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, 1999
----------------------------------------
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 shares outstanding of each of the issuer's classes of common stock
as of October 15, 1999:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,450,660 Shares
<PAGE>
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WELLS FINANCIAL CORP. and SUBSIDIARY
LOGO GRAPHIC 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 9-14
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
================================================================================
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1999 and December 31, 1998
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
1999 1998
--------- ---------
<S> <C> <C>
Cash, including interest-bearing accounts
9/30/99 $1,138; 12/31/98 $18,523 $ 2,606 $ 19,446
Certificates of deposit 400 500
Securities available for sale, at fair value 2,669 2,968
Securities held to maturity (approximate market value $15,231 at
September 30, 1999 and $5,542 at December 31, 1998) 15,585 5,539
Loans held for sale 435 6,097
Loans receivable, net 167,267 154,305
Accrued interest receivable 1,499 843
Foreclosed real estate 31 --
Premises and equipment 1,351 1,249
Other assets 1,004 929
--------- ---------
TOTAL ASSETS $ 192,847 $191,876
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 157,261 $ 158,441
Borrowed funds 9,000 5,000
Advances from borrowers for taxes and insurance 1,849 1,220
Income taxes:
Current
(38) 128
Deferred 777 885
Accrued interest payable 302 100
Accrued expenses and other liabilities 186 210
--------- ---------
TOTAL LIABILITIES 169,337 165,984
--------- ---------
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 16,921 16,840
Retained earnings, substantially restricted 17,968 17,211
Accumulated other comprehensive income,
725 901
Unearned ESOP shares (474) (591)
Unearned compensation restricted stock awards (34) (67)
Treasury stock, at cost (11,815) (8,621)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 23,510 25,892
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 192,847 $ 191,876
========= =========
</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,
------------------------------------- --------------------------------------
1999 1998 1999 1998
---------------- ------------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Interest and dividend income Loans receivable:
First mortgage loans $ 2,543 $ 2,741 $ 7,437 $ 8,594
Consumer and other loans 691 662 2,001 1,963
Investment securities and other
interest bearing deposits 322 189 1,116 783
---------------- ------------------ ------------------- ----------------
Total interest income 3,556 3,592 10,554 11,340
---------------- ------------------ ------------------- ----------------
Interest Expense
Deposits 1,831 1,884 5,480 5,495
Borrowed funds 75 68 209 771
---------------- ------------------ ------------------- ----------------
Total interest expense 1,906 1,952 5,689 6,266
---------------- ------------------ ------------------- ----------------
Net interest income 1,650 1,640 4,865 5,074
Provision for loan losses - 30 27 90
---------------- ------------------ ------------------- ----------------
Net interest income after provision for
loan losses 1,650 1,610 4,838 4,984
---------------- ------------------ ------------------- ----------------
Noninterest income
Gain on sale of loans originated for sale 39 90 161 277
Loan origination and commitment fees 38 171 264 625
Loan servicing fees 101 71 295 188
Insurance commissions 92 92 254 245
Fees and service charges 99 92 334 254
Other 9 5 28 16
---------------- ------------------ ------------------- ----------------
Total noninterest income 378 521 1,336 1,605
---------------- ------------------ ------------------- ----------------
Noninterest expense
Compensation and benefits 637 600 1,816 1,801
Occupancy and equipment 185 190 589 566
SAIF deposit insurance premium 24 23 71 69
Data processing 77 66 256 207
Advertising 66 48 160 135
Other 292 218 842 671
---------------- ------------------ ------------------- ----------------
Total noninterest expense 1,281 1,145 3,734 3,449
---------------- ------------------ ------------------- ----------------
Income before taxes 747 986 2,440 3,140
Income tax expense 303 410 982 1,284
---------------- ------------------ ------------------- ----------------
Net Income $ 444 $ 576 $ 1,458 $ 1,856
================ ================== =================== ================
Earnings per share
Basic earnings per share $ 0.30 $ 0.34 $ 0.96 $ 1.03
================ ================== =================== ================
Diluted earnings per share $ 0.29 $ 0.33 $ 0.94 $ 1.00
================ ================== =================== ================
Weighted average number of common shares outstanding:
Basic 1,471,337 1,706,993 1,518,562 1,805,235
================ ================== =================== ================
Diluted 1,508,291 1,758,048 1,555,940 1,858,833
================ ================== =================== ================
</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,
------------ --- -------------- ------------- --- -------------
1999 1998 1999 1998
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income $ 444 $ 576 $ 1,458 $ 1,856
Other comprehensive income:
Unrealized appreciation (depreciation) on
securities available for sale (144) 59 (298) 180
Income tax benefit (expense) 59 (24) 122 (74)
------------ -------------- ------------- -------------
Comprehensive income $ 359 $ 611 $ 1,282 $ 1,962
============ ============== ============= =============
</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, 1999
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unearned
Employee Unearned
Accumulated Stock Compensation
Additional Other Ownership Restricted Total
Common Paid-In Retained Comprehensive Plan Stock Treasury Stockholders'
Stock Capital Earnings Income shares Awards Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 219 $ 16,840 $ 17,211 $ 901 $ (591) $ (67) $ (8,621) $ 25,892
Net income for the nine months
ended September 30, 1999 - - 1,458 - - - - 1,458
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - (176) - - - (176)
Treasury stock purchases (3,194) (3,194)
Amortization of unearned
compensation - - - - - 33 - 33
Dividends on common stock - - (701) - - - - (701)
Allocated employee stock
ownership plan shares - - - 117 - - 198
-----------------------------------------------------------------------------------------------------
Balance September 30, 1999 $ 219 $ 16,921 $ 17,968 $ 725 $ (474) $ (34) $(11,815) $ 23,510
=====================================================================================================
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,458 $ 1,856
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 27 90
Gain on the sale of loans originated for sale (119) (277)
Compensation on allocation of ESOP shares 198 242
Amortization of restricted stock awards 33 70
(Gain) loss on the sale of foreclosed real estate -- 1
Unrealized gain on loans held for sale -- (14)
Gain on disposal of leasehold improvements -- (28)
Deferred income taxes 13 104
Depreciation and amortization on premises and equipment 185 207
Amortization of deferred loan origination fees (124) (176)
Amortization of excess servicing fees, mortgage servicing
rights and bond premiums and discounts 165 96
Loans originated for sale (27,002) (57,194)
Proceeds from the sale of loans originated for sale 32,577 56,260
Changes in assets and liabilities:
Accrued interest receivable (656) (58)
Other assets (31) (80)
Income taxes payable, current (166) 4
Accrued expenses and other liabilities 178 265
-------- --------
Net cash provided by operating activities 6,736 1,368
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans $(12,987) $ 20,344
Purchase of certificates of deposit (400) (5,300)
Purchase of securities held to maturity (11,230) (2,840)
Proceeds from principal repayments of mortgage backed securities -- 86
Proceeds from the maturities of certificates of deposit 500 6,000
Proceeds from the maturities of securities held to maturity 1,183 2,893
Proceeds from the sale of securities available for sale 212
Proceeds from the disposal of leasehold improvements -- 75
Proceeds from the sale and redemption of foreclosed real estate 97 --
Investment in foreclosed real estate (6) (2)
Purchase of premises and equipment (287) (112)
-------- --------
Net cash provided by (used in) investment activities (23,130) 21,356
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits $ (1,180) $ 7,277
Net increase in advances from borrowers
for taxes and insurance 629 684
Proceeds from repayment of loan to ESOP -- --
Repayments on borrowed funds 4,000 (19,500)
Purchase of treasury stock (3,194) (5,937)
Dividends on common stock (701) (789)
-------- --------
Net cash used in financing activities (446) (18,265)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,459 (16,840)
CASH:
Beginning 19,446 5,971
-------- --------
Ending $ 2,606 $ 10,430
======== ========
</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, 1999 and 1998
(Dollars in Thousands)
(Unaudited
<TABLE>
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 5,351 $ 5,262
Interest on borrowed funds 207 801
Income taxes 995 1,176
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTIING FINANCING
ACTIVITIES:
Transfers from loans to foreclosed real estate $ 98 $ 33
Allocation of ESOP shares to participants 117 124
Net change in unrealized appreciation on securities available for sale (176) 106
======= =======
</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 September 30, 1999 and December 31, 1998.
