net
deferred loan origination fees.
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs (net of recoveries). Management's periodic evaluation of
the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions. While management uses its best
information available to make its evaluation, it is possible that adjustments to
the allowance may be necessary if there are significant changes in economic
conditions.
A loan is impaired when it is probable the creditor will be unable to collect
all principal and interest payments due in accordance with the terms of the loan
agreement. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent.
Interest on loans is recognized over the terms of the loans and is calculated
using the simple-interest method on principal amounts outstanding. Accrual of
interest is discontinued when management believes, after considering economics,
business conditions, and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful. Interest on these
loans is recognized only when actually paid by the borrower if collection of
principal is likely to occur. Accrual of interest is generally resumed when, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal.
Loan origination fees and related costs: Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the Company's
historical prepayment experience.
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
Loan servicing: The Company generally retains the right to service mortgage
loans sold to others. The cost allocated to the mortgage servicing rights
retained has been recognized as a separate asset and is being amortized in
proportion to and over the period of estimated net servicing income. Mortgage
servicing rights are periodically evaluated for impairment based on the fair
value of those rights. Fair values are estimated using discounted cash flows
based on current market rates of interest. For purposes of measuring impairment,
the rights must be stratified by one or more predominant risk characteristics of
the underlying loans. The Company stratifies its capitalized mortgage servicing
rights based on the interest rate and term of the underlying loans. The amount
of impairment recognized is the amount, if any, by which the amortized cost of
the rights for each stratum exceed their fair value.
Foreclosed real estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at lower of cost or fair value less
estimated costs to sell at date of foreclosure. Costs relating to improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed.
Valuations are periodically performed by management and charge-offs to
operations are made if the carrying value of a property exceeds its estimated
fair value less estimated costs to sell.
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.
Premises and equipment: Land is carried at cost. Bank premises, leasehold
improvements, and furniture, fixtures, and equipment are carried at cost, less
accumulated depreciation and amortization. Bank premises and furniture,
fixtures, and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets ranging from 10 to 40 years for bank
premises, 7 to 10 years for leasehold improvements and 3 to 7 years for
furniture, fixtures and equipment. The cost of leasehold improvements is being
amortized using the straight-line method over the terms of the related leases.
Fair value of financial instruments: The following methods and assumptions were
used by the Company in estimating the fair value of its financial instruments:
Cash: The carrying amounts reported for cash and interest-bearing accounts
approximate their fair values.
Certificates of deposit: The carrying amounts reported for certificate of
deposits approximate their fair values.
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
Securities: Fair values for securities available for sale and securities
held to maturity are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments, except for stock in the Federal
Home Loan Bank for which fair value is equal to cost.
Loans held for sale: Fair values are based on quoted market prices of
similar loans sold on the secondary market.
Loans and accrued interest receivable: For variable-rate loans that reprice
frequently and that have experienced no significant change in credit risk,
fair values are based on carrying values. Fair values for all other loans
are estimated based on discounted cash flows, using interest rates
currently being offered for loans with similar terms to borrowers with
similar credit quality. The carrying amount of accrued interest receivable
approximates its fair value.
Mortgage servicing rights: The fair value of mortgage servicing rights
approximates its carrying value as the interest rate and repayment
assumptions used in the calculation of mortgage servicing rights have not
changed significantly.
Deposits and other liabilities: The fair values of demand deposits and
savings accounts equal their carrying amounts, which represent the amounts
payable on demand. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on those certificates. The carrying amounts of
advances by borrowers for taxes and insurance and accrued interest payable
approximate their fair values.
Borrowed funds: The fair value of long term fixed rate borrowed funds are
estimated by using a discounted cash flow analysis based on current
incremental borrowing rates for similar types of borrowing arrangements.
The fair value of the variable rate borrowed funds approximates carrying
value as these borrowings reprice monthly.
Off-statement of financial condition instruments: Since the majority of the
Company's off-statement of financial condition instruments consist of non
fee-producing, variable rate commitments, the Company has determined they
do not have a distinguishable fair value.
Emerging accounting standards: In June 1997, the Financial Accounting Standards
Board issued Statement No. 130, Reporting Comprehensive Income. This Statement
requires an entity to include a statement of comprehensive income in its full
set of general-purpose financial statements. Comprehensive income consists of
the net income or loss of the entity plus or minus the change in equity of the
entity during the period from transactions, other events, and circumstances
resulting from nonowner sources. Statement No. 130 is effective for years
beginning after December 15, 1997 and will require financial statements of
earlier periods that are presented for comparative purposes to be reclassified.
<PAGE>
Note 2. Certificates of Deposit
Certificates of deposit with a carrying value of $1,850 and $200 at December 31,
1997 and 1996, respectively, had weighted average yields of 5.68% and 5.75%,
respectively, and contractual maturities of less than one year.
