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 March 31, 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 (I.R.S. Employer
Incorporation 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 April 30, 1998:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,959,360 Shares
<PAGE>
================================================================================
WELLS FINANCIAL CORP. and SUBSIDIARY
[LOGO]
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION: Page
------------------------------- ----
<S> <C>
Item 1. Financial Statements
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 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures
</TABLE>
================================================================================
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, 1998 and December 31, 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
1998 1997
---------------------- --------------------------
<S> <C> <C>
Cash, including interest-bearing accounts
3/31/98 $14,951; 12/31/97 $4,838 $ 15,780 $ 5,971
Certificates of deposit 7,150 1,850
Securities available for sale 2,772 2,640
Securities held to maturity (approximate market value $2,168 at
March 31, 1998 and $3,201 at December 31, 1997) 3,198
2,170
Mortgage-backed securities available for sale - 86
Loans held for sale 6,975 2,012
Loans receivable, net 171,496 182,724
Accrued interest receivable 1,167 1,106
Foreclosed real estate 34 35
Premises and equipment 1,373 1,425
Other assets 525 389
====================== ==========================
TOTAL ASSETS $ 209,442 $ 201,436
====================== ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 146,618 $ 145,378
Borrowed funds 29,500 24,500
Advances from borrowers for taxes and insurance 1,849 1,080
Income taxes:
Current 347 111
Deferred 558 474
Accrued interest payable 215 139
Accrued expenses and other liabilities 107 113
---------------------- --------------------------
TOTAL LIABILITIES 179,194 171,795
---------------------- --------------------------
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 16,730 16,694
Retained earnings, substantially restricted 16,159 15,736
Accumulated other comprehensive income, unrealized
appreciation on securities available for sale, net 662 584
Unearned ESOP shares (718) (757)
Unearned compensation restricted stock awards (120) (151)
Treasury stock, at cost (2,864) (2,684)
---------------------- --------------------------
TOTAL STOCKHOLDERS' EQUITY 30,248 29,641
---------------------- --------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 209,442 $ 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
March 31,
-----------------------------------------
1998 1997
----------------- --------------------
<S> <C> <C>
Interest and dividend income Loans receivable:
First mortgage loans $ 3,033 $ 2,977
Consumer and other loans 645 558
Investment securities and other
interest bearing deposits 264 221
----------------- --------------------
Total interest income 3,942 3,756
----------------- --------------------
Interest Expense
Deposits 1,787 1,694
Borrowed funds 404 346
----------------- --------------------
Total interest expense 2,191 2,040
----------------- --------------------
Net interest income 1,751 1,716
Provision for loan losses 30 45
----------------- --------------------
Net interest income after provision for
loan losses 1,721 1,671
----------------- --------------------
Noninterest income
Gain on sale of loans originated for sale 81 8
Loan origination and commitment fees 246 29
Loan servicing fees 54 50
Insurance commissions 69 73
Fees and service charges 69 64
Other 4 16
----------------- --------------------
Total noninterest income 523 240
----------------- --------------------
Noninterest expense
Compensation and benefits 578 480
Occupancy and equipment 193 151
SAIF deposit insurance premium 23 24
Data processing 73 59
Advertising 43 36
Other 213 193
----------------- --------------------
Total noninterest expense 1,123 943
----------------- --------------------
Income before taxes 1,121 968
Income tax expense 463 408
================= ====================
Net Income $ 658 $ 560
================= ====================
Earnings per share
Basic earnings per share $ 0.35 $ 0.29
================= ====================
Diluted earnings per share $ 0.34 $ 0.29
================= ====================
Weighted average number of common shares
outstanding:
Basic 1,867,221 1,908,943
================= ====================
Diluted 1,916,760 1,937,291
================= ====================
</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
March 31,
------------------ ----- ---------------
1998 1997
------------------ ---------------
<S> <C> <C>
Net income $ 658 $ 560
Other comprehensive income, net of taxes of $54
for 1998 and $31 for 1997
Unrealized appreciation (depreciation) on
securities available for sale 78 (44)
================== ===============
Comprehensive income $ 736 $ 516
================== ===============
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1998
