UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number 0-25342
-------
Wells Financial Corp.
------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
Minnesota 41-1799504
- --------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
53 1st Street S.W., P.O. Box 310, Wells MN 56097
(Address of principal executive offices)
(507) 553-3151
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check by |X| whether the 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 the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
The number of share outstanding of each of the issuer's classes of common stock
as of October 30, 1998:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,652,160 Shares
<PAGE>
================================================================================
WELLS FINANCIAL CORP. and SUBSIDIARY
[OBJECT OMITTED]
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION: Page
------------------------------- ----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive Income 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures
================================================================================
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1998 and December 31, 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
1998 1997
--------- ---------
<S> <C> <C>
Cash, including interest-bearing accounts
9/30/98 $9,436; 12/31/97 $4,838 $ 10,430 $ 5,971
Certificates of deposit 1,150 1,850
Securities available for sale, at fair value 2,608 2,640
Securities held to maturity (approximate market value $3,152 at
September 30, 1998 and $3,201 at December 31, 1997) 3,141 3,198
Mortgage-backed securities available for sale -- 86
Loans held for sale 2,788 2,012
Loans receivable, net 162,447 182,724
Accrued interest receivable 1,164 1,106
Foreclosed real estate 69 35
Premises and equipment 1,283 1,425
Other assets 811 389
--------- ---------
TOTAL ASSETS $ 185,891 $ 201,436
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 152,655 $ 145,378
Borrowed funds 5,000 24,500
Advances from borrowers for taxes and insurance 1,764 1,080
Income taxes:
Current 115 111
Deferred 652 474
Accrued interest payable 342 139
Accrued expenses and other liabilities 174 113
--------- ---------
TOTAL LIABILITIES 160,702 171,795
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 500,000 shares
authorized; none outstanding -- --
Common stock, $.10 par value; authorized 7,000,000
shares; issued 2,187,500 shares 219 219
Additional paid in capital 16,812 16,694
Retained earnings, substantially restricted 16,803 15,736
Accumulated other comprehensive income, unrealized
appreciation on securities available for sale, net 690 584
Unearned ESOP shares (633) (757)
Unearned compensation restricted stock awards (81) (151)
Treasury stock, at cost (8,621) (2,684)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 25,189 29,641
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 185,891 $ 201,436
========= =========
</TABLE>
(See Notes to Consolidated Financial Statements)
1
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest and dividend income Loans receivable:
First mortgage loans 2,741 3,064 8,594 9,046
Consumer and other loans 662 637 1,963 1,795
Investment securities and other
interest bearing deposits 189 161 783 594
--------- --------- --------- ---------
Total interest income 3,592 3,862 11,340 11,435
--------- --------- --------- ---------
Interest Expense
Deposits 1,884 1,777 5,495 5,180
Borrowed funds 68 396 771 1,149
--------- --------- --------- ---------
Total interest expense 1,952 2,173 6,266 6,329
--------- --------- --------- ---------
Net interest income 1,640 1,689 5,074 5,106
Provision for loan losses 30 45 90 135
--------- --------- --------- ---------
Net interest income after provision for
loan losses 1,610 1,644 4,984 4,971
--------- --------- --------- ---------
Noninterest income
Gain on sale of loans originated for sale 90 22 277 37
Gain on sale of securities available for sale -- 2 -- 9
Loan origination and commitment fees 171 53 625 122
Loan servicing fees 71 49 188 148
Insurance commissions 92 88 245 230
Fees and service charges 92 81 254 213
Other 5 7 16 30
--------- --------- --------- ---------
Total noninterest income 521 302 1,605 789
--------- --------- --------- ---------
Noninterest expense
Compensation and benefits 600 501 1,801 1,497
Occupancy and equipment 190 172 566 480
SAIF deposit insurance premium 23 23 69 71
Data processing 66 59 207 182
Advertising 48 43 135 121
Other 218 194 671 563
--------- --------- --------- ---------
Total noninterest expense 1,145 992 3,449 2,914
--------- --------- --------- ---------
Income before taxes 986 954 3,140 2,846
Income tax expense 410 399 1,284 1,192
--------- --------- --------- ---------
Net Income 576 555 1,856 1,654
========= ========= ========= =========
Earnings per share
Basic earnings per share $ 0.34 $ 0.30 $ 1.03 $ 0.88
========= ========= ========= =========
Diluted earnings per share $ 0.33 $ 0.29 $ 1.00 $ 0.87
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic 1,706,993 1,869,430 1,805,235 1,877,086