Note 3. Securities Available for Sale
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock in Federal Home Loan Bank $ 1,633 $ -- $ -- $ 1,633
FHLMC stock 24 983 -- 1,007
------------------------------------------------------------
1,657 983 -- 2,640
Mortgage-backed securities 86 -- -- 86
------------------------------------------------------------
$ 1,743 $ 983 $ -- $ 2,726
------------------------------------------------------------
</TABLE>
Securities Available for Sale (Continued)
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mutual Funds:
Short term U.S. government securities fund $ 2,396 $ -- $ (76) $ 2,320
U.S. Government mortgage securities fund 1,251 -- (80) 1,171
Intermediate mortgage securities fund 1,209 -- (60) 1,149
Stock in Federal Home Loan Bank 1,633 -- -- 1,633
FHLMC stock 29 798 -- 827
------------------------------------------------------------
6,518 798 (216) 7,100
Mortgage-backed securities 427 1 -- 428
------------------------------------------------------------
$ 6,945 $ 799 $ (216) $ 7,528
------------------------------------------------------------
</TABLE>
Equity securities do not have contractual maturities. Mortgage-backed securities
lack a single maturity date as the borrowers retain the right to prepay the
obligations.
The Company's subsidiary, as a member of the Federal Home Loan Bank system, is
required to maintain an investment in capital stock of the Federal Home Loan
Bank in an amount equal to 1% of its outstanding home loans. No ready market
exists for the bank stock, and it has no quoted market value. For disclosure
purposes, such stock is assumed to have a market value which is equal to cost.
<PAGE>
Note 3. Securities Available for Sale (Continued)
Changes in unrealized appreciation (depreciation) on securities available for
sale:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 348 $ 318 $ (10)
Unrealized appreciation (depreciation) during
the year 399 56 531
Deferred tax effect relating to unrealized
appreciation (depreciation) (163) (26) (203)
---------------------------------------------------
Balance, ending $ 584 $ 348 $ 318
---------------------------------------------------
</TABLE>
Securities with a carrying value of $500 and $-0- at December 31, 1997 and 1996,
respectively, were pledged to secure public deposits and for other purposes as
required or permitted by law.
Note 4. Securities Held to Maturity
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government corporations and agencies $ 3,198 $ 4 $ (1) $ 3,201
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government corporations and agencies $ 2,049 $ -- $ (5) $ 2,044
------------------------------------------------------------
</TABLE>
Contractual maturities: The scheduled maturities of securities held to maturity
at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 800 $ 799
Due from one to five years 2,398 2,402
----------------------------------
$ 3,198 $ 3,201
----------------------------------
</TABLE>
<PAGE>
Note 5. Loans Receivable and Loans Held for Sale
Composition of loans receivable:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans (principally conventional):
Principal balances:
Secured primarily by one-to-four family residences $ 141,346 $ 140,444
Secured by other properties, primarily agricultural real estate 12,012 12,233
Construction 1,943 2,081
Less net deferred loan origination fees (642) (714)
----------------------------------
Total first mortgage loans 154,659 154,044
----------------------------------
Consumer and other loans:
Principal balances:
Home equity, home improvement and second mortgages 18,781 15,197
Agricultural operating loans 1,299 1,171
Vehicle loans 4,988 4,619
Other 3,760 4,031
----------------------------------
Total consumer and other loans 28,828 25,018
----------------------------------
Total loans 183,487 179,062
Less allowance for loan losses (763) (615)
----------------------------------
Loan receivable, net $ 182,724 $ 178,447
----------------------------------
</TABLE>
Allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 615 $ 512 $ 376
Provision for loan losses 180 180 166
Loans charged off (66) (88) (41)
Recoveries 34 11 11
--------------------------------------------------
Balance, ending $ 763 $ 615 $ 512
--------------------------------------------------
</TABLE>
Nonaccrual loans: Loans on which the accrual of interest has been discontinued
totaled to $237, $298 and $298 at December 31, 1997, 1996 and 1995,
respectively. The effect of nonaccrual loans was not significant to the results
of operations.
The Company includes all loans considered impaired under FASB Statement No. 114
in nonaccrual loans. The amount of impaired loans was not material at December
31, 1997 and 1996.
Related party loans: The Company has entered into transactions with its
executive officers, directors, significant shareholders, and their affiliates
(related parties). The aggregate amounts of loans to such related parties at
December 31, 1997 and 1996 were $452 and $380, respectively. During 1997, new
loans to such related parties were $243 and repayments were $171.
<PAGE>
Note 5. Loans Receivable and Loans Held for Sale (Continued)
Loans held for sale: As of December 31, 1997 and 1996, the Company's loans held
for sale were $2,012 and $1,791, respectively, and consisted of one to four
family residential real estate loans. Loans held for sale have been reduced by
estimated unrealized market losses of $14 and $30 at December 31, 1997 and 1996,
respectively. Outstanding commitments to sell loans at December 31, 1997 were
$847.
