SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-25342
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Wells Financial Corp.
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(Exact name of small business issuer in its charter)
Minnesota 48-1799504
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(State or other jurisdiction of (I.R.S. employer
of incorporation or organization) identification no.)
53 First Street, S.W., Wells, Minnesota 56097
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (507) 553-3151
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of class)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Registrant's revenues for the year ended December 31, 1999 were $15.9
million.
Registrant's voting stock trades on the Nasdaq National Market under
the symbol "WEFC." The aggregate market value of the voting stock held by
non-affiliates of registrant, based upon the closing price of such stock as of
March 3, 2000 ($12.23 per share), was $14.5 million.
As of March 3, 2000, registrant had 1,389,157 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Portions of Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1999.
2. Part III -- Portions of Registrant's Proxy Statement for the 2000 Annual
Meeting of Stockholders.
<PAGE>
PART I
WELLS FINANCIAL CORP. (THE "COMPANY") MAY FROM TIME TO TIME MAKE
WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING
THIS ANNUAL REPORT ON FORM 10-KSB AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS
NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
Item 1. Business
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General
Wells Financial Corp. ("Registrant" or the "Company") is a unitary
savings and loan holding company that was incorporated in December 1994 under
the laws of the State of Minnesota for the purpose of acquiring all of the
issued and outstanding common stock of Wells Federal Bank, fsb (the "Bank").
This acquisition occurred in April 1995 at the time the Bank simultaneously
converted from a mutual to a stock institution, and sold all of its outstanding
capital stock to the Company and the Company made its initial public offering of
common stock (the "Conversion"). As of December 31, 1999, the Company had total
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assets of $199.8 million, total deposits of $157.0 million, and stockholders'
equity of $23.5 million or 11.8% of total assets under generally accepted
accounting principles ("GAAP"). The only subsidiary of the Company is the Bank.
The primary activity of the Company is directing and planning the
activities of the Bank, the Company's primary asset. At December 31, 1999, the
remainder of the assets of the Company were maintained in the form of a loan to
an employee stock ownership plan ("ESOP") that was established for the benefit
of the Bank's employees, deposits in interest bearing accounts with other
financial institutions and selected investments. The Company engages in no other
significant activities. As a result, references to the Company or Registrant
generally refer to the Bank, unless the context otherwise indicates. In the
discussion of regulation, except for the discussion of the regulation of the
Company, all regulations apply to the Bank rather than the Company.
The Bank is a federally chartered stock savings bank headquartered in
Wells, Minnesota. The Bank has eight full service offices located in Faribault,
Martin, Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota. The Bank
was founded in 1934 and obtained its current name in 1991. The Bank's deposits
have been federally insured by the Savings Association Insurance Fund ("SAIF")
and its predecessor, the Federal Savings and Loan Insurance Corporation
("FSLIC") since 1934, and the Bank is a member of the Federal Home Loan Bank
("FHLB") System. The Bank is a community oriented, full service retail savings
institution offering traditional mortgage loan products. It is the Bank's intent
to remain an independent community savings bank serving the local banking needs
of Faribault, Martin, Blue Earth, Nicollet, Steele and Freeborn Counties,
Minnesota.
The Bank attracts deposits from the general public and uses such
deposits primarily to invest in residential lending on owner occupied
properties. The Bank also makes consumer loans, commercial loans, and
agricultural related loans and purchases mortgage-backed and investment
securities.
The principal sources of funds for the Registrant's lending activities
are deposits, advances from the Federal Home Loan Bank and the amortization,
repayment, and maturity of loans, and investment securities. Principal sources
of income are interest and fees on loans, investment securities, and deposits
held in other financial institutions. The Registrant's principal expense is
interest paid on deposits.
Market Area
The Company's primary market area consists of Faribault, Martin, Blue
Earth, Nicollet, Steele and Freeborn Counties, Minnesota. Located southwest of
Minneapolis, this area is primarily rural and contains approximately 50
communities ranging in population size from 200 to 40,000. The primary lending
concentration is in the Mankato, North Mankato and Owatonna areas. These areas
have a relatively large population base. The Company has an office in each of
the Mankato, North Mankato and Owatonna areas. Historically, the economy in the
Company's market area has been dependent on agriculture and agriculture related
industries. Economic growth in the Company's market area remains dependent upon
the local economy. In addition, the deposit and loan activity of the Company is
significantly affected by economic conditions in its market area including the
agriculture industry.
Lending Activities. The Company's loan portfolio predominantly consists
of mortgage loans secured by one to four-family residences. The Company also
makes consumer loans and commercial loans. For its mortgage loan portfolio, the
Company originates and retains adjustable rate loans as well as lower
loan-to-value ratio fixed rate loans with original maturities that are greater
than twenty years. The Company sells other conventional fixed rate mortgage
loans to the secondary market. The Company's consumer loan
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portfolio consists primarily of home equity or improvement loans secured by
second liens on real estate on which the Company has the first lien. To a lesser
extent, the consumer loan portfolio includes loans secured by vehicles and
savings accounts. The Company also originates commercial and multi-family real
estate loans, the vast majority of which are secured by farm land. In addition
to loans secured by farm real estate, the Company makes commercial business
loans, the majority of which are secured by farm operating equipment, livestock,
crops on hand, growing crops and farm real estate.
The consumer, commercial real estate, and commercial business loan
portfolios are primarily composed of adjustable rate loans.
The Company's adjustable rate loans reprice based on a cost of funds
index that is a lagging market index. A lagging index does not adjust as rapidly
as market interest rates and may not adjust as rapidly as would other indices.
During periods of increasing interest rates, use of a lagging index results in
adjustable rate loans repricing upward at a slower rate than if a leading market
index had been used. During periods of decreasing interest rates, use of a
lagging index results in adjustable rate loans repricing downward at a slower
rate than if a leading market index had been used.
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Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Company's loan portfolio in dollar amounts and
in percentages of the total loan portfolio (before deductions for loans in
process, deferred loan origination fees and costs and allowances for losses) as
of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
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1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------ ------- ------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
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One- to four-family $136,022 79.38% $141,067 78.20% $141,697 76.82% $105,088 67.25% $106,292 60.82%
Multi-family 880 0.51 1,355 0.75 1,167 0.63 950 0.61 654 0.37
Commercial 10,554 6.16 10,878 6.03 10,845 5.88 20,068 12.84 31,928 18.27
Construction 2,774 1.62 2,081 1.15 1,943 1.05 1,279 0.82 2,957 1.69
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 150,230 87.67 155,381 86.13 155,652 84.38 127,385 81.52 141,831 81.15
------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
- -----------
Consumer Loans:
Savings account 436 0.25 443 0.25 349 0.19 395 0.25 578 0.33
Vehicles 3,353 1.96 4,619 2.56 4,988 2.70 4,644 2.97 4,914 2.81
Home equity, home improvement
and second mortgages 12,875 7.51 15,197 8.42 18,781 10.18 18,475 11.83 21,315 12.20
Other 3,279 1.91 3,588 1.99 3,411 1.85 2,970 1.90 3,144 1.80
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans 19,943 11.63 23,847 13.22 27,529 14.92 26,484 16.95 29,951 17.14
Commercial business loans 1,191 0.70 1,171 0.65 1,299 0.70 2,394 1.53 2,988 1.71
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total other loans 21,134 12.33 25,018 13.87 28,828 15.62 28,878 18.48 32,939 18.85
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 171,364 100.00% 180,399 100.00% 184,480 100.00% 156,263 100.00% 174,770 100.00%
====== ====== ====== ======= ======
Less:
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Loans in process 493 623 351 655 722
Deferred loan origination fees
and costs 689 714 642 450 478
Allowance for loan losses 512 615 763 853 857
------- ------- ------- ------- -------
Total loans receivable, net $169,670 $178,447 $182,724 $154,305 $172,713
======= ======= ======= ======= =======
</TABLE>
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Origination, Purchase, and Repayment of Loans. The following table sets
forth the Company's loan originations, sales, and principal repayments for the
periods indicated. The Company originates loans for retention in its portfolio
and did not purchase loans during the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
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1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans receivable at
beginning of year $166,941 $171,364 $180,399 $184,480 $156,263
------- ------- ------- ------- -------
Loans originated:
One- to four-family residential 30,609 43,411 28,035 93,546 48,627
Commercial and multi-family real
estate 1,366 1,759 2,286 9,364 14,860
Construction loans 5,522 6,776 5,182 1,196 6,933
Consumer loans 12,103 10,242 16,102 18,944 16,568
Commercial business loans 1,567 610 1,983 1,170 946
------ ------ ------ ------- ------
Total loans originated 51,167 62,798 53,588 124,220 87,934
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Principal reductions:
Loans sold 13,584 19,209 14,735 85,316 36,151
Loan principal repayments 33,160 34,554 34,772 67,121 33,276
------ ------ ------ ------ ------
Total principal reductions 46,744 53,763 49,507 152,437 69,427
------ ------ ------ ------- ------
Total gross loans receivable at
end of year $171,364 $180,399 $184,480 $156,263 $174,770
======= ======= ======= ======= =======
</TABLE>
Due to the historically low interest rates on residential mortgage
loans during 1998 and the first quarter of 1999, many of the customers in the
Company's market area elected to refinance their mortgage loans which resulted
in the increase in loan originations during those periods.
Loan Sales. During 1999 the Company sold $36.2 million of mortgage
loans into the secondary market. The Company sells the FHA and Veterans
Administration ("VA") loans that it originates to another financial institution.
The Company does not retain the servicing on the FHA/VA loans. The Company also
sells conforming fixed-rate conventional loans with loan-to-value ratios of 90%
or higher to the Federal Home Loan Mortgage Corporation ("FHLMC"). The Company
retains the servicing rights on these loans. All loans sold to FHLMC ($35.6
million) were sold without recourse to the Company, except for documentation
deficiencies that may require the Company to repurchase these loans within a
limited time period following the sale to FHLMC. To a lesser extent, the Company
has sold loans with high loan to value ratios to maintain its loan quality.
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Loan Maturity Tables. The following table sets forth the maturity of
the Company's loan portfolio at December 31, 1999. The table does not include
prepayments, scheduled principal repayments or loans held for sale. All mortgage
loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
1- to 4- Other
Family Residential
Real Estate and
Mortgage Commercial Construction Consumer Total
-------- ---------- ------------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year $ 275 $ 111 $ 2,957 $ 3,728 $ 7,071
1 to 3 years 1,735 106 -- 4,101 5,942
3 to 5 years 1,852 3,361 -- 10,074 15,287
5 to 10 years 11,384 7,161 -- 14,560 33,105
Over 10 years 91,046 21,843 -- 476 113,365
-------- ------- ------ ------- -------
Total amount due $ 106,292 $ 32,582 $ 2,957 $ 32,939 174,770
======== ======= ====== =======
Less:
Allowance for loan losses 857
Loans in process 722
Deferred loan fees 478
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Loans receivable, net $ 172,713
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 2000 that have pre-determined interest rates and which have
floating or adjustable interest rates. This table does not include loans held
for sale.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One- to four-family $ 51,205 $ 54,812 $ 106,017
Commercial and multi-family real estate 25,641 6,830 32,471
Construction -- -- --
Commercial business and consumer 17,139 12,072 29,211
------- ------- --------
Total $ 93,985 $ 73,714 $ 167,699
======= ======= ========
</TABLE>
One- to Four-Family Residential Loans. The Company's primary lending
activity consists of the origination of single family residential mortgage loans
secured by property located in the Company's primary market area. The Company
generally originates one- to four-family residential mortgage loans without
private mortgage insurance in amounts up to 80% of the lesser of the appraised
value or selling price of the mortgaged property. The Company typically requires
private mortgage insurance or government guarantee on any loan at more than 80%
of the value of the mortgaged property. The Company originates adjustable rate
mortgage loans for retention in its portfolio with loan-to-value ratios of up to
95% and requires private mortgage insurance when the loan-to-value ratio exceeds
80%.
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The Company's adjustable rate loans provide for annual 1%-2% interest
rate adjustments with a maximum adjustment over the term of the loan of between
5% and 6%. The Company also permits adjustable rate loans to be converted into
fixed-rate loans.
Loan originations are generally obtained from existing customers,
members of the local community, and referrals from realtors within the Company's
lending area. Mortgage loans originated and held by the Company in its portfolio
include due-on sale clauses which provide the Company with the contractual right
to deem the loan immediately due and payable in the event that the borrower
transfers ownership of the property without the Company's consent.