September 30, 1999 December 31, 1998
Amount Percent Amount Percent
----------------------------------------------------------------
(Dollars in Thousands)
Tier 1 (Core) Capital:
Required $ 7,467 4.00% $ 5,480 3.00%
Actual 16,666 8.93% 15,896 8.70%
Excess 9,199 4.93% 10,416 5.70%
Risk-based Capital
Required 9,918 8.00% 9,066 8.00%
Actual 17,524 14.13% 16,745 14.78%
Excess 7,606 6.13% 7,679 6.78%
7
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to consolidated Financial Statements Continued
(Unaudited)
NOTE 3. EARNINGS PER SHARE
Earnings per share are calculated and presented in accordance with 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 1,518,562 and 1,805,235 for the nine month
periods ended September 30, 1999 and 1998, respectively. The weighted average
number of shares of common stock were increased by 37,378 and 53,598 for the
nine month periods ended September 30, 1999 and 1998, respectively, for the
assumed exercise of the employee stock options in computing the diluted
per-share data.
NOTE 4. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998
-----------------------
<S> <C> <C>
Return on assets
(ratio of net income to average total assets) (1) 1.01% 1.25%
Return on equity
(ratio of net income to average equity) (1) 7.74% 8.62%
Equity to assets ratio
(ratio of average equity to average total assets) 13.04% 13.55%
Net interest margin
(ratio of net interest income to average interest earning assets) (1) 3.45% 3.48%
(1) Net income and net interest income have been annualized
</TABLE>
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 were 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. 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, 1999 and December 31, 1998:
Total assets increased by $971,000, from $191,876,000 at December 31,
1998 to $192,847,000 at September 30, 1999. Loans receivable and securities held
to maturity increased by $12.9 million and $10 million, respectively, at
September 30, 1999 when compared to December 31, 1998. The increase in loans
receivable was primarily due to an increase in loans secured by agricultural
real estate. Cash decreased by $16.8 million, from $19,446,000 at December 31,
1998 to $2,606,000 at September 30, 1999 as cash and cash obtained from the
increase in borrowed funds was used to fund loan growth, the purchase of
securities held to maturity and the purchase of 201,500 shares of treasury
stock.
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. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current economic conditions. As of September 30, 1999
and December 31, 1998 the balances in the allowance for loan losses and the
allowance for loan losses as a percentage of total loans were $858,000 and
$853,000 and 0.51% and 0.53%, respectively.
9
<PAGE>
Activity in the Company's allowance for loan losses for the nine months
ended September 30, 1999 and 1998 is summarized as follows:
1999 1998
----------------------
Balance on January 1, $ 852,557 $ 763,292
Provision for loan losses 27,000 90,000
Charge-offs (37,223) (23,047)
Recoveries 15,874 10,886
--------- ---------
Balance on September 30, $ 858,208 $ 841,131
========= =========
Loans on which the accrual of interest has been discontinued amounted
to $196,000 and $260,000 at September 30, 1999 and December 31, 1998,
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, 1999 and December 31, 1998.
Liabilities increased by $3,353,000, from $165,984,000 at December 31,
1998 to $169,337,000 at September 30, 1999. This increase is primarily due to a
$4,000,000 increase in borrowed funds, which was used to fund loan growth and to
purchase investment securities and treasury stock.
Equity decreased by $2,382,000 from $25,892,000 at December 31, 1998 to
$23,510,000 at September 30, 1999. This change in equity is primarily due to net
income of $1,458,000 for the nine months ended September 30, 1999 being offset
by the purchase of 201,500 shares of treasury stock at a total cost of
$3,194,000. Also affecting equity during the first nine months of 1999 were
payments totaling $701,000 in cash dividends. On October 19, 1999, the Board of
Directors of the Company declared a $0.15 per share cash dividend to be paid on
November 12, 1999 to the stockholders of record on November 1, 1999. 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, 1999 and September 30, 1998.
Net Income. Net income decreased by $132,000 and $398,000 for the three
and nine-month periods ended September 30, 1999, respectively, when compared to
the same periods in 1998. The decreases in net income were primarily due to
decreases of $133,000 and $361,000 in loan origination and commitment fees for
the three and nine-month periods ended September 30, 1999, respectively, when
compared to the same periods in 1998. Early in 1999 interest rates on mortgage
loans increased. This resulted in fewer mortgage loans being refinanced during
the first nine months of 1999 when compared to the same period in 1998 which is
the primary reason for the decrease in loan origination and commitment fees.