Note 6. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans as of December 31, 1997 and 1996 were $72,192 and $66,125,
respectively, and consist of one-to-four family residential real estate loans.
These loans are serviced primarily for the Federal Home Loan Mortgage
Corporation.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in advances from borrowers for taxes and insurance, were
$387 and $339 at December 31, 1997 and 1996, respectively.
Effective January 1, 1996, the Company adopted FASB Statement No. 122,
Accounting for Mortgage Servicing Rights. This Statement requires that a
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and then sells or
securitizes those loans with servicing rights retained should allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans based
on their relative fair values if it is practicable to estimate those fair
values.
Effective January 1, 1997, the Company adopted FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement establishes the basic principles that an entity
should recognize only assets it controls and liabilities it has incurred. Assets
should be "derecognized" only when control has been surrendered, liabilities
should be "derecognized" only when they have been extinguished, and recognition
of financial assets and liabilities should not be affected by the sequence of
transactions unless the effect of the transactions is to maintain effective
control over a transferred financial asset. Statement No. 125 also continues the
recognition of mortgage servicing rights on loans sold and supersedes Statement
No. 122 for transactions after January 1, 1997.
In accordance with the provisions of Statements No. 122 and 125, mortgage
servicing rights in the amounts of $107 and $105 were capitalized during the
years ended December 31, 1997 and 1996, respectively. The Company recognized
amortization of the cost of mortgage servicing rights in the amounts of $30 and
$17 for the years ended December 31, 1997 and 1996, respectively. The effect of
adopting Statements No. 122 and 125 was to increase net income by $77 and $88
for the years ended December 31, 1997 and 1996, respectively.
<PAGE>
Note 7. Foreclosed Real Estate
The Company had investment in real estate acquired through foreclosure or deeded
to the Company in lieu of foreclosure of $35 and $78 as of December 31, 1997 and
1996, respectively. No allowances for losses on foreclosed real estate were
required at these dates.
Note 8. Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
Cost:
<S> <C> <C>
Land $ 71 $ 71
Buildings and improvements 1,075 1,075
Leasehold improvements 537 537
Furniture, fixtures and equipment 1,861 1,682
----------------------------------
3,544 3,365
Less accumulated depreciation and amortization 2,119 1,846
----------------------------------
$ 1,425 $ 1,519
----------------------------------
</TABLE>
Note 9. Deposits
Composition of deposits:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Demand and NOW accounts $ 20,940 $ 21,299
Savings accounts 16,117 16,312
Certificates of deposit 108,321 107,399
----------------------------------
$ 145,378 $ 145,010
----------------------------------
</TABLE>
The aggregate amount of certificates of deposit over $100 was $15,473 and $9,447
at December 31, 1997 and 1996, respectively.
A summary of scheduled maturities of certificates of deposits is as follows:
Years Ending December 31,
- ------------------------------------------------------------------------------
1998 $ 78,869
1999 18,802
2000 8,385
2001 2,127
2002 138
-----------------
$ 108,321
================
<PAGE>
Note 9. Deposits (Continued)
Eligible savings accounts are insured up to $100 by the Savings Association
Insurance Fund (SAIF) under management of the Federal Deposit Insurance
Corporation (FDIC). On September 30, 1996, legislation was signed into law
requiring savings institutions insured by the SAIF to pay a special assessment
to recapitalize the fund. The Company recorded its assessment of $1,085 in
September, 1996.
Note 10. Borrowed Funds
Borrowed funds consisted of advances from Federal Home Loan Bank (FHLB), as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------
Due Date Interest Rate
- --------------------------------------------------
<S> <C> <C> <C> <C>
06/05/97 5.67% $ $ 7,500
06/05/97 5.91% 5,000
06/27/97 6.35% 3,000
04/08/98 6.13% 3,000
05/04/98 5.46% 5,000 5,000
05/26/98 5.61% 6,000 6,000
06/23/98 5.86% 10,500
----------------------------------
$ 24,500 $ 26,500
----------------------------------
</TABLE>
The Company has a $5,000 open line of credit with the FHLB which expires June
26, 1998. There were no advances outstanding on this line of credit at December
31, 1997.
The advances due on April 8, 1998 and June 23, 1998 have fixed interest rates.
The advances due on May 4, 1998 and May 26, 1998 have variable interest rates.
At December 31, 1997 the current rates were as stated above.
Prepayment of the advances will result in prepayment penalties.
The advances are collateralized by FHLB stock and first mortgage loans of
$44,250 at December 31, 1997.
On January 16, 1998, the Company entered into an agreement with the FHLB to
borrow an additional $5 million. Terms of the agreement call for a fixed
interest rate of 5.34% with the entire balance due on January 16, 2008 but
callable on January 16, 2003.