The Company primarily originates fixed and adjustable rate mortgage
loans with 15-30 year terms. The Company offers various loan programs, including
low documentation loans for loans with lower loan-to-value ratios and other loan
programs using cost of funds or one-year U.S. treasury indices for adjustable
rate loan repricing. Interest rates charged on mortgage loans are competitively
priced based on market conditions and the Company's cost of funds. Throughout
the year, origination fees for loans were generally 1% of the loan amount. The
Company's standard underwriting guideline for fixed-rate mortgage loans conform
to FHLMC guidelines and the loans may be sold in the secondary market to private
investors. The Company customarily sells all Federal Housing Administration and
Veterans' Administration ("FHA/VA") loans as well as certain conforming fixed
rate mortgage loans in the secondary market. The Company also originates
adjustable rate mortgages ("ARMs") which adjust every year based upon various
indices.
At December 31, 1999 the Company was servicing approximately $155.2
million of loans for others, primarily long term fixed rate loans sold to FHLMC.
Generally, the Company retains all servicing on loans sold to FHLMC and does not
retain servicing on FHA/VA loans sold. Except for document deficiencies that may
occur during origination that may require a repurchase by the Company, loans are
sold without recourse.
Consumer Loans. The Company offers second mortgage loans on one- to
four-family residences which are typically offered as adjustable rate loans.
Such loans are only made on owner-occupied one- to four-family residences and
are subject to a 90% combined loan-to-value ratio. The Company holds the
majority of the underlying first mortgages on these loans. The underwriting
standards for second mortgage loans are similar to the Company's standards
applicable to one- to four-family residential loans. To a lesser extent, the
Company makes loans secured by vehicles and by savings accounts held with the
Company. Loans secured by vehicles totaled $4.9 million, or 2.81%, of the loan
portfolio at December 31, 1999.
Federal regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of an institution's assets.
In addition, a federal thrift has lending authority above the 35% category for
certain consumer loans, property improvement loans, and loans secured by savings
accounts. The Company originates consumer loans in order to provide a wide range
of financial services to its customers and because the shorter terms and
normally higher interest rates on such loans help maintain a profitable spread
between its average loan yield and its cost of funds. Consumer loans, however,
tend to have a higher risk of default than residential mortgage loans.
Typically, based on the Company's experience, a borrower faced with either
paying a mortgage loan to avoid foreclosure on the borrower's home or defaulting
on a consumer loan will continue paying the mortgage loan. At December 31, 1999
the Company had approximately $79,000 in consumer loans that were more than 90
days delinquent.
Commercial Real Estate Loans. In order to enhance yields on its assets,
the Company originates loans secured by commercial real estate. Approximately
93% of this portfolio is secured by farm real estate. In addition to originating
farm real estate loans, the Company also purchases participations in farm real
estate loans that are originated by commercial banks in southern Minnesota. Most
of the remainder of the
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portfolio is secured by church real estate. At December 31, 1999, loans secured
by farm real estate were originated in amounts up to the lesser of 65% of the
appraised value of the property or $1,000 per tillable acre. These loans are
evaluated on a cash flow basis in addition to an asset value basis. Loans
secured by church real estate are generally originated in amounts up to 70% of
the appraised value of the property. At December 31, 1999, the Company's largest
commercial real estate loan consisted of a $1,125,000 performing loan secured by
farm real estate. All commercial real estate loans, excluding loans of less than
$200,000 secured by farm real estate, require prior approval by the Bank's Board
of Directors. As part of its underwriting, the Company requires that borrowers
qualify for a commercial loan at the fully indexed interest rate rather than at
the origination interest rate.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. For loans secured by farm real estate, repayment
may be affected by weather conditions and government policies and subsidies
concerning farming. For loans secured by church real estate, repayment is
dependent upon the continuing financial support of the church's members.
Commercial Business Loans. The Company's commercial business loans
consist of agricultural operating loans secured primarily by farm equipment,
livestock, crops, and farm real estate. These loans are generally originated in
amounts up to 70% of the appraised value of the property. These loans typically
are adjustable rate loans with quarterly adjustments. Agricultural operating
loans generally involve a greater degree of risk than residential mortgage
loans. This increased credit risk is a result of several factors, including the
effects of general economic conditions on income producing property and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of agricultural operating loans is typically
dependent upon the successful operation of the related property. If the cash
flow from the property is reduced, the borrower's ability to repay the loan may
be impaired.
Construction Loans. Construction loans are made on single family
residential property to the individuals who are the owners and occupants upon
completion of construction. These loans are made on a long term basis and are
classified as construction permanent loans with no principal payments required
during the first six months, after which the payments are set at an amount that
will amortize over the term of the loan. The maximum loan-to-value ratio is 80%
and is made at a variable or fixed interest rate.
The Company does not originate many speculative loans to builders and
limits the loan-to-value ratio to 70% with a maximum loan term of 18 months. In
underwriting such loans, the Company takes into consideration the number of
units that the builder has on a speculative basis that remain unsold.
Construction lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The Company's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost of construction. If the estimate of
construction cost and the marketability of the property upon completion of the
project prove to be inaccurate, the Company may be compelled to advance
additional funds to complete the development. Furthermore, if the estimate of
value proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan, with a property with a value that is insufficient to
assure full repayment. For the small number of speculative loans originated to
builders, the
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ability of the builder to sell completed dwelling units will
depend, among other things, on demand, pricing, and availability of comparable
properties and economic conditions.
Loan Approval Authority and Underwriting. All loans, other than smaller
dollar value consumer loans, must be approved by the Company's Loan Committee. A
minimum of two committee members may approve loans on one- to four-family
residential units, non-owner occupied residential properties that do not exceed
eight units, farm real estate loans of $200,000 or less, farm operating loans of
$100,000 and less, and all consumer loans. All commercial real estate loans and
other loans that exceed the above limitations, excluding farm real estate loans
of less than $200,000, must be submitted to the Board of Directors for prior
approval.
For all loans originated by the Company, upon receipt of a completed
loan application from a prospective borrower, a credit report is generally
ordered, income and certain other information is verified and, if necessary,
additional financial information is requested. For real estate loans, an
appraisal of the real estate intended to be used as security for the proposed
loan is obtained from an independent appraiser designated and approved by the
Board of Directors of the Bank. In certain cases, an appropriate valuation is
completed by Company staff as allowed by regulation. In addition, the
relationship of the loan to the value of the collateral is considered. The
Company makes construction/permanent loans on individual properties. Funds
advanced during the construction phase are held in a loan-in-process account and
disbursed based upon various stages of completion in accordance with the results
of inspection reports that are obtained through physical inspection of the
construction by an independent contractor hired by the Company or in some cases
by a loan officer. For real estate loans, the Company will require either title
insurance or a title opinion. Borrowers must also obtain hazard or flood
insurance (for loans on property located in a flood zone, flood insurance is
required) prior to the closing of the loan.
Loan Commitments. The Company issues written commitments or verbal
commitments to prospective borrowers on all real estate approved loans.
Generally, the commitment requires acceptance within 90 days of the date of
issuance. Commitments for consumer loans are given verbally and not in writing
and generally expire in a shorter period of time. At December 31, 1999, the
Company had $20.2 million of commitments to cover originations, undisbursed
funds for loans in process and unused lines of credit. The Company estimates
that the majority of the Company's commitments are funded.
Loans to One Borrower. Loans-to-one borrower are limited in an amount
equal to 15% of unimpaired capital and unimpaired surplus and an additional
amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is
secured by readily marketable collateral (generally, financial instruments, not
real estate) or $500,000, whichever is higher. The Company's maximum loan-to-one
borrower limit was approximately $2.5 million as of December 31, 1999.
At December 31, 1999, the Company's largest amount of loans to one
borrower was $1.1 million, consisting of performing loans secured by
approximately 8 dwelling units and a personal residence, all of which are
located in the Company's market area.
Loan Delinquencies. The Company's collection procedures provide that
when a mortgage loan is 15 days past due, a notice of nonpayment is sent. If
payment is still delinquent after 30 days past due the customer will receive a
letter and/or telephone call and may receive a visit from a representative of
the Company. If the delinquency continues, similar subsequent efforts are made
to eliminate the delinquency. If the loan continues in a delinquent status for
60 days past due and no repayment plan is in effect, a notice of right to cure
default is mailed to the customer giving 30 additional days to bring the account
current before
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foreclosure is commenced. The loan committee meets regularly to
determine when foreclosure proceedings should be initiated and the customer is
notified when foreclosure has been commenced.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when a mortgage loan or a non-mortgage loan becomes 120 or 90
days delinquent, respectively, and, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent interest payments, if any, are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Non-accrual loans fluctuate over time due to a variety of factors. For
the Company, non-accrual loans may be affected by the payments on one large loan
or a delay in the harvesting of crops due to weather conditions. The Company's
experience has been that these fluctuations are normal and are not dependant on
any one factor over time.
The following table sets forth information regarding non-accrual loans,
real estate owned, and certain other repossessed assets and loans.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1- to 4-family
residences $ 265 $ 164 $ 219 $ 192 $ --
All other mortgage loans -- 59 -- -- 32
Non-mortgage loans:
Commercial 7 -- -- -- --
Consumer 26 75 18 68 79
----- ----- ----- ----- -----
Total $ 298 $ 298 $ 237 $ 260 $ 111
===== ===== ===== ===== =====
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Construction loans $ -- $ -- $ -- $ -- $ --
Permanent loans secured by 1- to 4-family
residences -- 147 201 100 11
All other mortgage loans -- -- -- -- --
Non-mortgage loans:
Commercial -- -- -- -- --
Consumer 1 -- 4 -- --
----- ----- ----- ----- -----
Total $ 1 $ 147 $ 205 $ 100 $ 11
===== ===== ===== ===== =====
Total non-accrual and accruing loans
past due 90 days or more $ 299 $ 445 $ 442 $ 360 $ 122
===== ===== ===== ===== =====
Foreclosed real estate $ 29 $ 78 $ 35 $ -- $ 55
===== ===== ===== ===== =====
Other nonperforming assets $ -- $ -- $ $ -- $ --
===== ===== ===== ===== =====
--
Total nonperforming assets $ 328 $ 523 $ 477 $ 360 $ 177
===== ===== ===== ===== =====
Total non-accrual and accruing loans past
due 90 days or more to net loans 0.18% 0.25% 0.24% 0.23% 0.07%
==== ==== ==== ==== ====
Total non-accrual and accruing loans past
due 90 days or more to total assets 0.15% 0.22% 0.22% 0.19% 0.06%
==== ==== ==== ==== ====
Total nonperforming assets to total assets 0.17% 0.26% 0.24% 0.19% 0.09%
==== ==== ==== ==== ====
</TABLE>
10
<PAGE>
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was immaterial for
the year ended December 31, 1999. Amounts included in the Company's interest
income on non-accrual loans for the year ended December 31, 1999 were likewise
immaterial.
Classified Assets. Office of Thrift Supervision ("OTS") regulations
provide for a classification system for problem assets of insured institutions
which covers all problem assets. Under this classification system, problem
assets of insured institutions are classified as "substandard," "doubtful," or
"loss." An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that do not
currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The following table provides further information about the Company's
problem assets as of December 31, 1999.
(In Thousands)
Special Mention $ $911
Substandard 209
Doubtful assets --
Loss assets --
--
Total $1,120
=====
General loss allowance $ 857
=====
Foreclosed Real Estate. Real estate acquired by the Company as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at the lower of
the loan balance or the fair value at the date of foreclosure less estimated
costs of disposition. There may be significant other expenses incurred such as
attorney and other extraordinary servicing costs involved with foreclosures. The
Company had $55,000 in foreclosed real estate at December 31, 1999.
11
<PAGE>
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in the
Company's loan portfolio. Such evaluation, which includes a review of all loans
of which full collectibility of interest and principal may not be reasonably
assured, considers the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and current
economic conditions.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
12
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Company's allowance for loan losses by loan category and
the percent of loans in each category to total loans receivable, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio. The allocation of the
allowance for loan losses is based on management's evaluation of the loans in
the respective portfolios; the Company does not attempt to manage the percentage
of the allocation between loan categories. As part of management's evaluation,
for each loan category, the allowance is determined after examination of prior
period experience but is adjusted for various factors such as delinquencies,
expected charge-offs, recoveries, amount of classified assets, amount of
non-accrual loans and any known local economic trends. As a result, the
allocation of the allowance does not reflect relative levels of historic
charge-offs between loan categories.