========= ========= ========= =========
Diluted 1,758,048 1,909,101 1,858,833 1,909,914
========= ========= ========= =========
</TABLE>
(See Notes to Consolidated Financial Statements)
2
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 576 $ 555 $ 1,856 $ 1,654
Other comprehensive income:
Unrealized appreciation on
securities available for sale 59 17 180 232
Income tax expense (24) (7) (74) (96)
------- ------- ------- -------
Comprehensive income $ 611 $ 565 $ 1,962 $ 1,790
======= ======= ======= =======
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1998
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unearned
Employee Unearned
Accumulated Stock Compensation Total
Additional Other Ownership Restricted Stock-
Common Paid-In Retained Comprehensive Plan shares Stock Treasury holders'
Stock Capital Earnings Income Awards Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 219 $ 16,694 $ 15,736 $ 584 $ (757) $ (151) $ (2,684) $29,641
Net income for the nine months
ended September 30, 1998 - - 1,856 -
- - - 1,856
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - 106
- - - 106
Treasury stock purchases (5,937) (5,937)
Amortization of unearned
compensation - - - -
- 70 - 70
Dividends on common stock - - (789) - - - - (789)
Allocated employee stock
ownership plan shares - - - 242
118 124 - -
-----------------------------------------------------------------------------------------------------
Balance September 30, 1998 $ 219 $ 16,812 $ 16,803 $ 690 $ (633) $ (81) $ (8,621) $25,189
=====================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,856 $ 1,654
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 90 135
Gain on the sale of loans originated for sale (277) (37)
Compensation on allocation of ESOP shares 242 157
Amortization of restricted stock awards 70 102
Write-down of foreclosed real estate 1 2
Gain on the sale of foreclosed real estate -- (10)
Gain on the sale of securities available for sale -- (9)
Unrealized gain on loans held for sale (14) (11)
Gain on disposal of leasehold improvements (28) --
Deferred income taxes 104 (46)
Depreciation and amortization on premises and equipment 207 200
Amortization of deferred loan origination fees (176) (99)
Amortization of excess servicing fees, mortgage servicing
rights and bond premiums and discounts 96 30
Loans originated for sale (57,194) (7,920)
Proceeds from the sale of loans originated for sale 56,260 6,963
Changes in assets and liabilities:
Accrued interest receivable (58) (147)
Other assets (80) (30)
Income taxes payable, current 4 114
Accrued expenses and other liabilities 265 316
-------- --------
Net cash provided by operating activities 1,368 1,364
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans $ 20,344 $ (6,197)
Purchase of certificates of deposit (5,300) (100)
Purchase of securities available for sale -- (171)
Purchase of securities held to maturity (2,840) (3,298)
Proceeds from principal repayments of mortgage backed securities 86 253
Proceeds from the maturities of certificates of deposit 6,000 200
Proceeds from the maturities of securities held to maturity 2,893 2,999
Proceeds from the sale of securities available for sale 212 2,535
Proceeds from the disposal of leasehold improvements 75 --
Proceeds from the sale and redemption of foreclosed real estate -- 103
Investment in foreclosed real estate (2) (32)
Purchase of premises and equipment (112) (111)
-------- --------
Net cash provided by (used in) investment activities 21,356 (3,819)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 7,277 $ (855)
Net increase in advances from borrowers
for taxes and insurance 684 398
Proceeds from borrowed funds -- 15,000
Repayments on borrowed funds (19,500) (12,500)
Purchase of treasury stock (5,937) (921)
Dividends on common stock (789) (222)
-------- --------
Net cash provided by (used in) financing activities (18,265) 900
-------- --------
Net increase (decrease) in cash and cash equivalents 4,459 (1,555)
CASH:
Beginning 5,971 8,301
-------- --------
Ending $ 10,430 $ 6,746
======== ========
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
(Unaudited
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $5,262 $5,050
Interest on borrowed funds 801 1,138
Income taxes 1,176 1,108
====== ======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Transfers from loans to foreclosed real estate $ 33 $ 27
Allocation of ESOP shares to participants 124 97
Net change in unrealized appreciation on securities
available for sale 106 136
====== ======
(See Notes to Consolidated Financial Statements)
6
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes To Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The foregoing consolidated financial statements are unaudited. However,
in the opinion of management, all adjustments (which consist of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Results for any interim period are not
necessarily indicative of results to be expected for the year. The interim
consolidated financial statements include the accounts of Wells Financial Corp.