<PAGE>
Note 11. Income Tax Matters
The Company and its subsidiary file consolidated federal income tax returns. For
the year ended December 31, 1995, if certain conditions are met in determining
taxable income, the Company was allowed a special bad debt deduction based on a
percentage of taxable income (8 percent) or on specified experience formulas.
The Company used the taxable income method in 1995.
Effective for the year ended December 31, 1996, federal income tax laws changed
to eliminate the percentage of taxable income formula for the Company and will
only allow bad debt deductions based on actual charge-offs. The Company is
required to recapture into income the excess of its December 31, 1995 loan loss
reserves for "qualifying" and "nonqualifying" loans over its December 31, 1987
loan loss reserves for "qualifying" and "nonqualifying" loans. This excess,
which is $177, is required to be recaptured ratably over a six year period. The
onset of recapture can be delayed for up to two years if the Company meets
residential loan origination requirements. At December 31, 1997, the Company
recorded a deferred tax liability of $48 to provide for the recapture of the
loan loss reserves and it is netted against the deferred tax asset.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 1,186 $ 690 $ 612
Deferred (credit) (36) (6) 24
--------------------------------------------------
1,150 684 636
--------------------------------------------------
State:
Current 387 230 196
Deferred (credit) (12) (2) 10
--------------------------------------------------
375 228 206
--------------------------------------------------
Total $ 1,525 $ 912 $ 842
--------------------------------------------------
</TABLE>
Total income tax expense differed from the amounts computed by applying the
statutory U.S. Federal income tax rates to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income before income taxes taxes $ 1,311 $ 739 $ 739
State income taxes, net of federal benefit 242 137 137
Effect of graduated rates (37) (21) (21)
Other 9 57 (13)
------------------------------------------------
Income tax expense $ 1,525 $ 912 $ 842
------------------------------------------------
</TABLE>
<PAGE>
Note 11. Income Tax Matters (Continued)
The net deferred tax liability included in liabilities in the accompanying
statements of financial condition includes the following amounts of deferred tax
assets and liabilities:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 261 $ 189
Deferred loan origination fees 10 40
Other 36 35
----------------------------------
307 264
Less valuation allowance
----------------------------------
307 264
----------------------------------
Deferred tax liabilities:
Premises and equipment 165 169
Securities available for sale 399 236
FHLB stock dividends 217 217
----------------------------------
781 622
----------------------------------
$ (474) $ (358)
----------------------------------
</TABLE>
Retained earnings at December 31, 1997 includes approximately $1,839 related to
the pre-1987 allowance for loan losses for which no deferred federal income tax
liability has been recognized. This amount represents an allocation of income to
bad debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debts or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which would be
subject to the then current corporate income tax rate. The unrecorded deferred
income tax liability on the above amount for financial statement purposes was
approximately $736 at December 31, 1997.
Note 12. Stockholders' Equity, Regulatory Capital and Dividend Restrictions
The Company has received approval from the Office of Thrift Supervision to
buy-back up to 14.5% (317,188 shares) of its common stock. This approval is
effective through April 11, 1998. As of December 31, 1997, the Company had
purchased 190,375 shares of treasury stock.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
<PAGE>
Note 12. Stockholders' Equity, Regulatory Capital and Dividend Restrictions
(Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
The most recent examination by the Office of Thrift Supervision, as of May 20,
1996, categorized the Bank as "well capitalized" under the regulatory framework
for Prompt Corrective Action. To be categorized as adequately capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The following table summarizes the Bank's compliance with its regulatory capital
requirements at December 31, 1997:
<TABLE>
<CAPTION>
Bank's Bank's Required Required Excess
Capital Capital Capital Capital Capital
-----------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $ 22,790 11.41 % $ 5,990 3.00 % $ 16,800 8.41 %
Risk-based capital 23,544 20.00 % 9,417 8.00 % 14,127 12.00 %
</TABLE>
Under current regulations, the Bank is not permitted to pay dividends on its
stock if its regulatory capital would reduce below (i) the amount required for
the liquidation account established to provide a limited priority claim to the
assets of the Bank to certain qualifying depositors who had deposits at the Bank
and who continue to maintain those deposits after its conversion from a Federal
mutual savings and loan association to a Federal stock savings bank pursuant to
its Plan of Conversion (Plan) adopted October 19, 1994, or (ii) the Bank's
regulatory capital requirements. As a "Tier 1" institution (an institution with
capital in excess of its capital requirements, both immediately before the
proposed capital distribution and after giving effect to such distribution), the
Bank may make capital distributions without the prior consent of the Office of
Thrift Supervision in any calendar year. The capital distribution is equal to
the greater of 100% of net income for the year to date plus 50% of the amount by
which the lesser of the institution's tangible, core or risk-based capital
exceeds its capital requirement for such capital commitment, as measured at the
beginning of the calendar year or up to 75% of net income over the most recent
four quarter period.