<TABLE>
<CAPTION>
At December 31
-------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------------- ----------------- ------------------ ---------------- -----------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Each Loans in Loans in Loans in
Each Category to Each Each Each
Category to Total Loans Category to Category to Category to
-----------
Amount Total Loans Amount Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of year allocated to:
Mortgage $394 87.67% $484 86.13% $617 84.38% $ 722 81.52% $ 749 81.15%
Consumer and non-mortgage 118 12.33 131 13.87 146 15.62 131 18.48 108 18.85%
--- ------- --- ------- --- ------ ---- ------ ---- ------
Total allowance $512 100.00% $615 100.00% $763 100.00% $ 853 100.00% $ 857 100.00%
=== ====== === ====== === ====== ==== ====== ==== ======
</TABLE>
13
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets
forth information with respect to the Company's allowance for loan losses for
the years indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total loans outstanding $171,364 $180,399 $184,480 $156,263 $174,770
======= ======= ======= ======= =======
Average loans outstanding $170,395 $173,383 $183,591 $172,219 $161,444
======= ======= ======= ======= =======
Beginning allowance balances $ 376 $ 512 $ 615 $ 763 $ 853
Provision:
One- to four-family 166 180 180 120 27
Commercial and multi-family
real estate -- -- -- -- --
Consumer -- -- -- -- --
Charge-offs:
One- to four-family 23 21 12 -- --
Commercial and multi-family
real estate -- -- -- -- --
Consumer 18 67 54 46 43
Recoveries:
One- to four-family -- -- -- -- --
Commercial and multi-family
real estate -- -- -- -- --
Consumer 11 11 34 16 20
Other -- -- -- -- --
------- ------- ------- ------- -------
Ending allowance balance $ 512 $ 615 $ 763 $ 853 $ 857
======= ======= ======= ======= =======
Allowance for loan losses as a percent
of total loans outstanding 0.30% 0.34% 0.41% 0.55% 0.49%
Net loans charged off as a percent of
average loans outstanding 0.02% 0.04% 0.02% 0.02% 0.01%
</TABLE>
14
<PAGE>
Analysis of the Allowance for Foreclosed Real Estate. The following
table sets forth information with respect to the Company's allowance for losses
on foreclosed real estate at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total foreclosed real estate and real estate
in judgment, net $ 29 $ 78 $ 35 $ -- $ 55
==== ==== ==== ==== ====
Allowance balances - beginning -- -- -- -- --
Provision -- -- -- -- --
Charge-offs -- -- -- -- --
Recoveries -- -- -- -- --
Other -- -- -- -- --
---- ---- ---- ---- ----
Allowance balances - ending $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ====
Allowance for losses on foreclosed real estate
in judgment to net foreclosed real estate and
real estate in judgment --% --% --% --% --%
== == == == ==
</TABLE>
Investment Activities
The Company is required under federal regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments. The Company has maintained a liquidity portfolio
in excess of regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of future yield levels, as
well as management's projections as to the short-term demand for funds to be
used in the Company's loan origination and other activities. At December 31,
1999, the Company had an investment portfolio of approximately $18.5 million,
consisting primarily of U.S. government corporate and agency obligations. To a
lesser extent, the portfolio also includes FHLMC stock, certificates of deposit
and FHLB stock, as permitted by the OTS regulations. The Company classifies its
investments, including debt and equity securities, as either held to maturity or
available for sale, in accordance with SFAS 115. The Company will continue to
seek high quality investments. The primary and secondary goals of the investment
portfolio are safety of principal and rate of return, respectively.
15
<PAGE>
Investment Portfolio. The following table sets forth the carrying value
of the Company's investments, including short-term investments, FHLB stock, and
mortgage-backed securities, at the dates indicated. At December 31, 1999, the
Company's securities that were classified as available for sale had an
unrealized net gain of $1.1 million. The Company's securities that were
classified as held to maturity had a net unrealized loss of $469,000. This
unrealized loss is not reflected in the table below because these securities are
carried at amortized cost in accordance with SFAS 115. At December 31, 1999, the
market value for the interest bearing deposits shown below approximated their
cost.
At December 31,
--------------------------
1997 1998 1999
----- ---- ----
(In Thousands)
Securities available for sale:
Equity securities $2,640 $2,968 $2,551
Securities held to maturity:
U.S. agency securities 3,198 5,539 15,559
----- ----- ------
Total investment securities 5,838 8,507 18,110
Interest-bearing deposits 1,850 500 400
Mortgage-backed securities available
for sale 86 -- --
----- ----- ------
Total investments $7,774 $9,007 $18,510
===== ===== ======
16
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Company's investment securities portfolio.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
------------------- ------------------- ----------------- ------------------ ----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- -------- --------- ------- -------- -------- -------- ------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Agency Obligations $ -- --% $15,559 5.93% $ -- --% $ -- --% $15,559 5.93% $15,090
FHLB Stock -- -- -- -- -- -- -- -- 1,421 -- 1,421
Equity Securities -- -- -- -- -- -- -- -- 1,130 -- 1,130
Interest Bearing Deposits 400 .19 -- -- -- 400 5.19% 400
--- ------ ---- ----- ------ ------
Total $400 $15,559 $ -- $ -- $18,510 $18,041
=== ====== ==== ===== ====== ======
</TABLE>
17
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Company's funds
for lending and other investment purposes. The Company derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities, borrowings and operations. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and market conditions. The Company may also borrow from the FHLB of Des
Moines as a source of funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's primary market area through the offering of a broad
selection of deposit instruments including regular savings accounts, NOW
accounts, and term certificate accounts. The Company also offers IRA and KEOGH
accounts. Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit and the interest rate, among
other factors.
Jumbo Certificate Accounts. The following table indicates, at December
31, 1999, the amount of the Company's certificates of deposit of $100,000 or
more by time remaining until maturity.
Maturity Period
- ---------------
In Thousands)
Within three months $3,124
Three through six months 1,026
Six through twelve months 1,223
Over twelve months 2,953
-----
$8,326
=====
Borrowings. Deposits are the primary source of funds of the Company's
lending and investment activities and for its general business purposes. Through
the Bank, the Company may obtain advances from the FHLB of Des Moines to
supplement its supply of lendable funds. Advances from the FHLB of Des Moines
are typically secured by a pledge of the Bank's stock in the FHLB of Des Moines
and a portion of the Company's first mortgage loans and certain other assets.
The Bank, if the need arises, may also access the Federal Reserve Bank discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At December 31, 1999, the Company had $17.0 million in advances
outstanding from the FHLB of Des Moines (see Note 10 of the Notes to the
Company's Consolidated Financial Statements). Future use of advances depends on
the rates on advances as compared to the rates on deposits.
18
<PAGE>
The following table sets forth certain information as to FHLB advances
at the dates indicated.
As of and for the Years Ended December 31
---------------------------------------------
1997 1998 1999
---- ---- ----
(Dollars in Thousands)
FHLB advances $24,500 $5,000 $17,000
Weighted average interest rate
of FHLB advances 5.92% 5.34% 5.73%
Maximum amount of advances $29,500 $29,500 $17,000
Average amount of advances $26,808 $14,615 $7,462
Weighted average interest rate
of average amount of advances 5.75% 5.74% 5.16%
Subsidiary Activity
The Company has one wholly owned subsidiary, the Bank. The Bank has two
wholly owned subsidiaries, known as Wells Insurance Agency, Inc. ("WIA") and
Greater Minnesota Mortgage, Inc. ("GMM").
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under the 2% limitation,
as of December 31, 1999, the Bank was authorized to invest up to approximately
$3.9 million in the stock of, or loans to, service corporations.
WIA was incorporated under the laws of the State of Minnesota in 1976.
WIA offers life, health, casualty, and business insurance on behalf of others
and also offers fixed-rate annuities. The Bank's investment in WIA totaled
$714,000 at December 31, 1999.
GMM was incorporated under the laws of Minnesota in 1997. GMM
originates loans through referrals from community commercial banks and,
primarily, sells these loans to the secondary market. During 1999, GMM
originated $10.2 million in single family dwelling loans, which were sold to the
secondary market. At December 31, 1999, the Bank's investment in GMM totaled
$197,000.
Personnel
As of December 31, 1999, the Bank had 64 full-time and two part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Company, with no employees of its own, utilizes those of
the Bank.
Competition
The competition for deposit products includes banks ranging in size
from larger, Minneapolis-based regional banks with branches in the Company's
market area to local independent community banks. Deposit competition also
includes a number of insurance products sold by local agents and investment
products sold by local and regional sales people.
19
<PAGE>
Loan competition varies depending upon market conditions. Loan
competition includes branches of large Minneapolis-based commercial banks and
thrifts, credit unions, mortgage bankers with local sales staff and local banks.
The Company believes that it is one of the few area lenders that has
consistently offered a variety of loans throughout all types of economic
conditions.
The Company has traditionally maintained a leadership position in
mortgage loan volume and market share throughout its service area by virtue of
its local presence. The Company believes that it has been able to effectively
market its larger variety of loan and other financial products and services when
compared to other local-based institutions and its superior customer service
when compared to branches of larger institutions based outside of the Company's
market area.
Regulation
Set forth below is a brief description of certain laws that relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
The Company generally is not restricted in the types of business in
which it may engage, provided that the Bank maintains a specified amount of its
assets in housing related investments. The changes to federal banking law
affected by the Gramm-Leach-Bliley Act are not expected to materially impact the
Company or the Bank.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "--
Regulation of the Bank -- Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
20
<PAGE>
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator. The FDIC may also prohibit an insured
depository institution from engaging in any activity the FDIC determines to pose
a serious threat to the SAIF.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup assignment.
In addition, the FDIC is authorized to increase deposit insurance rates on a
semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC.
On January 1, 1997, deposit insurance assessments for SAIF members were
reduced to approximately .064% of deposits on an annual basis; this rate
continued through the end of 1999. During this same period, members of the Bank
Insurance Fund ("BIF"), predominantly commercial banks, were annually assessed
approximately .013% of deposits. Thereafter, assessments for BIF and SAIF
members may be the same and the SAIF and BIF may be merged. It is expected that
these continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 4% of total adjusted assets for most savings institutions, and (3) a
risk-based capital requirement equal to 8.0% of total risk-weighted assets. The
Bank exceeded these minimum standards at December 31, 1999. The Bank's capital
ratios are set forth in Note 12 to the Company's Consolidated Financial
Statements. Regulations that enable the OTS to take prompt corrective action
against savings institutions effectively impose higher capital requirements on
the Bank.
21
<PAGE>
Savings associations with a greater than "normal" level of interest
rate exposure may, in the future, be subject to a deduction for an interest rate
risk ("IRR") component may be from capital for purposes of calculating their
risk-based capital requirement.
Dividend and Other Capital Distribution Limitations. The Bank must give
the OTS 30 days advance notice of any proposed distribution of capital, such as
a declaration of dividends to the Company, and the OTS has the authority under
its supervisory powers to prohibit any payment of dividends to the Company that
it deems to constitute an unsafe or unsound practice. In addition, the Bank may
not declare or pay a dividend on its capital stock if the dividend would (1)
reduce the regulatory capital of the Bank below the amount required for the
liquidation account established in connection with the conversion from mutual to
stock form or (2) reduce the amount of capital of the Bank below the amounts
required in accordance with other OTS regulations. In contrast, the Company has
fewer restrictions on its payment of dividends to its stockholders.
During 1999, the Company declared four $0.15 per share quarterly
dividends to its shareholders. During 1998, the Company declared one $0.12 per
share quarterly dividend and three $0.15 per share quarterly dividends to its
shareholders. The Company's dividend payout ratio for 1999 was 47.6% and for
1998 was 40.0%.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Des Moines. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 20% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. As of December 31, 1999, the Bank was in compliance with its
QTL requirement.
Loans-to-One Borrower. See "Business -- Loans-to-One Borrower."
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS.
22
<PAGE>
Proposed Regulation. The OTS has announced that it will consider
amending its capital standards so as to more closely conform its requirements to
those of the other federal banking agencies. The impact of this possible change
is not expected to materially impact the Bank. The impact on the Company cannot
yet be determined.
Item 2. Description of Properties
- ---------------------------------
The Company does not own any real property but utilizes the offices of
the Bank. The Bank operates from its main office located at 53 First Street,
S.W., Wells, Minnesota and eight full service branch offices. The Bank owns the
offices in Wells and one branch facility, and leases the remaining locations. In
the opinion of the Bank's management, the physical condition of each of the
offices is good and is adequate for the conduct of the Bank's business.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which Registrant is
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which Registrant holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to
Registrant's business. In the opinion of management, no material loss is
expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" on pages 1 and 2 of the Company's 1999 Annual Report to
Stockholders (the "Annual Report"), is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The following financial statements and the report of independent
accountants of Registrant included in Registrant's Annual Report to Stockholders
are incorporated herein by reference.
Independent Auditor's Report.
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998.
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998, and 1997.
23
<PAGE>
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
- --------------------------------------------------------------------------------
The information contained under the section captioned "Information with
Respect to Nominees for Director and Directors Continuing in Office" in the
Registrant's definitive proxy statement for Registrant's 1998 Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference. The
information contained under the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is also incorporated
herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first table under "Information with Respect
to Nominees for Director and Directors Continuing in Office"
in the Proxy Statement.