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unearned Unearned
Accumulated Employee Compensation
Additional Other Stock Restricted Total
Common Paid-In Retained Comprehensive Ownership Stock Treasury Stockholders'
Stock Capital Earnings Income Plan Shares 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
three months
ended March 31,
1998 - - 658 - - - - 658
Net change in
unrealized
appreciation on
securities
available for
sale, net of
related deferred
taxes - - - 78 - - - 78
Amortization of
unearned compensation - - - - - 31 - 31
Dividends on common
stock - - (235) - - - - (235)
Allocated employee
stock ownership
plan shares - 36 - - 39 - - 75
-----------------------------------------------------------------------------------------------------------
Balance March 31,
1998 $ 219 $ 16,730 $ 16,159 $ 662 $ (718) $ (120) $ (2,684) $ 30,248
===========================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Three Months Ended March 31, 1998 and 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 658 $ 560
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 30 45
Gain on the sale of loans originated for sale
(81) (8)
Compensation on allocation of ESOP shares 64 50
Amortization of restricted stock awards 31 34
Write-down of foreclosed real estate 1 -
(Gain) on the sale of foreclosed real estate - (11)
Unrealized (gain) loss on loans held for sale (14) 19
Deferred income taxes 30 (35)
Depreciation and amortization on premises and equipment 71 65
Amortization of deferred loan origination fees (65) (13)
Amortization of excess servicing fees 3 3
Amortization of mortgage servicing rights 22 7
Loans originated for sale (21,961) (1,315)
Proceeds from the sale of loans originated for sale 16,949 1,753
Changes in assets and liabilities:
Accrued interest receivable (61) (16)
Other assets (31) (44)
Income taxes payable, current 236 388
Accrued expenses and other liabilities 70 151
-------------------- ---------------------
Net cash provided by (used in) operating activities (4,048) 1,642
-------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans $ 11,277 $ (1,293)
Purchase of certificates of deposit (5,300) -
Purchase of securities available for sale - (73)
Purchase of securities held to maturity (410) (2,000)
Proceeds from principal repayments of mortgage backed securities 86 105
Proceeds from the maturities of securities held to maturity 1,438 749
Proceeds from the sale and redemption of foreclosed real estate - 56
Purchase of premises and equipment (19) (6)
-------------------- ---------------------
Net cash provided by (used in) investment activities 7,072 (2,462)
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 1,240 $ (411)
Net increase in advances from borrowers for taxes and
insurance 769 470
Proceeds from repayment of loan to ESOP 11 -
Proceeds from borrowed funds 5,000 1.500
Repayments on borrowed funds - (2,000)
Purchase of treasury stock - (65)
Dividends on common stock (235) (235)
-------------------- ---------------------
Net cash provided by (used in) financing activities 6,785 (506)
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 9,809 (1,326)
CASH:
Beginning 5,971 8,301
-------------------- ---------------------
Ending $ 15,780 $ 6,975
==================== =====================
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Three Months Ended March 31, 1998 and 1997
(Dollars in Thousands)
(Unaudited
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
<S> <C> <C>
Interest on deposits $ 1,775 $ 1,611
Interest on borrowed funds 411 334
Income taxes 95 55
==================== ====================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Allocation of ESOP shares to participants $ 39 $ 28
Net change in unrealized appreciation (depreciation)
on securities available for sale 78 (44)
==================== ====================
</TABLE>
(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 March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
Amount Percent Amount Percent
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Tangible Capital:
Required $ 3,109 1.50% $ 2,995 1.50%
Actual 23,251 11.22% 22,790 11.41%
Excess 20,142 9.72% 19,795 9.91%
Core Capital
Required (1) $ 6,218 3.00% $ 5,990 3.00%
Actual 23,251 11.22% 22,790 11.41%
Excess 17,033 8.22% 16,800 8.41%
Risk-based Capital
Required $ 9,444 8.00% $ 9,417 8.00%
Actual 24,040 20.36% 23,544 20.00%
Excess 14,596 12.36% 14,127 12.00%
</TABLE>
(1) The OTS is expected to adopt a core capital requirement for savings
institutions comparable to the requirement for national banks that became
effective December 31, 1990. The OTS core capital requirement is anticipated to
be at least 3% of total adjusted assets for thrifts that receive the highest
supervisory rating for safety and soundness, with a 4% to 5% core capital
requirement for all other thrifts. No prediction can be made as to the exact
nature of any new OTS core capital regulation, or the date of its effectiveness,
and the core capital requirement to be applicable to the Bank under such
regulation.