<PAGE>
Note 13. Earnings Per Share
Effective December 31, 1997, the Company adopted FASB Statement No. 128,
Earnings per Share. The Statement requires the presentation of earnings per
share (EPS) 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. All other entities are
required to present basic and diluted earnings 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 a loss or increase the
income per common share from continuing operations.
A reconciliation of the numerators and denominators of the basic and diluted
earnings per-share computations follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
---------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income $ 2,220 1,873,499 $ 1.18
-----------------
Effect of Dilutive Securities
Stock options -- 37,016
----------------------------------
Diluted EPS
Net income plus assumed conversions $ 2,220 1,910,515 $ 1.16
---------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income $ 1,200 1,960,731 $ 0.61
-----------------
Effect of Dilutive Securities
Stock options -- 6,454
----------------------------------
Diluted EPS
Net income plus assumed conversions $ 1,200 1,967,185 $ 0.61
---------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Period Ended December 31, 1995
---------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income $ 1,031 2,063,166 $ 0.50
-----------------
Effect of Dilutive Securities
Stock options -- 10,450
----------------------------------
Diluted EPS
Net income plus assumed conversions $ 1,031 2,073,616 $ 0.50
---------------------------------------------------
</TABLE>
<PAGE>
Note 13. Earnings Per Share (Continued)
The earnings per-share calculation for 1995 includes earnings from April 11,
1995, the date of conversion, to December 31, 1995.
Basic and diluted earnings per-share, as calculated under FAS Statement No. 128,
are not materially different than primary and fully-diluted earnings per-share
as previously reported for all prior periods.
Note 14. Employee Benefit Plans
Defined Benefit Plan: The Bank had a qualified, noncontributory defined-benefit
retirement plan covering substantially all of its employees. The benefits were
based on each employee's years of service and average monthly compensation and
reduced by a percentage of the employee's social security benefit. It was the
policy of the Bank to fund the maximum amount that could be deducted for federal
income tax purposes.
Effective December 31, 1995, the plan was amended such that no further benefits
will be earned for employee service. In conjunction therewith, the Bank
recognized a curtailment gain of $75 for the year ended December 31, 1995. The
plan was terminated on November 1, 1996 and all obligations were settled on that
date by payments to the participants in cash or by payments to their individual
accounts in the Bank's 401(k) plan (see below).
In connection with this plan, the Company recorded net pension expense of $-0-,
$6 and $46 for the years ended December 31, 1997, 1996 and 1995, respectively.
Defined Contribution 401(k) Plan: The Bank provides a 401(k) plan which covers
substantially all of the Bank's employees who are eligible as to age and length
of service. A participant may elect to make contributions of up to 15 percent of
the participant's annual compensation. At the discretion of the Board of
Directors, the Bank may make matching contributions of up to 4 percent of each
participant's contribution. There were no contributions made by the Bank for the
years ended December 31, 1997, 1996 and 1995.
Employee Stock Ownership Plan: An Employee Stock Ownership Plan (ESOP) was
adopted on April 11, 1995 covering all full-time employees of the Company who
have attained age 21 and completed one year of service during which they work at
least 1,500 hours.
<PAGE>
Note 14. Employee Benefit Plans (Continued)
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service. The ESOP's debt was incurred when the Company loaned the ESOP $1,120
which was used by the ESOP to purchase common stock of the Company. All
dividends received by the ESOP on unallocated shares are used to pay additional
principal on the debt. The ESOP shares initially were pledged as collateral for
its debt. As the debt is repaid, shares are released from collateral and
allocated to employees based on the proportion of debt service paid in the year.
The shares pledged as collateral are deducted from stockholders' equity as
unearned ESOP shares in the accompanying statement of financial condition. As
shares are 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. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as compensation expense.
Compensation expense for the ESOP was $218, $163 and $143 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Shares of the Company held by the ESOP at December 31, 1997 and 1996 are as
follows:
1997 1996
- -------------------------------------------------------------------------------
Shares released for allocation 45,360 28,000
Unreleased (unearned) shares 94,640 112,000
-----------------------------
140,000 140,000
-----------------------------
Fair value of unreleased (unearned) shares $ 1,692 $ 1,470
-----------------------------
Stock Option Plan: The Company, effective November 15, 1995, adopted a stock
option plan (Plan). Pursuant to the Plan, stock options for 218,750 common
shares may be granted to directors, officers and key employees of the Bank.
Options granted under the Plan may be either options that qualify as Incentive
Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986,
as amended, or options that do not so qualify.
