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 June 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 July 31, 1998:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,835,660 Shares
<PAGE>
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WELLS FINANCIAL CORP. and SUBSIDIARY
================================================================================
[OBJECT OMITTED]
=======================================
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION: Page
------------------------------- ----
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 7-8
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
June 30, 1998 and December 31, 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
1998 1997
--------- ---------
<S> <C> <C>
Cash, including interest-bearing accounts
6/30/98 $7,307; 12/31/97 $4,838 $ 8,071 $ 5,971
Certificates of deposit 1,150 1,850
Securities available for sale 2,549 2,640
Securities held to maturity (approximate market value $4,234 at
June 30, 1998 and $3,201 at December 31, 1997) 4,234 3,198
Mortgage-backed securities available for sale -- 86
Loans held for sale 3,161 2,012
Loans receivable, net 166,298 182,724
Accrued interest receivable 1,128 1,106
Foreclosed real estate 69 35
Premises and equipment 1,277 1,425
Other assets 740 389
--------- ---------
TOTAL ASSETS $ 188,677 $ 201,463
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 152,452 $ 145,378
Borrowed funds 5,000 24,500
Advances from borrowers for taxes and insurance 1,165 1,080
Income taxes:
Current
14 111
Deferred 614 474
Accrued interest payable 291 139
Accrued expenses and other liabilities 147 113
--------- ---------
TOTAL LIABILITIES 159,683 171,795
--------- ---------
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 16,775 16,694
Retained earnings, substantially restricted 16,487 15,736
Accumulated other comprehensive income, unrealized
appreciation on securities available for sale, net 655 584
Unearned ESOP shares (676) (757)
Unearned compensation restricted stock awards (100) (151)
Treasury stock, at cost (4,366) (2,684)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 28,994 29,641
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 188,677 $ 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 Six Months Ended
June 30, June 30,
------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest and dividend income
Loans receivable:
First mortgage loans $ 2,820 $ 3,005 $ 5,853 $ 5,982
Consumer and other loans 656 600 1,301 1,158
Investment securities and other
interest bearing deposits 330 212 594 433
----------------- ------------------ ------------------ ------------------
Total interest income 3,806 3,817 7,748 7,573
----------------- ------------------ ------------------ ------------------
Interest Expense
Deposits 1,824 1,709 3,611 3,403
Borrowed funds 299 407 703 753
----------------- ------------------ ------------------ ------------------
Total interest expense 2,123 2,116 4,314 4,156
----------------- ------------------ ------------------ ------------------
Net interest income 1,683 1,701 3,434 3,417
Provision for loan losses 30 45 60 90
----------------- ------------------ ------------------ ------------------
Net interest income after provision for
loan losses 1,653 1,656 3,374 3,327
----------------- ------------------ ------------------ ------------------
Noninterest income
Gain on sale of loans originated for sale 106 7 187 15
Loan origination and commitment fees 208 40 454 69
Loan servicing fees 63 49 117 99
Insurance commissions 84 69 153 142
Fees and service charges 93 68 162 132
Other 7 14 11 30
----------------- ------------------ ------------------ ------------------
Total noninterest income 561 247 1,084 487
----------------- ------------------ ------------------ ------------------
Noninterest expense
Compensation and benefits 623 516 1,201 996
Occupancy and equipment 183 157 376 308
SAIF deposit insurance premium 23 24 46 48
Data processing 68 64 141 123
Advertising 44 42 87 78
Other 240 176 453 369
----------------- ------------------ ------------------ ------------------
Total noninterest expense 1,181 979 2,304 1,922
----------------- ------------------ ------------------ ------------------
Income before taxes 1,033 924 2,154 1,892
Income tax expense 411 385 874 793
---------------- ----------------- ----------------- -----------------
Net Income $ 622 $ 539 $ 1,280 $ 1,099
================= ================== ================== ==================
Earnings per share
Basic earnings per share $ 0.34 $ 0.29 $ 0.69 $ 0.58
================= ================== ================== ==================
Diluted earnings per share $ 0.33 $ 0.28 $ 0.67 $ 0.57
================= ================== ================== ==================
Weighted average number of common shares
2outstanding:
Basic 1,852,393 1,866,857 1,861,516 1,887,774
================= ================== ================== ==================
Diluted 1,911,768 1,896,375 1,916,341 1,916,713
================= ================== ================== ==================
</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 Six Months Ended
June 30, June 30,
------------- -- -------------- ------------- --- -------------
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income $ 622 $ 539 $ 1,280 $ 1,099
Other comprehensive income (loss);
Unrealized appreciation (depreciation) on
securities available for sale (11) 289 121 214
Income tax (expense) benefit 4 (119) (50) (88)
------------- -------------- ------------- -------------
Comprehensive income $ 615 $ 709 $ 1,351 $ 1,225
============= ============== ============= =============
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 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
six months ended
June 30, 1998 - - 1,280 - - - - 1,280
Net change in
unrealized
appreciation on