10
<PAGE>
Interest Income. Interest income from the loan portfolio decreased by
$169,000 and $1,119,000 for the three and nine-month periods ended September 30,
1999, respectively, when compared to the same periods in 1998. Interest income
from investments in securities, certificates of deposit and interest earned on
interest bearing cash accounts increased by $133,000 and $333,000 for the three
and nine month periods ended September 30, 1999 when compared to the same
periods in 1998. The decrease in interest income from the loan portfolio for the
three and nine month periods ended September 30, 1999 when compared to the same
periods in 1998 were primarily the result of a decrease in the average amount of
the loan portfolio during the first nine months of 1999 when compared to the
same period in 1998. Due to lower interest rates on residential mortgages,
management elected to sell the majority of the residential loans originated
during 1998 and the first three months of 1999 to the secondary market. Included
in the loans originated and sold during 1998 and the first three months of 1999
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
nine months of 1999 when compared to the same period in 1998.
Interest Expense. Total interest expense decreased by $46,000 and
$577,000 for the three and nine month periods ended September 30, 1999,
respectively, when compared to the same periods in 1998 primarily due to a
decrease in interest expense on borrowed funds. The decrease in interest expense
on borrowed funds was due to a decrease in the average amount of borrowed funds
during the three and nine-month periods ended September 30, 1999 when compared
to the same periods in 1998.
Net Interest income. Net interest income increased by $10,000 and
decreased by $209,000 for the three and nine month periods ended September 30,
1999, respectively, when compared to the same periods in 1998 due to the changes
in interest income and interest expense described above.
Provision for loan losses. The provision for loan losses decreased by
$30,000 for the three-month period ended September 30, 1999 and decreased by
$63,000 for the nine month period ended September 30, 1999 when compared to the
same periods in 1998. 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 1999. 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 decreased by $143,000 and
$269,000 for the three and nine-month periods ended September 30, 1999,
respectively, when compared to the same periods in 1998. The decrease in
noninterest income was primarily due to decreases in loan origination and
commitment fees of $133,000 and $361,000 for the three and nine-month periods
ended September 30, 1999 when compared to the same periods in 1998 which
resulted from the decreased refinance activity described above. The decreases in
loan origination and commitment fees were partially offset by increases in loan
servicing fees and increases in fees and service charges.
Noninterest Expense. Noninterest expense increased by $136,000 and
$285,000 for the three and nine month periods ended September 30, 1999,
respectively, when compared to the same periods in 1998 primarily due to
increases in data processing and other noninterest expense. Other noninterest
expense increased by $74,000 and $171,000 for the three month and nine month
periods ended September 30, 1999, respectively, when compared to the same
periods in 1998. The increases in other noninterest expense are primarily due to
increases in the amortization of mortgage servicing rights of $24,000 and
$72,000 for the three and nine-month periods ended September 30, 1999,
respectively, when compared to the same periods in 1998.
Income Tax Expense. Income tax expense decreased by $107,000 and
$302,000 for the three and nine month periods ended September 30, 1999 when
compared to the same periods in 1998. This decrease was the result of a decrease
in income before income taxes for the three and nine-month periods ended
September 30, 1999 when compared to the same periods in 1998.
11
<PAGE>
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans
One to four family real estate $ 63 $ 192
Agricultural real estate 82 -
Consumer 52 68
-------------------- ------------------------
Total $ 197 $ 260
-------------------- ------------------------
Accruing loans which are contractually
Past due 90 days or more
One to four family real estate $ 128 $ 100
Commercial real estate 381 -
-------------------- ------------------------
Total $ 509 $ 100
-------------------- ------------------------
Total non-accrual and accruing loans
Past due 90 days or more $ 706 $ 360
==================== ========================
Repossessed and non-performing assets
Repossessed property $ 31 $ -
Other non-performing assets - -
-------------------- ------------------------
Total repossessed and non-performing assets $ 31 $ -
-------------------- ------------------------
Total non-performing assets $ 737 $ 360
==================== ========================
Total non-accrual and accruing loans
past due 90 days or more to net loans 0.44% 0.23%
==================== ========================
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.37% 0.19%
==================== ========================
Total nonperforming assets to total assets 0.38% 0.19%
==================== ========================
</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, require 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, 1999 and December 31, 1998, the value of loans that would be
classified as impaired under these Statements is considered to be immaterial.
12
<PAGE>
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,
1999, the Bank's liquidity, as measured for regulatory purposes, was 6.43%. The
Bank adjusts liquidity as appropriate to meet its asset/liability objectives.
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. The
Company bought 307,200 shares of its common stock during 1998, which completed
these approved buy back programs. On January 21, 1999, the Company approved a
stock buy back program in which up to 129,660 shares of the common stock of the
Company could be acquired. This stock buy back program was completed on August
9, 1999. On August 26, 1999, the Company approved a stock buy back program in
which up to 76,000 shares of the common stock of the Company could be acquired.