(c) Management of Registrant knows of no arrangements, including
any pledge by any person of securities of Registrant, the
operation of which may at a subsequent date result in a change
in control of Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
24
<PAGE>
PART IV
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) The following exhibits are included in this Report or incorporated
herein by reference:
3(i) Articles of Incorporation of Wells Financial Corp.*
3(ii) Bylaws of Wells Financial Corp.**
10.1 1995 Stock Option Plan of Wells Financial Corp.***
10.2 Management Stock Bonus Plan and Trust Agreements***
10.3 Change in Control Severance Agreement with James D. Moll****
10.4 Change in Control Severance Agreement with Gerald D. Bastian****
13 Annual Report to Stockholders for the fiscal year ended December
31, 1999 (only those portions incorporated by reference in this
document are deemed filed)
21 Subsidiaries of Registrant****
23 Consent of McGladrey & Pullen, LLP
27 Financial Data Schedule (in electronic filing only)
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
- ---------------------
* Incorporated by reference to the registration statement on Form S-1 (File
No. 33-87922) declared effective by the SEC on February 13, 1995.
** Incorporated by reference to the identically numbered exhibit to the
Registrant's Form 10-KSB for the year ended December 31,1998 (File No.
0-25342).
*** Incorporated by reference to the exhibits to the Registrant's proxy
statement for a special meeting of stockholders held on November 15, 1995
and filed with the SEC on October 2, 1995 (File No. 0-25342).
**** Incorporated by reference to the identically numbered exhibit to the
Registrant's Form 10-K for the year ended December 31, 1995.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 21, 2000.
WELLS FINANCIAL CORP.
By:/s/ Lawrence H. Kruse
-------------------------------------
Lawrence H. Kruse
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 21, 2000.
<TABLE>
<CAPTION>
<S> <C>
/s/ Lawrence H. Kruse /s/ James D. Moll
- ------------------------------------------ -----------------------------------
Lawrence H. Kruse James D. Moll
President, Chief Executive Officer Treasurer and Principal Financial and
and Director (Principal Executive Officer) Accounting Officer
(Principal Financial and Accounting Officer)
/s/ Dale E. Stallkamp /s/ Gerald D. Bastian
- ------------------------------------------ -----------------------------------
Dale E. Stallkamp Gerald D. Bastian
Director Vice President and Director
/s/ Randel I. Bichler /s/ Richard A. Mueller
- ------------------------------------------ -----------------------------------
Randel I. Bichler Richard A. Mueller
Director Director
/s/ David Buesing
- ------------------------------------------
David Buesing
Director
</TABLE>
EXHIBIT 13
<PAGE>
[** LOGO **]
WELLS
FINANCIAL
CORP.
ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
WELLS FINANCIAL CORP.
ANNUAL REPORT
Wells Federal Bank, fsb TABLE OF CONTENTS
<S> <C> <C>
MAIN OFFICE: Profile and Stock Market Information....................... 1-2
Wells Selected Consolidated Financial and Other Data............. 3
53 First Street SW
Wells, Minnesota 56097 Letter to Stockholders..................................... 4
BRANCH OFFICES: Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 5-16
Blue Earth
303 South Main Street Independent Auditor's Report............................... 17
Blue Earth, Minnesota 56013 Consolidated Statements of Financial Condition............. 18
Consolidated Statements of Income.......................... 19
Mankato - Madison East
Madison East Center Consolidated Statements of Stockholders' Equity............20-21
1400 Madison Avenue
Mankato, Minnesota 56001 Consolidated Statements of Cash Flows..................... 22-24
North Mankato Notes to Consolidated Financial Statements................ 25-47
1800 Commerce Drive
North Mankato, Minnesota 56003 Office Location and Other Corporate Information........... 48
Fairmont
Five Lakes Centre
300 South State Street
Fairmont, Minnesota 56031
Albert Lea
Skyline Mall
1710 West Main Street
Albert Lea, Minnesota 56007
St. Peter
523 South Third Street
St. Peter, Minnesota 56082
Owatonna
496 North Street
Owatonna, Minnesota 55060
</TABLE>
<PAGE>
Wells Financial Corp.
Profile
Wells Financial Corp. (the "Company") is a Minnesota corporation
organized in December 1994 at the direction of the Board of Directors of Wells
Federal Bank, fsb (the "Bank") to acquire all of the capital stock that the Bank
issued upon its conversion from mutual to stock form of ownership. The Company
is a unitary savings and loan holding company which, under existing laws,
generally is not restricted in the types of business activities in which it may
engage provided that the Bank retains a specified amount of its assets in
housing-related investments. At the present time, because the Company does not
conduct any active business, the Company does not intend to employ any persons
other than officers of the Bank but utilizes the support staff of the Bank from
time to time.
The Bank is a federally chartered stock savings bank headquartered in
Wells, Minnesota. The Bank has eight full service offices located in Faribault,
Martin, Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota. The Bank
was founded in 1934 and its deposits have been federally insured by the Savings
Association Insurance Fund ("SAIF") and its predecessor, the Federal Savings and
Loan Insurance Corporation ("FSLIC"), since 1934. The Bank is a member of the
Federal Home Loan Bank ("FHLB") System. The Bank is a community oriented,
full-service retail savings institution. The Bank attracts deposits from the
general public and uses such deposits primarily to invest in residential lending
on owner occupied properties, home equity loans and other consumer loans. Other
lending activities include agricultural real estate, agricultural operating,
multi-family residential and commercial real estate loans. Cash in excess of
what is needed for lending operations is used to purchase investment securities
and to maintain required liquidity. The Bank has two subsidiaries, Greater
Minnesota Mortgage (GMM) and Wells Insurance Agency (WIA). GMM originates loans
through referrals from community commercial banks and, primarily, sells these
loans to the secondary market. WIA is a full service insurance agency that sells
property, casualty, life, health and investment products, including mutual
funds.
Stock Market Information
Since its issuance on April 11, 1995, the Company's common stock has
been traded on the Nasdaq National Market under the symbol "WEFC." The following
table reflects high and low bid information during the periods shown. The
quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission, and may not represent actual transactions.
HIGH LOW
------------ ----------
January 1, 1998 - March 31, 1998 $19.75 $16.13
April 1, 1998 - June 30, 1998 $21.94 $19.25
July 1, 1998 - September 30, 1998 $21.50 $15.75
October 1, 1998 - December 31, 1998 $18.00 $15.25
January 1, 1999 - March 31, 1999 $16.25 $14.75
April 1, 1999 - June 30, 1999 $16.06 $15.50
July 1, 1999 - September 30, 1999 $15.94 $15.25
October 1, 1999 - December 31, 1999 $15.63 $ 9.94
The number of stockholders of record of common stock as of the record
date of March 3, 2000, was approximately 547. This does not reflect the number
of persons or entities who held stock in nominee or "street" name through
various brokerage firms. At March 3, 2000, there were 1,389,157 shares
outstanding.
1
<PAGE>
The Company declared quarterly cash dividends of $0.15 per share on
January 20, 1999, April 21, 1999, July 21, 1999 and October 19, 1999. The
Company declared quarterly cash dividends of $0.12 per share on January 21, 1998
and $0.15 per share on April 15, 1998, July 15, 1998 and October 21, 1998. The
Company declared quarterly cash dividends of $0.12 per share on July 16, 1997
and October 15, 1997. No dividends were declared during 1995 or 1996.
The Company's ability to pay dividends to stockholders is subject to
the requirements of Minnesota law. No dividend may be paid by the Company unless
its board of directors determines that the Company will be able to pay its debts
in the ordinary course of business after payment of the dividend. In addition,
the Company's ability to pay dividends is dependent, in part, upon the dividends
it receives from the Bank. The Bank may not declare or pay a cash dividend on
any of its stock if the effect thereof would cause the Bank's regulatory capital
to be reduced below (1) the amount required for the liquidation account
established in connection with the Bank's conversion from mutual to stock form,
or (2) the regulatory capital requirements imposed by the Office of Thrift
Supervision ("OTS"). During 1999 and 1998 the Bank paid $975,000 and $9.0
million in cash dividends, respectively, to the Company.
2
<PAGE>
WELLS FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(dollars in thousands, except per share amounts)
Financial Condition
<TABLE>
<CAPTION>
- ------------------------------------------------------ ------------ ------------ ------------ ------------ -----------
December 31, 1995 1996 1997 1998 1999
- ------------------------------------------------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total assets $ 195,158 $ 201,326 $201,436 $191,876 $199,836
Loans held for sale 1,944 1,791 2,012 6,097 521
Loans receivable, net 169,760 178,447 182,724 154,305 172,713
Mortgage-backed securities available for sale 867 428 86 - -
Securities available for sale 6,753 7,100 2,640 2,968 2,551
Securities held to maturity 4,199 2,049 3,198 5,539 15,559
Certificates of deposit 800 200 1,850 500 400
Cash and cash equivalents 8,192 8,301 5,971 19,446 4,200
Deposits 146,686 145,010 145,378 158,441 156,984
Borrowed funds 18,000 26,500 24,500 5,000 17,000
Equity 28,852 28,202 29,641 25,892 23,457
Summary of Operations
- ------------------------------------------------------ ------------ ------------ ------------ ------------ -----------
Years Ended December 31, 1995 1996 1997 1998 1999
- ------------------------------------------------------ ------------ ------------ ------------ ------------ -----------
Interest income $13,489 $14,669 $15,325 $14,890 $14,214
Interest expense 8,165 8,146 8,522 8,178 7,698
Net interest income 5,324 6,523 6,803 6,712 6,516
Provision for loan losses 166 180 180 120 27
Noninterest income 809 1,014 1,109 2,405 1,709
Noninterest expense (1) 3,855 5,245 3,987 4,769 5,054
Net income 1,270 1,200 2,220 2,476 1,874
Other Selected Data
- ------------------------------------------------------ ------------ ------------ ------------ ------------ -----------
Years Ended December 31, 1995 1996 1997 1998 1999
- ------------------------------------------------------ ------------ ------------ ------------ ------------ -----------
Return on average assets 0.67% 0.61% 1.10% 1.26% 0.97%
Return on average equity 5.50% 4.24% 7.71% 8.85% 7.57%
Average equity to average assets 12.11% 14.40% 14.24% 14.25% 12.77%
Equity to assets 14.78% 14.01% 14.71% 13.49% 11.74%
Net interest rate spread (2) 2.29% 2.72% 2.75% 2.81% 2.89%
Nonperforming assets to total loans (3) 0.17% 0.29% 0.26% 0.23% 0.10%
Allowance for loan losses to total loans 0.30% 0.34% 0.41% 0.53% 0.49%
Allowance for loan losses to nonperforming loans (3) 171.24% 138.20% 172.62% 236.94% 702.46%
Basic earnings per share (4) $ 0.50 $ 0.61 $ 1.18 $ 1.42 $ 1.26
Diluted earnings per share (4) $ 0.50 $ 0.61 $ 1.16 $ 1.38 $ 1.23
</TABLE>
(1) For 1996, includes a special SAIF recapitalization assessment of $1,085.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Nonperforming loans are loans over 90 days past due. Nonperforming assets
include nonperforming loans and foreclosed real estate.
(4) Does not include earnings prior to April 11, 1995, the date of conversion
to stock form.
3
<PAGE>
To Our Stockholders:
Our 1999 annual report is enclosed for your review. In looking back at the
events of 1999, I would classify the year as a transition year. The residential
mortgage refinancing activities that began in 1998 continued into the first
months of 1999. Due to the low rates on the mortgage loans that were originated
during 1998 and the first quarter of 1999 we sold almost all of the loans
originated during those time periods to the secondary market. Included in the
loans originated and sold to the secondary market were loans that were
refinanced from our loan portfolio. In order to utilize our staff and to provide
future income, loans that were sold to the secondary market were sold on a
service-retained basis.
As rates increased during 1999 to levels we felt were acceptable we began
retaining residential mortgage loans that we originated. This change in
strategy, along with the origination of other types of loans, allowed us to
rebuild our loan portfolio to a higher level at December 31, 1999 than our loan
portfolio at December 31, 1998.
Preparation to assure that the Company's data processing systems would function
properly on January 1, 2000 consumed a considerable amount of time and effort
during 1999. These efforts were successful with all of the Company's systems
functioning properly.
To provide our customers with additional financial services we opened an
investment center in April of 1999. We are now able to offer mutual funds,
variable rate annuities and other investments as an alternative to our
traditional FDIC insured products.