(Company), its subsidiary, Wells Federal Bank (Bank), and the Bank's
subsidiaries, Greater Minnesota Mortgage, Inc. and Wells Insurance Agency, Inc.
NOTE 2. REGULATORY CAPITAL
The following table presents the Bank's regulatory capital amounts and
percents at September 30, 1998 and December 31, 1997.
September 30, 1998 December 31, 1997
Amount Percent Amount Percent
-----------------------------------------------------------------------
(Dollars in Thousands)
Tier 1 (Core) Capital:
Required $ 5,516 3.00% $ 5,990 3.00%
Actual 22,387 12.18% 22,790 11.41%
Excess 16,871 9.18% 16,800 8.41%
Risk-based Capital
Required $ 9,038 8.00% $ 9,417 8.00%
Actual 23,225 20.56% 23,544 20.00%
Excess 14,187 12.56% 14,127 12.00%
7
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to consolidated Financial Statements Continued
(Unaudited)
NOTE 3. 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 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.
The weighted average number of shares of common stock used to compute
the basic earnings per share were 1,805,235 and 1,877,086 for the nine month
periods ended September 30, 1998 and 1997, respectively. The weighted average
number of shares of common stock were increased by 53,598 and 32,828 for the
nine month periods ended September 30, 1998 and 1997, respectively, for the
assumed exercise of the employee stock options in computing the diluted
per-share data.
NOTE 4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted FASB 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 for 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
requires financial statements of earlier periods that are presented for
comparative purposes to be reclassified.
NOTE 5. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1998 1997
------- -------
<S> <C> <C>
Return on assets
(ratio of net income to average total assets) (1) 1.25% 1.09%
Return on equity
(ratio of net income to average equity) (1) 8.62% 7.70%
Equity to assets ratio
(ratio of average equity to average total assets) 14.47% 14.16%
Net interest margin
(ratio of net interest income to average interest earning assets) (1) 3.48% 3.44%
</TABLE>
(1) Net income and net interest income have been annualized
8
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General:
Wells Financial Corp. (Company) was incorporated under the laws of the
State of Minnesota in December 1994 for the purpose of owning all of the
outstanding stock of Wells Federal Bank, fsb (Bank) issued in the mutual to
stock conversion of the Bank. On April 11, 1995, the conversion was completed
and $8.4 million of the net proceeds from the sale of the stock was provided to
the Bank in exchange for all of the Bank's stock. The consolidated financial
statements included herein are for the Company, the Bank and the Bank's wholly
owned subsidiaries, Greater Minnesota Mortgage, Inc. and Wells Insurance Agency,
Inc.
The income of the Company is derived primarily from the operations of
the Bank and the Bank's subsidiaries, and to a lesser degree from interest
income from securities and certificates of deposit with other banks that the
Company has purchased. The Bank's net income is primarily dependent upon the
difference (or spread) between the average yield earned on loans, investments
and mortgage-backed securities and the average rate paid on deposits and
borrowings, as well as the relative amounts of such assets and liabilities. The
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. Net income is also
affected by, among other things, provision for loan losses, gains on the sale of
interest earning assets, service charges, servicing fees, subsidiary activities,
operating expenses, and income taxes.
The Bank has eight full service offices located in Faribault, Martin,
Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota.
Comparison of Financial Condition at September 30, 1998 and December 31, 1997:
Total assets decreased by $15,545,000, from $201,436,000 at December
31, 1997 to $185,891,000 at September 30, 1998 primarily due to a $20,277,000
decrease in loans receivable, from $182,724,000 at December 31, 1997 to
$162,447,000 at September 30, 1998. Due to lower interest rates on residential
mortgages, management elected to sell the majority of the residential loans
originated during the first nine months of 1998 to the secondary market.
Included in the loans that were originated and sold during the first nine months
of 1998 were loans from the Company's mortgage loan portfolio that were
refinanced. This is the primary reason for the decrease in loans receivable.
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 September 30,
1998 and December 31, 1997 the balances in the allowance for loan losses and the
allowance for loan losses as a percentage of total loans were $841,000 and
$763,000 and 0.51% and 0.41% respectively.