securities
available for
sale, net of
related deferred
taxes - - - 71 - - - 71
Treasury stock (1,682) (1,682)
purchases
Amortization of
unearned
compensation - - - - - 51 - 51
Dividends on common
stock - - (529) - - - - (529)
Allocated employee
stock ownership
plan shares - 81 - - 81 - - 162
-----------------------------------------------------------------------------------------------------------
Balance June 30, 1998 $ 219 $ 16,775 $ 16,487 $ 655 $ (676) $ (100) $ (4,366) $ 28,994
===========================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Six Months Ended June 30, 1998 and 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,280 $ 1,099
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 90
Gain on the sale of loans originated for sale (187) (15)
Compensation on allocation of ESOP shares 137 100
Amortization of restricted stock awards 51 68
Write-down of foreclosed real estate - 9
(Gain) loss on the sale of foreclosed real estate 1 (12)
Gain on the sale of securities available for sale - (7)
Unrealized (gain) loss on loans held for sale (14) 4
Gain on disposal of leasehold improvements (28) -
Deferred income taxes 90 (29)
Depreciation and amortization on premises and equipment 142 132
Amortization of deferred loan origination fees (123) (26)
Amortization of excess servicing fees, mortgage servicing
rights and bond premiums and discounts 60 19
Loans originated for sale (41,236) (2,751)
Proceeds from the sale of loans originated for sale 39,971 2,718
Changes in assets and liabilities:
Accrued interest receivable (22) (164)
Other assets (106) (152)
Income taxes payable, current (97) 150
Accrued expenses and other liabilities 186 195
-------------------- ---------------------
Net cash provided by operating activities 165 1,428
-------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans $ 16,470 $ (3,948)
Purchase of certificates of deposit (5,300) (100)
Purchase of securities available for sale - (135)
Purchase of securities held to maturity (2,840) (2,500)
Proceeds from principal repayments of mortgage backed securities 86 184
Proceeds from the maturities of certificates of deposit 6,000 200
Proceeds from the maturities of securities held to maturity 2,014 749
Proceeds from the disposal of leasehold improvements 75 -
Proceeds from the sale of securities available for sale - 2,535
Proceeds from the sale and redemption of foreclosed real estate - 71
Investment in foreclosed real estate (2) (32)
Purchase of premises and equipment (41) (94)
------------------- ---------------------
Net cash provided by (used in) investment activities 16,462 (3,070)
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 7,074 $ (1,648)
Net increase (decrease) in advances from borrowers
for taxes and insurance 85 (11)
Proceeds from repayment of loan to ESOP 25 -
Proceeds from borrowed funds - 14,000
Repayments on borrowed funds (19,500) (12,500)
Purchase of treasury stock (1,682) (921)
Dividends on common stock (529) -
-------------------- ---------------------
Net cash (used in) financing activities (14,527) (1,080)
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 2,100 (2,722)
CASH:
Beginning 5,971 8,301
-------------------- ---------------------
Ending $ 8,071 $ 5,579
==================== =====================
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Six Months Ended June 30, 1998 and 1997
(Dollars in Thousands)
(Unaudited
<TABLE>
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 3,429 $ 3,227
Interest on borrowed funds 733 744
Income taxes 778 668
==================== ====================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 33 $ -
Allocation of ESOP shares to participants 81 56
Net change in unrealized appreciation (depreciation)
on securities available for sale 71 126
==================== ====================
</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 June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
Amount Percent Amount Percent
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Tier 1 (Tangible) Capital:
Required $ 5,605 3.00% $ 5,990 3.00%
Actual 23,803 12.74% 22,790 11.41%
Excess 18,198 9.74% 16,800 8.41%
Risk-based Capital
Required $ 9,020 8.00% $ 9,417 8.00%
Actual 24,612 21.83% 23,544 20.00%
Excess 15,592 13.83% 14,127 12.00%
</TABLE>
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 1,861,516 and 1,887,774 for the six month
periods ended June 30, 1998 and 1997, respectively. The weighted average number
of shares of common stock were increased by 54,825 and 28,939 for the six month
periods ended June 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 six months ended
June 30,
1998 1997
-----------------------------------
<S> <C> <C>
Return on assets
(ratio of net income to average total assets) (1) 1.26% 1.09%
Return on equity
(ratio of net income to average equity) (1) 8.58% 7.71%
Equity to assets ratio
(ratio of average equity to average total assets) 14.69% 14.15%
Net interest margin
(ratio of net interest income to average interest earning assets) (1) 3.43% 3.46%
</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 June 30, 1998 and December 31, 1997:
Total assets decreased by $12,759,000, from $201,436,000 at December
31, 1997 to $188,677,000 at June 30, 1998 primarily due to a $16,426,000
decrease in loans receivable, from $182,724,000 at December 31, 1997 to
$166,298,000 at June 30, 1998. Due to lower interest rates on residential
mortgages, management elected to sell the majority of the residential loans
originated during the first half of 1998 to the secondary market. Included in
the loans that were originated and sold during the first half 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 loses. As of June 30, 1998 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 $812,000 and $763,000 and
0.48% and 0.41% respectively.