Despite positive performance by companies in the financial sector stock prices
of these companies generally declined during 1999. Wells Financial Corp.'s stock
price was no exception. In an effort to enhance the value of your investment in
Wells Financial Corp., we approved stock buy-back programs during 1999 in which
the Company can purchase up to 350,266 shares of its stock. As of December 31,
1999, the Company had purchased 223,003 shares towards fulfilling these buy-back
programs. I am also pleased that we were able to continue our quarterly dividend
program in which we paid a $0.15 per share dividend in each of the four quarters
of 1999. The management of Wells Financial Corp. will continue to explore ways
in which to increase the value of your investment.
Thank you for your investment and support of Wells Financial Corp.
Best regards,
/s/Lawrence H. Kruse
- --------------------
Lawrence H. Kruse
President and Chief Executive Officer
Chairman of the Board
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands)
General
The Company's business activities to date have been limited to its
investment in and loan to the Bank and a loan made to the Bank's Employee Stock
Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the Company's
common stock and, to a lesser degree, investing in securities and deposits in
other financial institutions. The Company's investment securities consist of
obligations issued by agencies of the U.S. government. As a result of the
limited operations of the Company, this discussion primarily relates to the
Bank. The principal business of the Bank consists of attracting deposits from
the general public and using such deposits, together with borrowings, primarily
to invest in residential lending on owner occupied properties. The Bank also
makes consumer loans and agricultural related loans and purchases investment
securities. The Bank's investment securities consist of U.S. government and
agency obligations, mortgage-backed securities, equity securities and FHLB
stock. The Bank's loans consist primarily of loans secured by residential real
estate located in its market area and, to a lesser extent, agricultural real
estate loans, commercial real estate loans and consumer loans.
The Bank's net earnings are dependent primarily on its net interest
income, which is the difference between interest income earned on its investment
and loan portfolios and interest paid on interest-bearing liabilities. Net
interest income is determined by (i) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. The Bank's interest rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. To a lesser extent, the level of noninterest
income, which primarily consists of service charges and other fees, also affects
the Bank's net earnings. In addition, the level of noninterest (general and
administrative) expenses affects net earnings.
The operations of the Bank and the entire thrift industry are
significantly affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of the federal government and governmental
agencies. The demand for and supply of housing, competition among lenders, the
level of interest rates, and the availability of funds influence lending
activities. Deposit flows and costs of funds are influenced by prevailing market
rates of interest, primarily on competing investments, account maturities, and
the levels of personal income and savings in the Bank's market area.
Asset/Liability Management
Net interest income, the primary component of the Bank's net earnings,
is derived from the difference or "spread" between the yield on interest-earning
assets and the cost of interest-bearing liabilities. The Bank has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities or repricing characteristics of its interest-earning assets
and interest-bearing liabilities. The matching of the Bank's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on its net portfolio value.
5
<PAGE>
(dollars in thousands)
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Bank's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Bank's net portfolio value and net interest income would tend
to increase during periods of rising interest rates but decrease during periods
of falling interest rates. If the Bank's assets mature or reprice more slowly or
to a lesser extent than its liabilities, the Bank's net portfolio value and net
interest income would tend to decrease during periods of rising interest rates
but increase during periods of falling interest rates. The Bank's policy has
been to mitigate the interest rate risk inherent in the historical savings
institution business of originating long-term loans funded by short-term
deposits by pursuing certain strategies designed to decrease the vulnerability
of its earnings to material and prolonged changes in interest rates. These
strategies include obtaining longer term fixed rate borrowings at favorable
rates and, in periods of lower interest rates, the sale of all newly originated
fixed rate mortgage loans to the secondary market.
The Bank's lending strategy is focused on the origination of
traditional one to four-family mortgage loans primarily secured by single family
residences in the Bank's primary market area. During recent periods, the Bank
has utilized borrowings as a way of accommodating loan demand, consistent with
its goal of maintaining asset quality. The Bank also invests a portion of its
assets in consumer, agricultural real estate and agricultural operating loans,
commercial business and commercial real estate loans and investment securities
as a method of reducing interest rate risk. These loans typically have
adjustable interest rates and are for shorter terms than residential first
mortgage loans. The Bank's entire commercial business loan portfolio and most of
the commercial real estate portfolio are secured by equipment or real estate
used for farming. These loans typically have higher interest rates than one- to
four-family loans but have not historically resulted in greater losses for the
Bank. Historically, the Bank sells higher loan to value ratio fixed rate
mortgage loans and mortgage loans with original maturities of twenty years or
less into the secondary market and retains adjustable rate mortgage loans and
lower loan to value ratios fixed rate loans with original maturities greater
than twenty years. Due to the lower than normal interest rate environment during
1998 and the first half of 1999 the Bank elected to sell the majority of the
fixed rate loans it originated during those time periods, regardless of the loan
to value ratio or the contractual maturity. In addition, the Bank retains
servicing on most of the loans that it sells, enabling it to generate additional
income and maintain certain economies of scale in loan processing.
In order to improve the Bank's interest rate sensitivity, improve asset
quality, and provide diversification in the asset mix, the Bank maintains a
percentage of its assets in investment securities, which generally have shorter
terms to maturity. The Bank's purchase of investment securities is designed
primarily for safety of principal and secondarily for rate of return.
On a weekly basis, the Bank monitors the interest rates of its
competitors and sets its interest rates such that its rates are neither the
highest or lowest in its market area. The Bank intends for its rates to be
competitive and perhaps slightly above the average rates being paid in its
market area. The Bank has sought to remain competitive in its market by offering
a variety of products. The Bank attempts to manage the interest rates it pays on
deposits while maintaining a stable deposit base and providing quality services
to its customers.
6
<PAGE>
(dollars in thousands)
Net Portfolio Value
To encourage associations to reduce their interest rate risk, the OTS
adopted a rule incorporating an interest rate risk ("IRR") component into the
risk-based capital rules. This rule in not yet in effect. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its net portfolio value ("NPV") to changes in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. An
institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in the NPV ratio of more than 2% (200 bp) will require the institution to deduct
from its capital 50% of the amount of change in NPV. The rule provides that the
OTS will calculate the IRR component quarterly for each institution. The OTS has
informed the Bank, based on asset size and risk-based capital, that it is exempt
from this rule. Nevertheless, the following table presents the Bank's NPV at
December 31, 1999, as calculated by the OTS, based on information provided to
the OTS by the Bank.
<TABLE>
<CAPTION>
Percent of Change in
Change Interest Estimated Amount of Estimated NPV NPV Ratio(4)
Rates (basis points) NPV Change(1) NPV(2) Ratio(3) (basis points)
-------------------- --- --------- ------ -------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+300 $9,220 $(10,634) (54)% 5.09% -511 bp
+200 12,970 (6,884) (35)% 6.98% -322 bp
+100 16,604 (3,280) (16)% 8.72% -148 bp
-- 19,854 10.20%
-100 22,258 2,405 12% 11.24% 104 bp
-200 24,045 4,191 21% 11.96% 176 bp
-300 25,940 6,086 31% 12.71% 251 bp
</TABLE>
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
7
<PAGE>
(dollars in thousands)
At
December 31,
1999
-------------------
*** Risk Measures: 200 bp rate shock ***
Pre-Shock NPV Ratio: NPV as % of PV of Assets 10.20%
Exposure Measure: Post-Shock NPV Ratio 6.98%
Sensitivity Measure: Change in NPV Ratio 322 bp
Although the OTS has informed the Bank that it is not subject to the
IRR component discussed above, the Bank is still subject to interest rate risk
and, as can be seen above, rising interest rates will reduce the Bank's NPV. If
the Bank were subject to the IRR component at December 31, 1999, a deduction
from capital would have been required.
Also, during periods of increasing interest rates, the Bank's interest
rate sensitive liabilities would reprice faster than its interest rate sensitive
assets (repricing periods on adjustable-rate loans affect the repricing of
interest rate sensitive assets, with longer repricing periods delaying the
repricing of such assets more than shorter repricing periods would delay the
repricing of such assets), causing a decline in the Bank's interest rate spread
and margin. In times of decreasing interest rates, the value of fixed rate
assets could increase in value and the lag in repricing of interest rate
sensitive assets could be expected to have a positive effect on the Bank.
8
<PAGE>
Average Balance Sheet (dollars in thousands)
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. The yields for the periods presented include loan origination
fees that are considered adjustments to yield. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily average balances has caused any material difference in
the information presented.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- --------- ------------ ------------ ------------ --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 183,591 $ 14,570 7.94% $ 172,219 $ 13,888 8.06% $ 161,444 $ 12,831 7.95%
Mortgage-backed
securities 250 18 7.2% 12 1 8.33% - - -
Investments (2) 14,426 737 5.11% 20,167 1,001 4.96% 27,442 1,383 5.04%
---------- --------- ------------ ------------ ---------- ---------
Total interest-
earning assets 198,267 15,325 7.73% 192,398 14,890 7.74% 188,886 14,214 7.53%
--------- ------------ ---------
Noninterest earning assets 3,979 4,049 4,994
---------- ------------ ----------
Total assets $ 202,246 $ 196,447 $ 193,880
========== ============ ==========
Interest bearing liabilities:
Savings, NOW and money
Market accounts 37,010 966 2.61% 40,300 1,046 2.60% 45,352 1,153 2.54%
Certificates of deposit 107,394 6,014 5.60% 110,836 6,293 5.68% 113,337 6,160 5.44%
Borrowed funds 26,808 1,542 5.75% 14,615 839 5.74% 7,462 385 5.16%
---------- --------- ------------ ------------ ---------- ---------
Total interest
bearing liabilities 171,212 8,522 4.98% 165,751 8,178 4.93% 166,151 7,698 4.64%
--------- ------------ ---------
Noninterest bearing
liabilities 2,232 2,706 2,975
---------- ------------ ----------
Total liabilities 173,444 168,457 169,126
Equity 28,802 27,990 24,754
---------- ------------ ----------
Total liabilities
and equity $ 202,246 $ 196,447 $ 193,880
========== ============ ==========
Net interest income 6,803 6,712 6,516
========= ============ =========
Interest rate spread (3) 2.75% 2.81% 2.89%
Net yield on interest
earning assets (4) 3.43% 3.49% 3.45%
Ratio of average interest
earning assets
to average interest
bearing liabilities 1.16X 1.16X 1.14X
========== ============ =========
</TABLE>
(1) Average balances include non-accrual loans and loans held for sale.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis (dollars in thousands)
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the years indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------- ----------------------------------------
1998 vs. 1997 1999 vs. 1998
--------------------------------------- ----------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
--------- -------- --------- ---------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable $ (903) $ 220 $ 1 $ (682) $ (869) $ (201) $ 13 $(1,057)
Mortgage-backed securities (17) 3 (3) (17) (1) -- -- (1)
Investments 293 (22) (7) 264 361 15 6 382
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets (627) 201 (9) (435) (509) (186) 19 (676)
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Deposit accounts 279 82 (2) 359 273 (290) (9) (26)
Borrowed funds (701) (3) 1 (703) (411) (85) 42 (454)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities (422) 79 (1) (344) (138) (375) 33 (480)
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income $ (205) $ 122 $ (8) $ (91) $ (371) $ 189 $ (14) $ (196)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
10
<PAGE>
(dollars in thousands)
Financial Condition
Total assets increased by $7,960 from $191,876 at December 31, 1998 to
$199,836 at December 31, 1999 primarily due to an increase of $12,832 in the
loan portfolio and a $10,020 increase in securities held-to-maturity. These
increases were partially offset by a $15,246 decrease in cash. The increase in
the loan portfolio was primarily due to an increase in real estate loans on
farmland and, to a lesser degree, on management's decision to retain residential
real estate loans that were originated during the last half of 1999.
Management's decision to retain almost all of the residential real estate loans
that were originated during the last half of 1999 resulted from an increase in
the rates on these loans during that period of time. Cash was used to fund the
increase in the loan portfolio and to purchase securities that were classified
as held-to-maturity.
In accordance with the Bank's internal classification of assets policy,
management evaluates the loan portfolio on a quarterly basis to identify and
determine the adequacy of the allowance for loan losses. As of December 31, 1999
and December 31, 1998, the balance in the allowance for loan losses and the
allowance for loan losses as a percentage of total loans were $857 and $853 and
0.49% and 0.53%, respectively.
Loans on which the accrual of interest had been discontinued amounted
to $111 and $260 at December 31, 1999 and 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 December 31,
1999 and 1998.
Deposits decreased by $1,457 from $158,441 at December 31, 1998 to
$156,984 at December 31, 1999. Borrowed funds increased by $12,000 at year-end
1999 when compared to year-end 1998. Cash and the increase in borrowed funds
were used to fund the increases in the loan portfolio and the securities
portfolio described above.