Loans on which the accrual of interest has been discontinued amounted
to $84,000 and $237,000 at September 30, 1998 and December 31, 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 September 30, 1998 and December 31, 1997.
9
<PAGE>
Activity in the Company's allowance for loan losses for the nine months
ended September 30, 1998 and 1997 is summarized as follows:
1998 1997
--------- ---------
Balance on January 1, $ 763,292 $ 615,372
Provision for loan losses 90,000 135,000
Charge-offs (23,047) (48,705)
Recoveries 10,886 31,022
--------- ---------
Balance on September 30, $ 841,131 $ 732,689
========= =========
Liabilities decreased by $11,093,000, from $171,795,000 at December 31,
1997 to $160,702,000 at September 30, 1998. The decrease in liabilities was
primarily the result of a $19,500,000 decrease in borrowed funds being partially
offset by a $7,277,000 increase in deposits. Cash obtained from the increase in
deposits and from the sale of loans that were refinanced during the first nine
months of 1998 to the secondary market was used to reduce borrowed funds.
Equity decreased by $4,452,000 from $29,641,000 at December 31, 1997 to
$25,189,000 at September 30, 1998. This change in equity is primarily due to net
income of $1,856,000 for the nine months ended September 30, 1998 being offset
by the purchase of 307,200 shares of treasury stock at a total cost of
$5,937,000. Also affecting equity were payments on February 13, 1998, May 11,
1998 and August 13, 1998 of $235,000, $287,904 and $266,096, or $0.12, $0.15 and
$0.15 per share, respectively, in cash dividends. On October 21, 1998, the Board
of Directors of the Company declared a $0.15 per share cash dividend to be paid
on November 13, 1998 to the stockholders of record on October 30, 1998. Subject
to the Company's earnings and capital, it is the current intention of the
Company to continue to pay regular quarterly cash dividends.
Comparison of Operating Results for the Three and Nine Month Periods Ended
September 30, 1998 and September 30, 1997.
Net Income. Net income increased by $21,000 and $202,000 for the three
and nine month periods ended September 30, 1998, respectively, when compared to
the same periods in 1997 primarily due to increases in noninterest income of
$219,000 and $816,000 for the three and nine month periods ended September 30,
1998, respectively, when compared to the same periods in 1997. These increases
were partially offset by increases in noninterest expense of $153,000 and
$535,000 for the three and nine month periods ended September 30, 1998,
respectively, when compared to the same periods in 1997.
Interest Income. Interest income from the loan portfolio decreased by
$298,000 and $284,000 for the three and nine month periods ended September 30,
1998, respectively, when compared to the same periods in 1997. Interest income
from investments in securities, certificates of deposit and interest earned on
interest bearing cash accounts increased by $28,000 and $189,000 for the three
and nine month periods ended September 30, 1998 when compared to the same
periods in 1997. The decrease in interest income from the loan portfolio for the
three and nine month periods ended September 30,1998 when compared to the same
periods in 1997 was primarily the result of a decrease in the average amount of
the loan portfolio during the first three quarters of 1998 when compared to the
same period in 1997. Due to lower interest rates on residential mortgages,
management elected to sell the majority of the residential loans originated
during the first nine months of 1998 to the secondary market. Included in the
loans originated and sold during the first nine months of 1998 were loans from
the Company's mortgage loan portfolio that were refinanced. This is the primary
reason for the decrease in the average amount of the loan portfolio. The
increase in interest income from investment securities, certificates of deposit
and other interest bearing deposits was primarily the result of increases in the
average amounts of these investments during the first three quarters of 1998
when compared to the same period in 1997.
10
<PAGE>
Interest Expense. Interest expense on deposits increased by $107,000
and $315,000 for the three and nine month periods ended September 30, 1998,
respectively, when compared to the same periods in 1997. The increase in
interest expense on deposits was primarily the result of increases in the
average amounts of deposits during the first nine months of 1998 when compared
to the first nine months of 1997. Interest expense on borrowed funds decreased
by $328,000 and $378,000 for the three and nine month periods ended September
30, 1998, respectively, when compared to the three and nine month periods ended
September 30, 1997. As described above, cash obtained from the sale of loans
that were refinanced during the first three quarters of 1998 to the secondary
market was used to reduce borrowed funds which resulted in a decrease in the
average amounts of borrowed funds during the nine months ended September 30,
1998 when compared to the nine months ended September 30, 1997.