Loans on which the accrual of interest has been discontinued amounted
to $197,000 and $237,000 at June 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 June 30,
1998 and December 31, 1997.
9
<PAGE>
Activity in the Company's allowance for loan losses for the six months
ended June 30, 1998 and 1997 is summarized as follows:
1998 1997
------------------------------------------------
Balance on January 1, $ 763,292 $ 615,372
Provision for loan losses 60,000 90,000
Charge-offs (17,585) (39,416)
Recoveries 6,786 12,323
--------------------- -----------------------
Balance on June 30, $ 812,493 $ 678,279
===================== =======================
Liabilities decreased by $12,112,000, from $171,795,000 at December 31,
1997 to $159,683,000 at June 30, 1998. The decrease in liabilities was primarily
the result of a $19,500,000 decrease in borrowed funds being partially offset by
a $7,074,000 increase in deposits. Cash obtained from the increase in deposits
and from the sale of loans that were refinanced during the first half of 1998 to
the secondary market was used to reduce borrowed funds.
Equity decreased by $647,000 from $29,641,000 at December 31, 1997 to
$28,994,000 at June 30, 1998. This change in equity is primarily due to net
income of $1,280,000 for the six months ended June 30, 1998 being offset by the
purchase of 80,500 shares of treasury stock at a total cost of $1,682,000. Also
affecting equity were payments on February 13, 1998 and May 11, 1998 of $235,000
and $293,904, or $0.12 and $0.15 per share, respectively, in cash dividends. On
July 15, 1998, the Board of Directors of the Company declared a $0.15 per share
cash dividend to be paid on August 13, 1998 to the stockholders of record on
July 31, 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 Six Month Periods Ended June
30, 1998 and June 30, 1997.
Net Income. Net income increased by $83,000 and $181,000 for the three
and six month periods ended June 30, 1998, respectively, when compared to the
same periods in 1997 primarily due to increases in noninterest income of
$314,000 and $597,000 for the three and six month periods ended June 30, 1998,
respectively, when compared to the same periods in 1997. These increases were
partially offset by increases in noninterest expense of $202,000 and $382,000
for the three and six month periods ended June 30, 1998, respectively, when
compared to the same periods in 1997.
Interest Income. Interest income from the loan portfolio decreased by
$129,000 for the three month period ended June 30, 1998 and increased by $14,000
for the six month period ended June 30, 1998 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 $118,000 and
$161,000 for the three and six month periods ended June 30, 1998 when compared
to the same periods in 1997. The decrease in interest income from the loan
portfolio for the second quarter of 1998 when compared to the second quarter of
1997 was primarily the result of a decrease in the average amount of the loan
portfolio during the second quarter 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 half
of 1998 to the secondary market. Included in the loans originated and sold
during the first half 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 and second quarters of 1998 when compared to the
same periods in 1997.
10
<PAGE>
Interest Expense. Interest expense on deposits increased by $115,000
and $208,000 for the three and six month periods ended June 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 half of 1998 when compared to the
first half of 1997. Interest expense on borrowed funds decreased by $108,000 and
$50,000 for the three and six month periods ended June 30, 1998, respectively,
when compared to the three and six month periods ended June 30, 1997. As
described above, cash obtained from the sale of loans that were refinanced
during the first half of 1998 to the secondary market was used to reduce
borrowed funds during the second quarter of 1998 which resulted in a decrease in
the average amounts of borrowed funds during the second quarter of 1998 when
compared to the second quarter of 1997.