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 1,867,221 and 1,908,943 for the three month
periods ended March 31, 1998 and 1997, respectively. The weighted average number
of shares of common stock were increased by 49,539 and 28,348 for the three
month periods ended March 31, 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.
8
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to consolidated Financial Statements Continued
(Unaudited)
NOTE 5. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
-----------------------------------
<S> <C> <C>
Return on assets
(ratio of net income to average total assets) (1) 1.27% 1.11%
Return on equity
(ratio of net income to average equity) (1) 8.81% 7.85%
Equity to assets ratio
(ratio of average equity to average total assets) 14.44% 14.19%
Net interest margin
(ratio of net interest income to average interest earning assets) (1) 3.45% 3.41%
</TABLE>
(1) Net income and net interest income have been annualized.
9
<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, Wells Insurance Agency, Inc. and Greater Minnesota Mortgage,
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 March 31, 1998 and December 31, 1997:
Total assets increased by $8,006,000, from $201,436,000 at December 31,
1997 to $209,442,000 at March 31, 1998 primarily due to increases in borrowed
funds and deposits. During the first quarter of 1998 the Federal Home Loan Bank
(FHLB) offered long term borrowings with fixed interest rates that would provide
lower interest cost to the Company and would enhance the Company's interest rate
risk. The Company borrowed $5,000,000 under this program and reinvested these
funds at a net interest gain in a certificate of deposit with the FHLB until the
Company's higher interest rate borrowings matured. Loans receivable decreased by
$11,228,000, from $182,724,000 at December 31, 1997 to $171,476,000 at March 31,
1998, and cash increased by $9,809,000, from $5,971,000 at December 31, 1997 to
$15,780,000 at March 31, 1998, primarily due to the sale of loans which were
refinanced during the first quarter of 1998 to the secondary market.
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 loses. As of December 31, 1997
and March 31, 1998 the balance in the allowance for loan losses and the
allowance for loan losses as a percentage of total loans was $763,000 and
$793,000 and 0.41% and 0.44% respectively.
Loans on which the accrual of interest has been discontinued amounted
to $107,000 and $237,000 at March 31, 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 March 31,
1998 and December 31, 1997.
10
<PAGE>
Activity in the Company's allowance for loan losses for the three
months ended March 31, 1998 and 1997 is summarized as follows:
1998 1997
-----------------------------------------
Balance on January 1, $ 763,292 $ 615,372
Provision for loan losses 30,000 45,000
Charge-offs (4,018) (17,628)
Recoveries 3,958 10,205
-----------------------------------------
Balance on March 31, $ 793,232 $ 652,949
-----------------------------------------
As stated above, deposits increased by $1,240,000 from $145,378,000 at
December 31, 1997 to $146,618,000 at March 31, 1998 and borrowed funds increased
by $5,000,000 from $24,500,000 at December 31, 1997 to $29,500,000 at March 31,
1998.
Equity increased by $607,000 from $29,641,000 at December 31, 1997 to
$30,248,000 at March 31, 1998. This change in equity is primarily due to net
income of $658,000 for the three months ended March 31, 1998 being partially
offset by the payment on February 13, 1998 of $235,000 in cash dividends, $0.12
per share, to stockholders of record on January 31, 1998. Also affecting equity
was an increase of $78,000 in the unrealized appreciation on securities
available for sale during the quarter. On April 15, 1998, the Board of Directors
of the Company declared a $0.15 per share cash dividend to be paid on May 11,
1998 to the stockholders of record on April 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 Month Period Ended March 31, 1998
and March 31, 1997.
Net Income. Net income increased by $98,000 for the quarter ended March
31, 1998 when compared to the same period in 1997 primarily due to an increase
in noninterest income of $283,000 being partially offset by an increase of
$180,000 in noninterest expense.
Interest Income. Interest income from the loan portfolio increased by
$143,000 for the three month period ended March 31, 1998 when compared to the
same period in 1997. Interest income from investments in securities,
certificates of deposit and interest earned on interest bearing cash accounts
increased by $43,000 for the three months period ended March 31, 1998 when
compared to the same period in 1997. The increase in interest income from the
loan portfolio and 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
quarter of 1998 when compared to the first quarter of 1997.