As of September 30, 1999, 71,400 shares of the Company's stock had been acquired
under this stock buy back program
The Company paid a cash dividend of $0.15 per share on February 12,
1999, May 14, 1999 and August 13, 1999. The Company declared a cash dividend of
$0.15 per share payable on November 12, 1999 to stockholders of record on
November 1, 1999. 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, 1999, 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 for the Bank is 4% of adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness. The Bank had core capital of 8.93% at September 30, 1999.
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.
13
<PAGE>
Year 2000 Issue. Rapid and accurate data processing is essential to the
Company's operations. Many computer programs that can only distinguish the final
two digits of the year entered are expected to read entries for the year 2000 as
the year 1900 or as zero and incorrectly attempt to compute payment, interest,
delinquency and other data. We have been evaluating both information technology
(our computer systems) and non-information technology systems (e.g., heating,
cooling and ventilation controls). We have contacted the third party suppliers
of non-information technology systems (utility companies, etc.) and examined all
of our non-information technology systems. The third party suppliers of
non-information technology systems have assured us they are aware of the
possible year 2000 issue and are working to become year 2000 compliant before
December 31, 1999. We do not expect any material costs to address our
non-information technology systems and have not had any material costs to date.
We have evaluated our information technology systems risk in three areas: (1)
our own computers, (2) computers of others used by our borrowers, and (3)
computers of others who provide us with data processing.
Our own computers. Our strategy to address the year 2000 issue in
regards to the computers that we own is to replace all computers that are not
year 2000 compliant. At September 30, 1999, all of our computers that were not
year 2000 compliant had been replaced.
Computers of others used by our borrowers. We have evaluated most of
our borrowers and do not believe that the year 2000 problem should, on an
aggregate basis, impact the borrowers' ability to make payments to the Company.
We believe that most of the Company's residential and consumer borrowers are not
dependent on their home computers for income. As a result, we have not contacted
residential or consumer borrowers concerning this issue and do not consider this
issue in our residential and consumer loan underwriting process. The majority of
the Company's commercial real estate loans are collateralized by agricultural
real estate and the majority of the Company's commercial operating loans are for
farm machinery and farm inputs. We feel that the year 2000 issue should not
significantly impact the Company's commercial borrowers' ability to make
payments to the Company.
Computers of others who provide us with data processing. This risk is
primarily focused on one-third party service bureau that provides virtually all
of the Company's data processing. The software that is used by this service
bureau was designed to be year 2000 compliant. We are monitoring the progress
this service bureau is making in regards to testing their software and hardware
to be year 2000 compliant. Testing of this risk that has been completed
includes: testing of the software by the software vendor, testing of the
software and hardware by the service bureau, proxy testing of the software and
hardware by us and other banks using the service bureau's system and testing by
us of the communication links between the Company and the service bureau. We
have successfully completed our testing of the software, hardware and
communication links. We believe that any expenses incurred during the fourth
quarter of 1999 to complete the testing and upgrading of our data processing and
communication systems will be immaterial.
Contingency plan. Should this data processing system fail, the Company
has developed a contingency plan. The contingency plan provides for the service
bureau to furnish to the Company a complete database tape of our customers'
accounts, complete with account history as of December 30, 1999. This
information will also be supplied in printed form. Each of the Company's offices
will be supplied with a computer workstation loaded with a database front-end
entry screen program for recording transactions on their customers' accounts. If
this labor-intensive approach is necessary, the Company's employees will become
much less efficient. However, we believe the Company will be able to operate in
this manner until the existing service bureau, or its replacement, is able to
again provide data processing services.
Despite our best efforts to address the year 2000 issue, the vast
number of external entities that have direct and indirect relationships with us
makes it impossible to assure that a failure to achieve compliance by one or
more of these entities would not have a material adverse impact on the
operations of the Company.
14
<PAGE>
WELLS FINANCIAL CORP. and SUBSIDIARIES
September 30, 1999
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: November 4, 1999
-------------------------------------------------------- ----------------
Lawrence H. Kruse
President and Chief Executive Officer
By: /s/ James D. Moll Date: November 4, 1999
-------------------------------------------------------- ----------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<TOTAL-ASSETS> 192,847
<DEPOSITS> 157,261
<SHORT-TERM> 9,000
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0
0
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