Net Interest income. Net interest income decreased by $18,000 for the
quarter ended June 30, 1998 and increased by $17,000 for the six month period
ended June 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 $30,000 for the three and six month periods ended June 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 $314,000 and
$597,000 for the three and six month periods ended June 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 $168,000 and
$385,000 for the three and six month periods ended June 30, 1998, respectively,
and the gain on sale of loans originated for sale of $99,000 and $172,000 for
the three and six months ended June 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 six months of 1998
when compared to the first six months of 1997.
Noninterest Expense. Noninterest expense increased by $202,000 for the
quarter ended June 30, 1998 and increased by $382,000 for the six months ended
June 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 $64,000 and $84,000 for
the three and six month periods ended June 30, 1998, respectively, when compared
to the same periods in 1997 primarily due to an increase in expenses associated
with the origination of loans, and an increase in the amortization of mortgage
servicing rights. The increase in the expense associated with the origination of
loans was $20,000 and $32,000 for the three and six month periods ended June 30,
1998, respectively, when compared to the same periods in 1997. The increase in
the amortization of mortgage servicing rights was $23,000 and $38,000 for the
three and six months ended June 30, 1998, respectively, when compared to the
same periods in 1997.
Income Tax Expense. Income tax expense increased by $26,000 and $81,000
for the three and six month periods ended June 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 six month periods ended June 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 June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans
One to four family real estate $ 184 $ 219
Consumer 14 18
--------------------- ------------------------
Total $ 198 $ 237
--------------------- ------------------------
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $ 258 $ 201
Consumer - -
--------------------- ------------------------
Total $ 258 $ 201
--------------------- ------------------------
Total non-accrual and accruing loans
past due 90 days or more $ 456 $ 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 $ 525 $ 473
===================== ========================
Total non-accrual and accruing loans
past due 90 days or more to net loans 0.27% 0.24%
===================== ========================
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.24% 0.22%
===================== ========================
Total nonperforming assets to total assets 0.28% 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 June 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:
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
June 30, 1998, the Bank's liquidity, as measured for regulatory purposes, was
11.34%. 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 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 June
30, 1998, the Company has purchased 270,875 shares under these programs which
leaves 46,313 shares remaining that may be purchased under these programs.
The Company paid a cash dividend of $0.12 per share on February 13,
1998 and $0.15 per share on April 15, 1998. The Company declared a cash dividend
of $0.15 per share payable on August 13, 1998 to stockholders of record on July
31, 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 June 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 12.74% at June 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 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.
13
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARIES
June 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
-----------------
Mr. Randel I. Bichler was appointed to the Board of Directors on
May 20, 1998 to fill the vacancy that was created by the death of
Joseph R. Gadola. Mr. Bichler is engaged in the general practice
of law in Wells, Minnesota. Mr. Bichler retired from the United
States Army Reserve in August of 1997 as a Lieutenant Colonel.
Mr. Bichler's term will expire in April of 1999.
The Board of Directors of the Company also appointed David
Buesing as a Director on May 20, 1998. Mr. Buesing is president
and general manager of Wells Concrete Products Co. Mr. Buesing is
a registered professional engineer in Minnesota, North Dakota and
Kansas. Mr. Buesing has served as director of the Prestressed
Concrete Institute and the Associated General Contractors of
Minnesota and is currently president of the Minnesota Prestressed
Association. Mr. Buesing's term will expire in April of 2001.
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/ Lawrence H. Kruse Date: August 7, 1998
------------------------------------------------------ --------------
Lawrence H. Kruse
President and Chief Executive Officer
By: /s/ James D. Moll Date: August 7, 1998
------------------------------------------------------ --------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer
</TABLE>
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 764
<INT-BEARING-DEPOSITS> 7,307
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,549
<INVESTMENTS-CARRYING> 4,234
<INVESTMENTS-MARKET> 4,234
<LOANS> 169,459
<ALLOWANCE> 812
<TOTAL-ASSETS> 188,677
<DEPOSITS> 152,452
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 2,231
<LONG-TERM> 0
0
0
<COMMON> 219
<OTHER-SE> 28,775
<TOTAL-LIABILITIES-AND-EQUITY> 188,667
<INTEREST-LOAN> 7,154
<INTEREST-INVEST> 594
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,748
<INTEREST-DEPOSIT> 3,611
<INTEREST-EXPENSE> 703
<INTEREST-INCOME-NET> 3,434
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,304
<INCOME-PRETAX> 2,154
<INCOME-PRE-EXTRAORDINARY> 2,154
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,280
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.67
<YIELD-ACTUAL> 3.43
<LOANS-NON> 198
<LOANS-PAST> 258
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 399
<ALLOWANCE-OPEN> 763
<CHARGE-OFFS> 18
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 812
<ALLOWANCE-DOMESTIC> 812
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