Interest Expense. Interest expense on deposits and interest expense on
borrowed funds increased by $93,000 and $58,000, respectively, for the three
months ended March 31, 1998 when compared to the same period during 1997. The
increases in interest expense on deposits and interest expense on borrowed funds
is primarily due to increases in the average amounts of deposits and borrowed
funds during the first quarter of 1998 when compared to the first quarter of
1997.
Net Interest income. Net interest income increased by $35,000 for the
quarter ended March 31, 1998 when compared to the same period in 1997 due to the
increase in interest income for the quarter being partially offset by the
increase in interest expense.
11
<PAGE>
Provision for loan losses. The provision for loan losses decreased by
$15,000 for the quarter ended March 31, 1998 when compared to the quarter ended
March 31, 1997. As described above, 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 the latest review, management decreased the
provision for loan loss during the quarter ended March 31, 1998 when compared to
the quarter ended March 31, 1997. 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 $283,000 for the
three months ended March 31, 1998 when compared to the same period in 1997. The
increase in noninterest income was primarily due to increases in loan
origination and commitment fees and the gain on sale of loans originated for
sale of $217,000 and $73,000, respectively, which resulted from a greater amount
of loans originated and sold to the secondary market during the first three
months of 1998 when compared to the first three months of 1997.
Noninterest Expense. Noninterest expense increased by $180,000 for the
quarter ended March 31, 1998 when compared to the quarter ended March 31, 1997
primarily due to increases in compensation and benefits and occupancy and
equipment of $98,000 and $42,000, respectively. During 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 is the primary reason for the increase in compensation and
benefits and occupancy and equipment during the first quarter of 1998 when
compared to the first quarter of 1997.
Income Tax Expense. Income tax expense increased by $55,000 for the
three months ended March 31, 1998 when compared to the same period in 1997. This
increase was the result of an increase in income before income taxes for the
three month period ended March 31, 1998 when compared to the same period in
1997.
12
<PAGE>
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans
One to four family real estate $ 71 $ 219
Consumer 35 18
--------------------- ------------------------
Total $ 106 $ 237
--------------------- ------------------------
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $ 104 $ 201
Consumer 40 -
--------------------- ------------------------
Total $ 144 $ 201
--------------------- ------------------------
Total non-accrual and accruing loans
past due 90 days or more $ 250 $ 438
===================== ========================
Repossessed and non-performing assets
Repossessed property $ 34 $ 35
Other non-performing assets - -
--------------------- ------------------------
Total repossessed and non-performing assets $ 34 $ 35
--------------------- ------------------------
Total non-performing assets $ 284 $ 473
===================== ========================
Total non-accrual and accruing loans
past due 90 days or more to net loans 0.14% 0.24%
===================== ========================
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.12% 0.22%
===================== ========================
Total nonperforming assets to total assets 0.14% 0.23%
===================== ========================
</TABLE>
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 March 31, 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:
Wells Federal 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
March 31, 1998, the Bank's liquidity, as measured for regulatory purposes, was
12.09%. The Bank adjusts liquidity as appropriate to meet its asset/liability
objectives.
13
<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 as income until funds are needed to
meet required loan funding.
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. As of March
31, 1998, the Company has purchased 190,375 shares under these programs which
leaves 126,813 shares remaining that may be purchased under these programs.
The Company paid a cash dividend of $0.12 per share on February 13,
1998. On April 15, 1998 the Company declared a cash dividend of $0.15 per share
payable on May 11, 1998 to stockholders of record on April 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.
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 March 31, 1998, the Bank's tangible
capital totaled $23.5 million, or 11.34% of adjusted total assets, and core
capital totaled $23.5 million, or 11.34% of adjusted total assets, which
substantially exceeded the respective 1.5% tangible capital and 3.0% core
capital requirements at that date by $20.4 million and $17.3 million,
respectively, or 9.84% and 8.34% of adjusted total assets, respectively. The
Bank's risk-based capital totaled $24.3 million at March 31, 1998 or 20.60% of
risk-weighted assets, which exceeded the current requirements of 8.0% of
risk-weighted assets by $14.9 million or 12.60% of risk-weighted assets.
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 is scheduled to begin
during 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 $100,000.
14
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARIES
March 31, 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
===============================================
15
<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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Lawrence H. Kruse Date: May 6, 1998
--------------------------------------------------------------- ---------------
Lawrence H. Kruse
President and Chief Executive Officer
By: /s/ James D. Moll Date: May 6, 1998
--------------------------------------------------------------- ----------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer
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