Equity decreased by $2,435 from $25,892 at December 31, 1998 to $23,457
at December 31, 1999. The decrease in equity was primarily the result of net
income for 1999 of $1,874 being offset by the payment of $896 in cash dividends
and by the repurchase of 223,003 shares of treasury stock at a cost of $3,462.
Also affecting equity was the allocation of $255 of employee stock ownership
plan shares, the amortization of $40 of unearned compensation and a $246
decrease in accumulated other comprehensive income.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
General. Net income for the year ended December 31, 1999 decreased by
$602, or 24.3%, from $2,476 for the year ended December 31, 1998 to $1,874 for
the year ended December 31, 1999. The decrease in net income for 1999 when
compared to 1998 was primarily due to a $696 decrease in noninterest income.
11
<PAGE>
(dollars in thousands)
Interest Income. Interest income decreased by $676, or 4.5%, for the
year ended December 31, 1999 when compared to the year ended December 31, 1998.
A $1,057 decrease in interest on loans was partially offset by a $381 increase
in interest income from investments. The decrease in interest income from loans
was the result of a decrease in the average amount of the loan portfolio during
1999 when compared to 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 those time periods 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 investments was the result of an increase
in the average amount of investments during 1999 when compared to 1998.
Interest Expense. Interest expense on deposits remained relatively
constant for 1999 when compared to 1998. Interest expense on borrowed funds
decreased by $454 for the year ended December 31, 1999 when compared to the year
ended December 31, 1998 primarily due to a decrease in the average amount of
borrowed funds during 1999 when compared to 1998.
Net Interest Income. Net interest income decreased by $196, or 2.9% for
the year ended December 31, 1999 when compared to the year ended December 31,
1998 due to the changes in interest income and interest expense described above.
Provision for Loan Losses. The provision for loan loss decreased by $93
for the year ended December 31, 1999 when compared to the year ended December
31, 1998. Management monitors the allowance for loan loss in relation to the
size and quality of the loan portfolio and adjusts the provision for loan losses
to adequately provide for loan losses. Based on the decrease in the average
amount of the loan portfolio during 1999 when compared to 1998 and management's
evaluation of the quality of the loan portfolio, management felt that a
reduction in the provision for loan losses was warranted. 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 $696, or 28.9%, for
1999 when compared to 1998. The decrease in noninterest income was primarily due
to a decrease of $670 for 1999 when compared to 1998 in loan origination and
commitment fees. The decrease in loan origination and commitment fees was the
result of fewer loan originations during 1999 when compared to 1998.
Noninterest Expense. Noninterest expense increased by $285, or 6%, for
the year ended December 31, 1999 when compared to the year ended December 31,
1998 due to increases in data processing and in other noninterest expense. Other
noninterest expense increased by $173 for 1999 when compared to 1998 primarily
due to a $87 increase in the amortization of mortgage servicing rights.
Income Tax Expense. Income tax expense decreased by $482 for the year
ended December 31, 1999 when compared to the year ended December 31, 1998. This
decrease was the result of a decrease in income before income taxes for 1999
when compared to 1998.
12
<PAGE>
(dollars in thousands)
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. Net income for the year ended December 31, 1998 was $2,476; an
increase of $256 when compared to net income for the year ended December 31,
1997. The increase in net income for 1998 when compared to 1997 was primarily
the result of a $1,296 increase in noninterest income being partially offset by
a $91 decrease in net interest income and a $782 and $227 increase in
noninterest expense and income tax expense, respectively.
Interest Income. Interest income decreased by $435 for the year ended
December 31, 1998 when compared to the year ended December 31, 1997. A $682
decrease in interest on loans was partially offset by a $247 increase in
interest income from investments. The decrease in interest income from loans was
the result of a decrease in the average amount of the loan portfolio during 1998
when compared to 1997. Due to lower interest rates on residential mortgages,
management elected to sell the majority of the residential loans originated
during 1998 to the secondary market. Included in the loans originated and sold
during 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 investments was the
result of an increase in the average amount of investments during 1998 when
compared to 1997.
Interest Expense. During 1998, average borrowed funds decreased by
$12,193 when compared to average borrowed funds during 1997 and average deposits
increased by $3,290 during 1998 when compared to average deposits during 1997.
The decrease in the average amount of borrowed funds during 1998 when compared
to average borrowed funds during 1997 is the primary reason for the decrease in
interest expense for the year ended December 31, 1998 when compared to the year
ended December 31, 1997.
Net Interest Income. Net interest income decreased by $91 for the year
ended December 31, 1998 when compared to the year ended December 31, 1997 due to
the changes in interest income and interest expense described above.
Provision for Loan Losses. The provision for loan loss decreased by $60
for the year ended December 31, 1998 when compared to the year ended December
31, 1997. Management monitors the allowance for loan loss in relation to the
size and quality of the loan portfolio and adjusts the provision for loan losses
to adequately provide for loan losses. Based on the decrease in size of the loan
portfolio during 1998 when compared to 1997 and management's evaluation of the
quality of the loan portfolio, management felt that a reduction in the provision
for loan losses was warranted. 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 $1,296 for 1998
when compared to 1997. The increase in noninterest income was primarily due to
increases in loan origination and commitment fees of $791 and the gain on sale
of loans of $353 for the year ended December 31, 1998 when compared to the year
ended December 31, 1997. These increases resulted from a greater amount of loans
originated and sold to the secondary market during 1998 when compared to 1997.
Also affecting noninterest income were increases in fees and service charges and
loan servicing fees of $85 and $69, respectively.
13
<PAGE>
(dollars in thousands)
Noninterest Expense. Noninterest expense increased by $782 for the year
ended December 31, 1998 when compared to the year ended December 31, 1997
primarily due to increases in compensation and benefits, occupancy and equipment
and other noninterest expense. 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.
The lease on the branch office at Riverfront Drive in Mankato expired during the
fourth quarter of 1998. The Company relocated this branch office to a larger
office with full drive-up facilities on Commerce Drive in North Mankato, an area
that management feels will provide greater growth potential for the Company.
These changes in facilities resulted in increased compensation and benefits and
occupancy and equipment. Also affecting compensation and benefits were annual
compensation increases. Other noninterest expense increased by $196 for 1998
when compared to 1997, primarily due to an increase in the amortization of
mortgage servicing rights of $95 for the year ended December 31, 1998 when
compared to the year ended December 31, 1997.
Income Tax Expense. Income tax expense increased by $227 for the year
ended December 31, 1998 when compared to the year ended December 31, 1997. This
increase was the result of an increase in income before income taxes for 1998
when compared to 1997.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. At December 31, 1999, the Bank's
liquidity, as measured for regulatory purposes, was 7.5%. The Bank adjusts
liquidity as appropriate to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of investment securities and funds provided from
operations. While scheduled loan repayments are a relatively predictable source
of funds, deposit flows and loan prepayments are significantly influenced by
general interest rates, economic conditions and competition. If needed, the
Bank's primary source of funds can be supplemented by wholesale funds obtained
through additional advances from the Federal Home Loan Bank system. The Bank
invests excess funds in overnight deposits, which not only serve as liquidity,
but also earn interest as income until funds are needed to meet required loan
funding.
The Bank's most liquid asset is cash including investments in interest
bearing accounts at the FHLB of Des Moines that have no withdrawal restrictions.
The levels of these assets are dependent on the Bank's operating, financing and
investing activities during any given period. At December 31, 1999 and 1998, the
Bank's noninterest bearing cash was $1,880 and $923, respectively.
Also available to the Bank to meet liquidity requirements are
borrowings from the Federal Home Loan Bank. At December 31, 1999, the Bank had
$17,000 in outstanding advances from the FHLB of Des Moines, which have been
used to fund loan originations. At December 31, 1999, the Bank had the ability
to borrow approximately 4.85 times its then outstanding advances.
14
<PAGE>
(dollars in thousands)
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. During 1999, the Company approved stock buy
back programs in which up to 350,266 shares of the common stock of the Company
can be acquired. The Company bought 223,003 shares of its common stock during
1999 and 29,000 shares of its common stock during January and February of 2000.
The Bank is required to maintain specified amounts of capital. The
capital standards generally require the maintenance of regulatory capital
sufficient to meet a tangible capital requirement, a core capital requirement
and a risk-based capital requirement. At December 31, 1999, the Bank's tangible
capital totaled $16,865, or 8.70% of adjusted total assets, and core capital
totaled $16,865, or 8.70% of adjusted total assets, which substantially exceeded
the respective 1.5% tangible capital and 4.0% core capital requirements at that
date by $13,958 and $9,111, respectively, or 7.20% and 4.70% of adjusted total
assets, respectively. The Bank's risk-based capital totaled $17,722 at December
31, 1999 or 13.96% of risk-weighted assets, which exceeded the current
requirements of 8.0% of risk-weighted assets by $7,568 or 5.96% of risk-weighted
assets.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
Impact of New Accounting Standards
Effective January 1, 1997, the Company adopted FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement establishes the basic principles that an entity
should recognize only assets it controls and liabilities it has incurred. Assets
should be "derecognized" only when they have been extinguished, and recognition
of financial assets and liabilities should not be affected by the sequence of
transactions unless the effect of the transactions is to maintain effective
control over a transferred financial asset. Statement No. 125 also continues the
recognition of mortgage servicing rights on loans sold with servicing rights
retained.
In accordance with the provisions of Statement No. and 125, mortgage
servicing rights in the amounts of $281, $662 and $107 were capitalized during
the years ended December 31, 1999, 1998 and 1997, respectively. The Company
recognized amortization of the cost of mortgage servicing rights in the amounts
of $212, $125 and $30 for the years ended December 31, 1999, 1998 and 1997,
respectively.
15
<PAGE>
(dollars in thousands)
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (Statement No. 130), which was issued in June 1997.
Statement No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, but has no effect on the Company's net
income or total stockholders' equity. Statement No. 130 requires unrealized
gains and losses on the Company's available for sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130.
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related information (Statement
No. 131). Statement No. 131 supersedes FASB Statement No. 14, Financial
Reporting for Segments of a Business Enterprise. Statement No. 131 establishes
standards for how public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. Statement No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
has determined that, for purposes of Statement No. 131, it has only one
operating segment and no additional disclosure is required. The adoption of
Statement No. 131 did not affect results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement
No. 133) which was required to be adopted in years beginning after June 15,
1999. The Statement requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings. In
June 1999, the Financial Accounting Standards Board issued Statement No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 (Statement No. 137) which delayed the
implementation of Statement No. 133 until quarters beginning after June 15,
2000. Because the Company does not use derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on the Company's earnings or financial position.
Year 2000 Update
Rapid and accurate data processing is essential to the Company's
operations. Due to this dependence on its information technology systems,
management spent a considerable amount of time and effort to assure that the
Company's information technology systems would function properly when the year
changed to 2000. These efforts were successful with all of the Company's systems
functioning properly on the first business day of the year 2000 and thereafter.
There were no customer inconveniences noted. The Company will continue to
diligently monitor its computer systems and computer generated data to ensure
the accuracy of all such data.