The exercise price under the awards was established at $11.00 per share which
was the fair market price on the date of adoption. Under APB Opinion No. 25, no
expense has been recorded for these options for the years ended December 31,
1997 and 1996 as the option price is the quoted market price of the shares at
the date of the award.
<PAGE>
Note 14. Employee Benefit Plans (Continued)
Grants under the Plan are accounted for following APB Opinion No. 25 and related
Interpretations. Accordingly, no compensation cost has been recognized, as noted
above, for this Plan. Had compensation cost for the Plan been determined based
on the grant date fair values of awards (the method described in FASB Statement
No. 123), additional compensation cost charged to income would have been $100,
$176 and $23 for the years ended December 31, 1997, 1996 and 1995, respectively.
Reported net income and earnings per common share would have been reduced to the
pro forma amounts shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 2,220 $ 1,200 $ 1,270
Pro forma 2,161 1,095 1,256
Basic earnings per share:
As reported $ 1.18 $ 0.61 0.50
Pro forma 1.15 0.56 0.49
Diluted earnings per share:
As reported $ 1.16 $ 0.61 0.50
Pro forma 1.14 0.56 0.49
</TABLE>
The Plan may grant options to purchase up to 218,750 shares of common stock,
with a maximum term of 10 years, at the market price on the date of grant. The
options vest at the rate of 20% per year.
The fair value of the options granted was estimated at the grant date using the
Black-Scholes option-pricing model using a dividend rate of 0%, price volatility
of 10%, a risk-free interest rate of 5.65%, and an estimated life of 6 years.
The estimated fair value was $408 at November 15, 1995, the grant date.
The status of the Company's fixed stock option plan as of December 31, 1997 and
1996, and changes during the years ended on those dates are presented below:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------
Weighted-Average Weighted-Average
Fixed Options Shares Exercise Shares Exercise
Price Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 125,405 $ 11 125,405 $ 11
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- -- --
-------------------------------------------------------------------
Outstanding at end of year 125,405 $ 11 125,405 $ 11
-------------------------------------------------------------------
</TABLE>
<PAGE>
Note 14. Employee Benefit Plan (Continued)
As of December 31, 1997, there were 125,405 options outstanding, all options had
an exercise price of $11 per share, and their remaining contractual life was 7.8
years. As of December 31, 1997 and 1996, 50,162 and 25,081 shares, respectively,
were exercisable.
Management Stock Bonus Plan: The Bank adopted a Management Stock Bonus Plan
(Plan) which was approved by the Company's stockholders on November 15, 1995.
Restricted stock awards covering shares representing an aggregate of up to 4%
(87,500 shares) of the common stock issued by the Company in the mutual to stock
conversion may be granted to directors and employees of the Bank. These awards
vest at the rate of 20% per year of continuous service with the Bank. The status
of shares awarded as of December 31, 1997 and 1996 and the changes during the
years ended on those dates is presented below:
Years Ended December 31,
-------------------------------
1997 1996
- ----------------------------------------------------------------------------
Outstanding at beginning of year 38,380 49,735
Granted -- --
Vested and distributed (9,595) (9,595)
Forfeited -- (1,760)
-------------------------------
Outstanding at end of year 28,785 38,380
-------------------------------
The Bank recorded expense of $129 relating to this Plan for the year ended
December 31, 1997 and $228 for the year ended December 31, 1996.
The Company contributed funds to the Plan's trust to allow the trust to purchase
all 87,500 shares on the open market. The trust purchased these shares in 1996.
49,735 shares were purchased for outstanding awards and the remaining 37,765
shares are recorded as treasury stock. Unearned compensation cost, recognized in
an amount equal to the fair value of the awarded shares at the award date, is
recorded in stockholders' equity and amortized to operations as the shares vest.
Note 15. Lease Commitments
The Company leases certain branch facilities under operating leases. Some leases
require the Company to pay related insurance, maintenance and repairs, and real
estate taxes. Future minimum rental commitments under operating leases as of
December 31, 1997 are as follows:
Years Ending
- --------------------------------------------------------------------------
1998 $ 151
1999 92
2000 88
2001 88
2002 77
----------------
$ 496
----------------
<PAGE>
Note 15. Lease Commitments (Continued)
Total rental expense related to operating leases was approximately $174, $162
and $163 for the years ended December 31, 1997, 1996 and 1995, respectively.
Note 16. Financial Instruments with Off-Statement of Financial Condition
Risk
The Company is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include primarily commitments to
extend credit. Those instruments involve, to varying degrees, elements of credit
risk and interest-rate risk in excess of the amount recognized in the
consolidated statement of financial condition. The contract or notional amounts
of those instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented by
the contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-statement of financial condition instruments.
Commitments to extend credit on loans totaled approximately $12,512 and $11,850
at December 31, 1997 and 1996, respectively. The portion of commitments to
extend credit that related to fixed rate loans is $3,201 and $676 as of December
31, 1997 and 1996, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
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 some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
normally includes real estate and personal property.