Net Interest income. Net interest income decreased by $49,000 for the
quarter ended September 30, 1998 and decreased by $32,000 for the nine month
period ended September 30, 1998 when compared to the same periods in 1997 due to
the changes in interest income and interest expense described above.
Provision for loan losses. The provision for loan losses decreased by
$15,000 and $45,000 for the three and nine month periods ended September 30,
1998, respectively, when compared to the same periods in 1997. Management
evaluates the quality of the loan portfolio on a quarterly basis to identify and
determine the adequacy of the allowance for loan loss. Based on these continuing
reviews, management decreased the monthly provision for loan loss beginning in
January of 1998. 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 estimated amounts.
Noninterest Income. Noninterest income increased by $219,000 and
$816,000 for the three and nine month periods ended September 30, 1998 when
compared to the same periods in 1997. The increases in noninterest income were
primarily due to increases in loan origination and commitment fees of $118,000
and $503,000 for the three and nine month periods ended September 30, 1998,
respectively, and the gain on sale of loans originated for sale of $68,000 and
$240,000 for the three and nine months ended September 30, 1998, respectively,
when compared to the same periods in 1997. These increases resulted from a
greater amount of loans originated and sold to the secondary market during the
first nine months of 1998 when compared to the first nine months of 1997. Also
affecting noninterest income were increases in loan servicing fees of $22,000
and $40,000 for the three and nine month periods ended September 30, 1998,
respectively, when compared to the same periods during 1997. At September 30,
1998, loans serviced for others by the Company exceeded $116,600,000, a 54%
increase over loans serviced for others at December 31, 1997.
Noninterest Expense. Noninterest expense increased by $153,000 for the
quarter ended September 30, 1998 and increased by $535,000 for the nine months
ended September 30, 1998 when compared to the same periods in 1997 primarily due
to increases in compensation and benefits and occupancy and equipment. Late in
the second quarter of 1997, the Company converted its loan origination office in
Owatonna, Minnesota to a full service banking facility by employing additional
staff and moving to a larger facility which resulted in increased compensation
and benefits and occupancy and equipment. Also affecting compensation and
benefits were annual compensation increases and an increase in the Employee
Stock Ownership Plan expense that resulted from the appreciation of the
Company's stock. Other noninterest expense increased by $24,000 and $108,000 for
the three and nine month periods ended September 30, 1998, respectively, when
compared to the same periods in 1997 primarily due to an increase in the
amortization of mortgage servicing rights. The increase in the amortization of
mortgage servicing rights was $26,000 and $63,000 for the three and nine months
ended September 30, 1998, respectively, when compared to the same periods in
1997.
Income Tax Expense. Income tax expense increased by $11,000 and $92,000
for the three and nine month periods ended September 30, 1998 when compared to
the same periods in 1997. This increase was the result of an increase in income
before income taxes for the three and nine month periods ended September 30,
1998 when compared to the same periods in 1997.
11
<PAGE>
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at September 30, 1998 and December 31,
1997.
September 30, 1998 December 31, 1997
-------------------------------------
(Dollars in Thousands)
Non-accruing loans
One to four family real estate $ 24 $219
Consumer 60 18
---- ----
Total $ 84 $237
---- ----
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $224 $201
Consumer 1 --
---- ----
Total $225 $201
---- ----
Total non-accrual and accruing loans
past due 90 days or more $309 $438
==== ====
Repossessed and non-performing assets
Repossessed property $ 69 $ 35
Other non-performing assets -- --
---- ----
Total repossessed and non-performing assets $ 69 $ 35
---- ----
Total non-performing assets $378 $473
==== ====
Total non-accrual and accruing loans
past due 90 days or more to net loans 0.19% 0.24%
==== ====
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.17% 0.22%
==== ====
Total nonperforming assets to total assets 0.20% 0.23%
==== ====
Financial Standards Board Statement No. 114, Accounting by Creditors
for Impairment of a Loan, and Statement No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, requires that
impaired loans within the scope of these Statements be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate; or as a practical expedient, either at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. At September 30, 1998 and December 31, 1997, the value of loans that
would be classified as impaired under these Statements is considered to be
immaterial.