16
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
Wells Financial Corp. and Subsidiary
Wells, Minnesota
We have audited the accompanying consolidated statements of financial condition
of Wells Financial Corp. and Subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wells Financial
Corp. and Subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
----------------------------------------
Rochester, Minnesota
February 10, 2000
17
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash, including interest-bearing accounts
1999 $2,320; 1998 $18,523 $ 4,200 $ 19,446
Certificates of deposit (Note 2) 400 500
Securities available for sale (Notes 3 and 10) 2,551 2,968
Securities held to maturity (Note 4) 15,559 5,539
Loans held for sale (Note 5) 521 6,097
Loans receivable, net (Notes 5, 10, 16 and 17) 172,713 154,305
Accrued interest receivable 1,350 843
Income taxes receivable 16 -
Premises and equipment (Note 8) 1,558 1,249
Foreclosed real estate (Note 7) 55 -
Other assets (Note 6) 913 929
----------------------------------------
Total assets $199,836 $ 191,876
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 9) $156,984 $ 158,441
Borrowed funds (Note 10) 17,000 5,000
Advances from borrowers for taxes and insurance (Note 6) 1,262 1,220
Income taxes (Note 11):
Current - 128
Deferred 763 885
Accrued interest payable 116 100
Accrued expenses and other liabilities 254 210
----------------------------------------
Total liabilities 176,379 165,984
----------------------------------------
Commitments, contingencies and credit risk (Notes 8, 15, 16, and 17)
Stockholders' Equity (Notes 12 and 14)
Preferred stock, no par value; 500,000 shares authorized;
none outstanding - -
Common stock, $.10 par value; 7,000,000 shares
authorized; 2,187,500 shares issued 219 219
Additional paid-in capital 16,939 16,840
Retained earnings, substantially restricted 18,189 17,211
Accumulated other comprehensive income 655 901
Unearned Employee Stock Ownership Plan shares (435) (591)
Unearned compensation-restricted stock awards (27) (67)
Less cost of treasury stock, 1999 758,343 shares;
1998 535,340 shares (12,083) (8,621)
----------------------------------------
Total stockholders' equity 23,457 25,892
----------------------------------------
Total liabilities and stockholders' equity $199,836 $ 191,876
========================================
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
Loans receivable:
First mortgage loans $ 10,112 $ 11,257 $ 12,112
Consumer and other loans 2,719 2,631 2,458
Investment securities and interest-
bearing deposits 1,383 1,002 755
----------------------------------------------------------
Total interest income 14,214 14,890 15,325
----------------------------------------------------------
Interest Expense
Deposits 7,313 7,339 6,980
Borrowed funds 385 839 1,542
----------------------------------------------------------
Total interest expense 7,698 8,178 8,522
----------------------------------------------------------
Net interest income 6,516 6,712 6,803
Provision for loan losses (Note 5) 27 120 180
----------------------------------------------------------
Net interest income after
provision for loan losses 6,489 6,592 6,623
----------------------------------------------------------
Noninterest Income
Gain on sale of loans 188 434 81
Loan origination and commitment fees 295 965 174
Loan servicing fees 397 267 198
Insurance commissions 346 334 313
Fees and service charges 450 381 296
Other 33 24 47
----------------------------------------------------------
Total noninterest income 1,709 2,405 1,109
----------------------------------------------------------
Noninterest Expenses
Compensation and benefits (Note 14) 2,493 2,521 2,037
Occupancy and equipment (Note 15) 788 735 681
Data processing 340 281 245
Advertising 214 190 175
Other 1,219 1,042 849
----------------------------------------------------------
Total noninterest expenses 5,054 4,769 3,987
----------------------------------------------------------
Income before income taxes 3,144 4,228 3,745
Income tax expense (Note 11) 1,270 1,752 1,525
----------------------------------------------------------
Net income $ 1,874 $ 2,476 $ 2,220
==========================================================
Earnings per share (Note 13):
Basic $ 1.26 $ 1.42 $ 1.18
==========================================================
Diluted $ 1.23 $ 1.38 $ 1.16
==========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Unearned
Employee Unearned
Accumulated Stock Compensation - Total
Additional Other Ownership Restricted Stock-
Comprehensive Common Paid-In Retained Comprehensive Plan Stock Treasury holders'
Income Stock Capital Earnings Income Shares Awards Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 $ 219 $ 16,588 $ 13,986 $ 348 $ (896) $ (280) $ (1,763) $ 28,202
Comprehensive Income:
Net income $ 2,220 - - 2,220 - - - - 2,220
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
related taxes 236 - - - 236 - - - 236
----------
Comprehensive income $ 2,456
==========
Treasury stock purchases,
64,500 shares (Note 12) - - - - - - (921) (921)
Cash dividends declared
($.24 per share) - - (470) - - - - (470)
Amortization of unearned
compensation - - - - - 129 - 129
Allocated ESOP shares - 106 - - 139 - - 245
---------------------------------------------------------------------------------------------
Balances, December 31, 1997 219 16,694 15,736 584 (757) (151) (2,684) 29,641
Comprehensive Income:
Net income $ 2,476 - - 2,476 - - - - 2,476
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
related taxes 317 - - - 317 - - - 317
----------
Comprehensive income $ 2,793
==========
Treasury stock purchases,
307,200 shares (Note 12) - - - - - - (5,937) (5,937)
Cash dividends declared
($.57 per share) - - (1,001) - - - - (1,001)
Amortization of unearned
compensation - - - - - 84 - 84
Allocated ESOP shares - 146 - - 166 - - 312
---------------------------------------------------------------------------------------------
Balances, December 31, 1998 219 16,840 17,211 901 (591) (67) (8,621) 25,892
Comprehensive Income:
Net income $ 1,874 - - 1,874 - - - - 1,874
Other comprehensive
income, net of tax:
Unrealized losses on
securities, net of
related taxes (246) - - - (246) - - - (246)
----------
Comprehensive income $ 1,628
==========
Treasury stock purchases,
223,003 shares (Note 12) - - - - - - (3,462) (3,462)
Cash dividends declared
($.60 per share) - - (896) - - - - (896)
Amortization of unearned
compensation - - - - - 40 - 40
Allocated ESOP shares - 99 - - 156 - - 255
---------------------------------------------------------------------------------------------
Balances, December 31, 1999 $ 219 $ 16,939 $ 18,189 $ 655 $ (435) $ (27) $ (12,083) $ 23,457
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
20 - 21
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,874 $ 2,476 $2,220
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 27 120 180
Gain on sale of loans (188) (434) (81)
Amortization of mortgage servicing rights 212 125 30
Compensation on allocation of ESOP shares 255 312 218
Amortization of unearned compensation 40 84 129
Write-down of foreclosed real estate - - 12
(Gain) loss on sale of foreclosed real estate (11) 2 (12)
Unrealized gain on loans held for sale - (14) (16)
Gain on premises and equipment - (28) -
Deferred income taxes 49 188 (48)
Depreciation and amortization on premises
and equipment 247 279 273
Amortization of deferred loan origination fees (154) (245) (151)
Amortization of excess servicing fees 12 13 13
Amortization of securities premiums and discounts - 9 -
Loans originated for sale (30,485) (89,160) (14,914)
Proceeds from the sale of loans 36,061 85,089 14,709
Changes in assets and liabilities:
Accrued interest receivable (507) 263 (46)
Other assets (208) (678) (52)
Income taxes payable, current (144) 17 111
Accrued expenses and other liabilities 60 58 16
-----------------------------------------------
Net cash provided by (used in)
operating activities 7,140 (1,524) 2,591
-----------------------------------------------
</TABLE>
(Continued)
22
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Investing Activities
Net (increase) decrease in loans $ (18,238) $ 28,945 $ (4,252)
Certificates of deposit:
Maturities 500 6,650 200
Purchases (400) (5,300) (1,850)
Purchase of securities available for sale - - (171)
Proceeds from sales of securities available for sale - 212 5,033
Securities held to maturity:
Maturities and calls 1,210 4,491 3,649
Purchases (11,230) (6,841) (4,798)
Proceeds from principal repayments of
mortgage-backed securities available for sale - 86 340
Proceeds from the disposal of leasehold improvements - 75 -
Purchase of premises and equipment (556) (150) (179)
Proceeds from the sale and redemption of
foreclosed real estate 108 69 102
Investment in foreclosed real estate (7) (3) (32)
-----------------------------------------------
Net cash provided by (used in) investing activities (28,613) 28,234 (1,958)
-----------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits (1,457) 13,063 368
Net increase from advances from
borrowers for taxes and insurance 42 140 60
Proceeds from borrowed funds 15,000 5,000 13,500
Repayments on borrowed funds (3,000) (24,500) (15,500)
Purchase of treasury stock (3,462) (5,937) (921)
Dividends paid (896) (1,001) (470)
-----------------------------------------------
Net cash provided by (used in)
financing activities 6,227 (13,235) (2,963)
-----------------------------------------------
Net increase (decrease) in cash (15,246) 13,475 (2,330)
Cash
Beginning 19,446 5,971 8,301
-----------------------------------------------
Ending $ 4,200 $ 19,446 $5,971
===============================================
</TABLE>
(Continued)
23
<PAGE>
WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest on deposits $ 7,313 $ 7,348 $6,982
Interest on borrowed funds 369 869 1,527
Income taxes 1,365 1,547 1,450
===============================================
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans $ 145 $ 33 $ 27
Allocation of ESOP shares to participants 156 166 139
Net change in unrealized gains (losses) on securities
available for sale (246) 317 236
===============================================
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
Nature of operations: Operations of Wells Financial Corp. (Company) primarily
consist of banking services through its subsidiary, Wells Federal Bank, fsb
(Bank). One of the Bank's subsidiaries, Wells Insurance Agency, Inc., is a
property and casualty insurance agency. The other subsidiary of the Bank,
Greater Minnesota Mortgage, Inc., is a mortgage banking company that originates
loans through referrals from commercial banks. The Company serves its customers
through the Bank's eight locations in South Central Minnesota.
Basis of financial statement presentation: The consolidated financial statements
have been prepared in conformity with generally accepted accounting principles.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statements of financial condition and revenues
and expenses for the reporting period. Actual results could differ from those
estimates. A material estimate that is particularly susceptible to significant
change in the near term relates to the determination of the allowance for loan
losses.
Management believes that the allowances for losses on loans are adequate. While
management uses available information to recognize losses on loans, future
additions to the allowances may be necessary based on changes in economic
conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowances for losses on
loans. Such agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (Statement No. 130), which was issued in June 1997.
Statement No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, but has no effect on the Company's net
income or total stockholders' equity. Statement No. 130 requires unrealized
gains and losses on the Company's available for sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130.
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (Statement No. 131). Statement
No. 131 supersedes FASB Statement No. 14, Financial Reporting for Segments of a
Business Enterprise. Statement No. 131 establishes standards for how public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement No.
131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company has determined
that, for purposes of Statement No. 131, it has only one operating segment and
no additional disclosure is required. The adoption of Statement No. 131 did not
affect results of operations or financial position.
25
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of Wells Financial Corp., its wholly owned subsidiary,
Wells Federal Bank, fsb, and the Bank's wholly owned subsidiaries, Wells
Insurance Agency, Inc. and Greater Minnesota Mortgage, Inc. All significant
intercompany transactions and balances are eliminated in consolidation.
Securities held to maturity: Debt securities for which the Company has both the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Amortization of premiums and accretion
of discounts, computed by the interest method over their contractual lives, is
included in interest income.
Securities available for sale: Securities classified as available for sale are
those securities that the Company intends to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are carried at fair value. Unrealized gains or
losses, net of the related deferred tax effect, are reported as a net amount in
other comprehensive income. Amortization of premiums and accretion of discounts,
computed by the interest method over their contractual lives, is recognized in
interest income.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Declines in the fair value of individual securities classified as either held to
maturity or available for sale below their amortized cost that are determined to
be other than temporary result in write-downs of the individual securities to
their fair value with the resulting write-downs included in current earnings as
realized losses.
Loans held for sale: Loans held for sale are those loans that the Company may
sell or intends to sell prior to maturity. They are carried at the lower of
aggregate cost or market value. Gains and losses on sales of loans are
recognized at settlement dates and are determined by the difference between the
sales proceeds and the carrying value of the loans. All sales are made without
recourse.
Loans receivable: Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are stated at the
amount of unpaid principal, reduced by an allowance for loan losses and net
deferred loan origination fees.
A loan is impaired when it is probable the creditor will be unable to collect
all principal and interest payments due in accordance with the terms of the loan
agreement. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent.
26
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
Interest on loans is recognized over the terms of the loans and is calculated
using the simple-interest method on principal amounts outstanding. Accrual of
interest is discontinued when management believes, after considering economics,
business conditions, and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful. Interest on these
loans is recognized only when actually paid by the borrower if collection of
principal is likely to occur. Accrual of interest is generally resumed when, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal.
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs (net of recoveries). Management's periodic evaluation of
the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions. While management uses its best
information available to make its evaluation, it is possible that adjustments to
the allowance may be necessary if there are significant changes in economic
conditions.
Loan origination fees and related costs: Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the Company's
historical prepayment experience.
Loan servicing: The Company generally retains the right to service mortgage
loans sold to others. The cost allocated to the mortgage servicing rights
retained has been recognized as a separate asset and is being amortized in
proportion to and over the period of estimated net servicing income. Mortgage
servicing rights are periodically evaluated for impairment based on the fair
value of those rights. Fair values are estimated using discounted cash flows
based on current market rates of interest. For purposes of measuring impairment,
the rights must be stratified by one or more predominant risk characteristics of
the underlying loans. The Company stratifies its capitalized mortgage servicing
rights based on the interest rate and term of the underlying loans. The amount
of impairment recognized is the amount, if any, by which the amortized cost of
the rights for each stratum exceed their fair value.
Foreclosed real estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at the lower of cost or fair value less
estimated costs to sell at date of foreclosure. Costs relating to improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed. Valuations are periodically performed by management and charge-offs to
operations are made if the carrying value of a property exceeds its estimated
fair value less estimated costs to sell.
Premises and equipment: Land is carried at cost. Bank premises, leasehold
improvements, and furniture, fixtures, and equipment are carried at cost, less
accumulated depreciation and amortization. Bank premises and furniture,
fixtures, and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets ranging from 10 to 40 years for bank
premises, 7 to 10 years for leasehold improvements and 3 to 7 years for
furniture, fixtures and equipment. The cost of leasehold improvements is being
amortized using the straight-line method over the terms of the related leases.