Note 17. Concentrations
Concentration by geographic location: The Company makes agricultural,
commercial, residential and consumer loans to customers primarily in South
Central Minnesota. Although the Company's loan portfolio is diversified, there
is a relationship in this region between the agricultural economy and the
economic performance of loans made to nonagricultural customers. The Company's
lending policies for agricultural and nonagricultural customers require loans to
be well-collateralized and supported by cash flows. Collateral for agricultural
loans includes equipment, crops, livestock and land. Credit losses from loans
related to the agricultural economy are consistent with credit losses
experienced in the portfolio as a whole. The concentration of credit in the
regional agricultural economy is taken into consideration by management in
determining the allowance for loan losses.
<PAGE>
Note 17. Concentrations (Continued)
Concentration by institution: As of December 31, 1997 the Company had $6,656 on
deposit with the FHLB of Des Moines.
Note 18. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash $ 5,971 $ 5,971 $ 8,301 $ 8,301
Certificates of deposit 1,850 1,850 200 200
Securities and mortgage backed
securities available for sale 2,726 2,726 7,528 7,528
Securities held to maturity 3,198 3,201 2,049 2,044
Loans receivable, net 182,724 184,336 178,447 179,721
Loans held for sale 2,012 2,012 1,791 1,791
Mortgage servicing rights 166 166 88 88
Accrued interest receivable 1,106 1,106 1,060 1,060
Financial liabilities
Deposits 145,378 145,443 145,010 145,702
Borrowed funds 24,500 24,496 26,500 26,502
Advances from borrowers for
taxes and insurance 1,080 1,080 1,020 1,020
Accrued interest payable 139 139 126 126
-------------------------------------------------------------------
</TABLE>
Note 20. Conversion to Stock Form Ownership
On October 19, 1994, the Board of Directors of the Bank adopted a Plan of
Conversion (the "Conversion"). The OTS approved this transaction and the
registration statement was declared effective by the SEC as of February 13,
1995. The institution converted from a federal mutual savings bank to a federal
stock savings bank with the concurrent formation of a holding company on April
11, 1995.
As part of the Conversion, the Company issued 2,187,500 shares of common stock
(140,000 shares of which were acquired by the ESOP) at $8 per share in a
community offering resulting in gross proceeds of $17,500. Expenses relating to
the Conversion totaled $775. One-half of the net proceeds, excluding the common
stock acquired by the ESOP, or $8,362, were used by the Company to acquire 100%
of the common stock of the Bank.
<PAGE>
Note 19. Conversion to Stock Form Ownership (Continued)
At the time of the Conversion, the Bank established a liquidation account in an
amount equal to its retained earnings as of the date of the latest statement of
financial condition appearing in the final prospectus. The liquidation account
is maintained for the benefit of eligible and supplemental eligible account
holders who continue to maintain their accounts at the Bank after the
Conversion. The liquidation account will be reduced annually to the extent that
eligible and supplemental eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible and supplemental
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible and supplemental eligible account holder
will be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for accounts
then held.
Note 20. Financial Information of Wells Financial Corp. (Parent Only)
The Company's condensed statements of financial condition as of December 31,
1997 and 1996 and related condensed statements of income and cash flows for each
of the years in the three year period ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, including deposits with Wells Federal
Bank, fsb 1997 $318; 1996 $203 $ 387 $ 1,829
Certificates of deposit 350 200
Securities held to maturity 750 499
Investment in Wells Federal Bank, fsb 24,148 21,731
Loan to Wells Federal Bank, fsb 4,000 4,000
Accrued interest receivable 12 15
------------------------------------
Total assets $ 29,647 $ 28,274
------------------------------------
Liabilities and Stockholders' Equity
Liabilities $ 6 $ 72
Stockholders' equity 29,641 28,202
------------------------------------
Total liabilities and stockholders' equity $ 29,647 $ 28,274
------------------------------------
</TABLE>
<PAGE>
Note 20. Financial Information of Wells Financial Corp. (Parent Only)
(Continued)
<TABLE>
<CAPTION>
Condensed Statements of Income 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 402 $ 466 $ 326
Other expense 52 73 87
--------------------------------------------------
Income before income taxes 350 393 239
Income tax expense 87 169 97
--------------------------------------------------
Net income before equity in net
income of subsidiary 263 224 142