Liquidity and Capital Resources:
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of US 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 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. At September 30,
1998, the Bank's liquidity, as measured for regulatory purposes, was 8.01%. The
Bank adjusts liquidity as appropriate to meet its asset/liability objectives.
12
<PAGE>
The Bank's primary sources of funds are deposits, borrowed funds,
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 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 income until funds are needed to meet
required loan funding.
In 1996 and 1998, the Company approved stock buy back programs in which
up to 535,340 shares of the common stock of the Company could be acquired. These
stock buy back programs were completed during the third quarter of 1998.
The Company paid a cash dividend of $0.12 per share on February 13,
1998 and $0.15 per share on April 15, 1998 and August 13, 1998. The Company
declared a cash dividend of $0.15 per share payable on November 13, 1998 to
stockholders of record on October 30, 1998. Subject to the Company's earnings
and capital, it is the current intention of the Company to continue to pay
regular quarterly cash dividends.
Savings institutions insured by the Federal Deposit Insurance
Corporation are required by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) to meet prescribed regulatory capital
requirements. If a requirement is not met, regulatory authorities may take legal
or administrative actions, including restrictions on growth or operations or, in
extreme cases, seizure. Institutions not in compliance may apply for an
exemption from the requirements and submit a recapitalization plan. At September
30, 1998, the Bank met all current capital requirements.
The Office of Thrift Supervision (OTS) has adopted a core capital
requirement for savings institutions comparable to the requirement for national
banks. The OTS core capital requirement is 3% of adjusted assets for thrifts
that receive the highest supervisory rating for safety and soundness. The Bank
had core capital of 12.18% at September 30, 1998.
Pursuant to FDICIA, the federal banking agencies, including the OTS,
have also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation or its effect on the Bank.
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
issue is whether computer systems will properly 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 heavily dependent on computer processing in its business
activities and the Year 2000 issue creates risk for the Company from unforeseen
problems in the Company's computer system and from third parties whom the
Company uses to process information. Such failures of the Company's computer
system and/or third parties computer systems could have a material impact on the
Company's ability to conduct its business.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. The Company has identified the software and hardware that requires
testing for year 2000 compliance and has established procedures and a time line
for testing the software and hardware. 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. The Company began testing its
hardware during the first quarter of 1998 and testing of the software that is
provided by the Company's primary processing vendors began in September 1998.
Progress reports on the year 2000 action plan are produced monthly by management
and reviewed by the Board of Directors. Based on the Company's review of its
computer system, management believes the cost to upgrade and test its computer
system to be Year 2000 compliant will be approximately $115,000.
13
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARIES
September 30, 1998
FORM 10-QSB
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other information
-----------------
None
Item 6. Exhibits and Reports of Form 8-K
--------------------------------
a. Exhibits:
27 - Financial data schedule
b. No reports on Form 8-K were filed
No other information is required to be filed under Part II of the form
- --------------------------------------------------------------------------------
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
WELLS FINANCIAL CORP.
By: /s/ Lawrence H. Kruse Date: November 9, 1998
--------------------------------------- ----------------
Lawrence H. Kruse
President and Chief Executive Officer
By: /s/ James D. Moll Date: November 9, 1998
--------------------------------------- ----------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 994
<INT-BEARING-DEPOSITS> 9,436
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,608
<INVESTMENTS-CARRYING> 3,141
<INVESTMENTS-MARKET> 3,152
<LOANS> 165,235
<ALLOWANCE> 841
<TOTAL-ASSETS> 185,891
<DEPOSITS> 152,655
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 3,047
<LONG-TERM> 0
0
0
<COMMON> 219
<OTHER-SE> 24,970
<TOTAL-LIABILITIES-AND-EQUITY> 185,891
<INTEREST-LOAN> 10,557
<INTEREST-INVEST> 783
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,340
<INTEREST-DEPOSIT> 5,495
<INTEREST-EXPENSE> 771
<INTEREST-INCOME-NET> 5,074
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,449
<INCOME-PRETAX> 3,140
<INCOME-PRE-EXTRAORDINARY> 3,140
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,856
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 3.48
<LOANS-NON> 84
<LOANS-PAST> 225
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 321
<ALLOWANCE-OPEN> 763
<CHARGE-OFFS> 23
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 841
<ALLOWANCE-DOMESTIC> 841
<ALLOWANCE-FOREIGN> 0
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</TABLE>