Equity in net income of subsidiary 1,957 976 889
--------------------------------------------------
Net income 2,220 $ 1,200 $ 1,031
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income $ 2,220 $ 1,200 $ 1,031
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,957) (976) (889)
Increase in accrued interest receivable 3 (5) (10)
Increase in other liabilities (55) 59 13
--------------------------------------------------
Net cash provided by
operating activities 211 278 145
--------------------------------------------------
Cash Flows From Investing Activities
Purchase of certificates of deposit (350) (200) (800)
Purchase of securities held to maturity (1,750) (1,999) (800)
Proceeds from the maturities of
certificates of deposit 200 800 --
Proceeds from maturity of securities
held to maturity 1,499 1,700 600
Investment in Wells Federal Bank -- -- (8,362)
Decrease in loan to Wells Federal Bank, fsb -- 1,000 (5,000)
--------------------------------------------------
Net cash provided by (used in)
investing activities (401) 1,301 (14,362)
--------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from sale of common stock 15,605
Payments relating to ESOP stock 139 112 112
Purchase of treasury stock (921) (1,362) --
Dividends paid (470) -- --
--------------------------------------------------
Net cash (used in) financing activities (1,252) (1,250) 15,717
--------------------------------------------------
Net increase in cash (1,442) 329 1,500
Cash:
Beginning of period 1,829 1,500 --
--------------------------------------------------
End of period $ 387 $ 1,829 $ 1,500
--------------------------------------------------
</TABLE>
<PAGE>
Note 21. Selected Quarterly Financial Data (Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 3,756 $ 3,817 $ 3,862 $ 3,890
Net interest income 1,716 1,701 1,689 1,697
Provision for loan losses 45 45 45 45
Net income 560 539 561 560
Earnings per share
Basic 0.29 0.29 0.30 0.30
Diluted 0.29 0.28 0.30 0.29
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- -------------------------------------------------------------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 3,578 $ 3,583 $ 3,715 $ 3,793
Net interest income 1,552 1,577 1,686 1,708
Provision for loan losses 45 45 45 45
Net income (loss) 500 363 (144) 481
Earnings per share
Basic 0.24 0.19 (0.07) 0.25
Diluted 0.24 0.19 (0.07) 0.24
</TABLE>
<PAGE>
OFFICE LOCATION AND OTHER CORPORATE INFORMATION
CORPORATE OFFICE
Wells Financial Corp.
53 First Street, S.W.
Wells, Minnesota 56097
Board of Directors of Wells Financial Corp.
Lawrence H. Kruse
President, Wells Federal Bank
Gerald D. Bastian Joseph R. Gadola
Branch Manager, Wells Federal Bank Attorney, Gadola Law Office
Wallace J. Butson Richard Mueller
Secretary, Wells Federal Bank Pharmacist, Wells Drug, Co
Executive Officers of Wells Financial Corp.
Lawrence H. Kruse James D. Moll, CPA
President and Chief Treasurer and Principal Financial
Executive Officer and Accounting Officer
Gerald D. Bastian Wallace J. Butson
Vice President Secretary
Corporate Counsel: Auditors:
Joseph R. Gadola, Esq. McGladrey & Pullen, LLP
28 South Broadway Suite 400
Wells, Minnesota 56097 102 South Broadway
Rochester, Minnesota 55904
Special Counsel: Transfer Agent and Registrar:
Malizia, Spidi, Sloane & Fisch, P.C. Registrar and Transfer Company
One Franklin Square 10 Commerce Drive
Suite 700 East Cranford, New Jersey 07016
1301 K Street, N.W.
Washington, D.C. 20005
The Company's Annual Report for the Year Ended December 31, 1997, filed
with the Securities and Exchange Commission on Form 10-KSB is available
without charge upon written request. For a copy of the Form 10-KSB or any
other investor information, please write the Secretary of the Company, at
the Company's corporate office in Wells, Minnesota. The annual meeting of
stockholders will be held on April 15, 1998 at 4:00 p.m. at the Corporate
Office, Wells, Minnesota.
EXHIBIT 23
<PAGE>
INDEPENDENT ACCOUNTANT'S CONSENT
Board of Directors
Wells Financial Corp.
58 First Street, S.W.
Wells, Minnesota 56097
We hereby consent to the incorporation of our report, dated February 9, 1998,
included in this Form 10-KSB in the previously filed Registration Statement of
Wells Financial Corp. on Form S-8 (No. 333-3520).
Rochester, Minnesota
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,133
<INT-BEARING-DEPOSITS> 4,838
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<INVESTMENTS-CARRYING> 3,198
<INVESTMENTS-MARKET> 3,201
<LOANS> 184,736
<ALLOWANCE> 763
<TOTAL-ASSETS> 201,436
<DEPOSITS> 145,378
<SHORT-TERM> 24,500
<LIABILITIES-OTHER> 1,917
<LONG-TERM> 0
0
0
<COMMON> 219
<OTHER-SE> 29,422
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<EXPENSE-OTHER> 3,987
<INCOME-PRETAX> 3,745
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<EPS-PRIMARY> 1.18<F1>
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<FN>
<F1> BASIC EARNINGS PER SHARE
</FN>
</TABLE>