27
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
Income taxes: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss or tax credit carry forwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets are reduced by a
valuation allowance when management determines that it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Earnings per share: Earnings per basic common share are computed based upon the
weighted average number of common shares outstanding during each year. Dilutive
per share amounts assume conversion, exercise or issuance of all potential
common stock instruments (stock options as discussed in Note 13) unless the
effect is to reduce a loss or increase income per common share.
Fair value of financial instruments: The following methods and assumptions were
used by the Company in estimating the fair value of its financial instruments:
Cash: The carrying amounts reported for cash and interest-bearing accounts
approximate their fair values.
Certificates of deposit: The carrying amounts reported for certificate of
deposits approximate their fair values.
Securities: Fair values for securities available for sale and securities
held to maturity are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments, except for stock in the Federal
Home Loan Bank for which fair value is assumed to be equal to cost.
Loans held for sale: Fair values are based on quoted market prices of
similar loans sold on the secondary market.
Loans and accrued interest receivable: For variable-rate loans that reprice
frequently and that have experienced no significant change in credit risk,
fair values are based on carrying values. Fair values for all other loans
are estimated based on discounted cash flows, using interest rates
currently being offered for loans with similar terms to borrowers with
similar credit quality. The carrying amount of accrued interest receivable
approximates its fair value.
Mortgage servicing rights: Fair values are estimated using discounted cash
flows based on current market rates of interest.
Deposits and other liabilities: The fair values of demand deposits and
savings accounts equal their carrying amounts, which represent the amounts
payable on demand. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on those certificates. The carrying amounts of
advances by borrowers for taxes and insurance and accrued interest payable
approximate their fair values.
28
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
Borrowed funds: The fair value of long term fixed rate borrowed funds is
estimated by using a discounted cash flow analysis based on current
incremental borrowing rates for similar types of borrowing arrangements.
The fair value of the variable rate borrowed funds approximates carrying
value as these borrowings reprice monthly.
Off-statement of financial condition instruments: Since the majority of the
Company's off-statement of financial condition instruments consist of non
fee-producing, variable rate commitments, the Company has determined they
do not have a distinguishable fair value.
Note 2. Certificates of Deposit
Certificates of deposit with a carrying value of $400 and $500 at December 31,
1999 and 1998, respectively, had weighted average yields of 5.19% and 5.81%,
respectively, and contractual maturities of less than one year.
Note 3. Securities Available for Sale
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock in Federal Home Loan Bank $ 1,421 $ - $ - $ 1,421
FHLMC stock 24 1,106 - 1,130
--------------------------------------------------------------------
$ 1,445 $ 1,106 $ - $ 2,551
====================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock in Federal Home Loan Bank $ 1,421 $ - $ - $ 1,421
FHLMC stock 24 1,523 - 1,547
--------------------------------------------------------------------
$ 1,445 $ 1,523 $ - $ 2,968
====================================================================
</TABLE>
Equity securities do not have contractual maturities. The Company's subsidiary,
as a member of the Federal Home Loan Bank system, is required to maintain an
investment in capital stock of the Federal Home Loan Bank in an amount equal to
1% of its outstanding home loans. No ready market exists for the bank stock and
it has no quoted market value. For disclosure purposes, such stock is assumed to
have a market value equal to cost.
29
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 3. Securities Available for Sale (Continued)
Changes in other comprehensive income unrealized gains on securities available
for sale:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 901 $ 584 $ 348
Unrealized gains (losses) during the year (417) 540 399
Deferred tax effect relating to unrealized
appreciation 171 (223) (163)
-------------------------------------------------
Balance, ending $ 655 $ 901 $ 584
=================================================
</TABLE>
Note 4. Securities Held to Maturity
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government corporations and agencies $15,559 $ - $469 $15,090
===========================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government corporations and agencies $ 5,539 $ 10 $ 7 $ 5,542
===========================================================
</TABLE>
Contractual maturities: The scheduled maturities of securities held to maturity
at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Amortized Cost Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ - $ -
Due from one to five years 15,559 15,090
----------------------------------
$15,559 $15,090
==================================
</TABLE>
Securities with a carrying value of $1,100 and $700 at December 31, 1999 and
1998, respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.
30
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 5. Loans Receivable and Loans Held for Sale
<TABLE>
<CAPTION>
Composition of loans receivable: December 31,
--------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans (principally conventional):
Secured primarily by one-to-four family residences $ 105,570 $ 104,433
Secured by other properties, primarily agricultural real estate 32,582 21,018
Construction 2,957 1,279
--------------------------------------
Total first mortgage loans 141,109 126,730
--------------------------------------
Consumer and other loans:
Home equity, home improvement and second mortgages 21,315 18,475
Agricultural operating loans 2,988 2,394
Vehicle loans 4,914 4,644
Other 3,722 3,365
--------------------------------------
Total consumer and other loans 32,939 28,878
--------------------------------------
Total loans 174,048 155,608
Less:
Net deferred loan origination fees (478) (450)
Net allowance for loan losses (857) (853)
--------------------------------------
Loan receivable, net $ 172,713 $ 154,305
======================================
</TABLE>
Allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 853 $ 763 $ 615
Provision for loan losses 27 120 180
Loans charged off (43) (46) (66)
Recoveries 20 16 34
-------------------------------------------------
Balance, ending $ 857 $ 853 $ 763
=================================================
</TABLE>
Nonaccrual loans: Loans on which the accrual of interest has been discontinued
totaled $111, $260, and $237 at December 31, 1999, 1998 and 1997, respectively.
The effect of nonaccrual loans was not significant to the results of operations.
The Company includes all loans considered impaired in nonaccrual loans. The
amount of impaired loans was not material at December 31, 1999 and 1998.
Related party loans: The Company has entered into transactions with its
executive officers, directors, significant shareholders, and their affiliates
(related parties). The aggregate amounts of loans to such related parties at
December 31, 1999 and 1998 were $321 and $294, respectively. During 1999, new
loans to such related parties were $43 and repayments were $16.
31
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 5. Loans Receivable and Loans Held for Sale (Continued)
Loans held for sale: As of December 31, 1999 and 1998, the Company's loans held
for sale were $521 and $6,097, respectively, and consisted of one to four family
residential real estate loans. Outstanding commitments to sell loans at December
31, 1999 were $521.
Note 6. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans as of December 31, 1999 and 1998 were $155,157 and $136,336,
respectively, and consist of one-to-four family residential real estate loans.
These loans are serviced primarily for the Federal Home Loan Mortgage
Corporation.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in advances from borrowers for taxes and insurance, were
$708 and $636 at December 31, 1999 and 1998, respectively.
Effective January 1, 1997, the Company adopted FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement establishes the basic principles that an entity
should recognize only assets it controls and liabilities it has incurred. Assets
should be "derecognized" only when control has been surrendered, liabilities
should be "derecognized" only when they have been extinguished, and recognition
of financial assets and liabilities should not be affected by the sequence of
transactions unless the effect of the transactions is to maintain effective
control over a transferred financial asset. Statement No. 125 also continues the
recognition of mortgage servicing rights on loans sold and supersedes Statement
No. 122 for transactions after January 1, 1997.
Mortgage servicing rights in the amounts of $281 and $662 were capitalized
during the years ended December 31, 1999 and 1998, respectively. The fair values
of capitalized mortgage servicing rights were $815 and $722 at December 31, 1999
and 1998, respectively. The fair values of the mortgage servicing rights were
estimated as the present value of the expected future cash flows using a
discount rate of 12%. The Company recognized amortization of the cost of
mortgage servicing rights in the amounts of $212, $125 and $30 for the years
ended December 31, 1999, 1998 and 1997, respectively. The effect of adopting
Statements No. 122 and 125 was to increase net income by $77 for the year ended
December 31, 1997.
No valuation allowances were provided for mortgage servicing rights capitalized
during the years ended December 31, 1999 and 1998.
Note 7. Foreclosed Real Estate
The Company had investment in real estate acquired through foreclosure or deeded
to the Company in lieu of foreclosure of $55 and $-0- as of December 31, 1999
and 1998, respectively. No allowances for losses on foreclosed real estate were
required at these dates.
32
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 8. Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost:
Land $ 79 $ 71
Buildings and improvements 1,461 1,075
Leasehold improvements 365 330
Furniture, fixtures and equipment 2,132 2,005
--------------------------------------
4,037 3,481
Less accumulated depreciation and amortization 2,479 2,232
--------------------------------------
$ 1,558 $ 1,249
======================================
</TABLE>
As of December 31, 1999, the Company was in the process of constructing an
addition to its main office in Wells, Minnesota. The total estimated cost of the
project is $636. As of December 31, 1999, costs of $328 had been incurred and
capitalized as premises and equipment.
Note 9. Deposits
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Demand and NOW accounts $ 25,445 $ 24,781
Savings accounts 19,050 18,377
Certificates of deposit 112,489 115,283
--------------------------------------
$ 156,984 $ 158,441
======================================
</TABLE>
The aggregate amount of certificates of deposit over $100 was $8,326 and $10,524
at December 31, 1999 and 1998, respectively.
A summary of scheduled maturities of certificates of deposits is as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 $ 75,991
2001 22,175
2002 12,521
2003 1,802
-------------------
$ 112,489
===================
</TABLE>
33
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 10. Borrowed Funds
Borrowed funds consisted of advances from Federal Home Loan Bank (FHLB), as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed rate advance, 5.83%, due January 10, 2000. $ 1,000 $ -
Fixed rate advance, 5.93%, due January 10, 2000. 2,000 -
Adjustable rate advance (currently 5.92%), due
October 13, 2000. 3,000 -
Adjustable rate advance (currently 5.92%), due
October 30, 2000. 1,000 -
Fixed rate advance, 5.34%, due January 16, 2008,
callable beginning January 16, 2003. 5,000 5,000
Fixed rate advance, 5.30%, due September 21, 2009,
callable beginning September 21, 2000. 3,000 -
Fixed rate advance, 5.45%, due December 1, 2009,
callable beginning December 1, 2000. 2,000 -
--------------------------------------
$ 17,000 $ 5,000
======================================
</TABLE>
All advances are subject to various prepayment provisions.
The advances are collateralized by FHLB stock and first mortgage loans with
balances exceeding 125% of the amount of the advances.
The scheduled maturities of borrowed funds at December 31, 1999 were as follows:
Fixed-Rate Adjustable Rate
Advances Advances
- -------------------------------------------------------------------------------
Due in one year or less $ 3,000 $ 4,000
Due from one to five years - -
Due from five to ten years 10,000 -
-----------------------------------
$ 13,000 $ 4,000
===================================
34
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 11. Income Tax Matters
The Company and its subsidiary file consolidated federal income tax returns. The
Company is allowed bad debt deductions based on actual charge-offs.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 940 $ 1,181 $ 1,186
Deferred (credit) 37 143 (36)
---------------------------------------------------------
977 1,324 1,150
---------------------------------------------------------
State:
Current 281 383 387
Deferred (credit) 12 45 (12)
---------------------------------------------------------
293 428 375
---------------------------------------------------------
Total $ 1,270 $ 1,752 $ 1,525
=========================================================
</TABLE>
Total income tax expense differed from the amounts computed by applying the
statutory U.S. Federal income tax rates to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,100 $ 1,480 $ 1,311
State income taxes, net of federal benefit 203 273 242
Effect of graduated rates (31) (42) (37)
Other (2) 41 9
---------------------------------------------------------
Income tax expense $ 1,270 $ 1,752 $ 1,525
=========================================================
</TABLE>
35
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 11. Income Tax Matters (Continued)
The net deferred tax liability included in liabilities in the accompanying
statements of financial condition includes the following amounts of deferred tax
assets and liabilities:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 323 $ 310
Management stock bonus plan 36 63
Accrued vacation 16 39
Other 28 21
--------------------------------------
403 433
Less valuation allowance - -
--------------------------------------
403 433
--------------------------------------
Deferred tax liabilities:
Premises and equipment 141 155
Securities available for sale 450 622
FHLB stock dividends 189 217
Mortgage servicing rights 313 284
Deferred loan origination fees 64 10
Other 9 30
--------------------------------------
1,166 1,318
--------------------------------------
$ (763) $ (885)
======================================
</TABLE>
Retained earnings at December 31, 1999 and 1998 include approximately $1,839
related to the pre-1987 allowance for loan losses for which no deferred federal
income tax liability has been recognized. This amount represents an allocation
of income to bad debt deductions for tax purposes only. If the Bank no longer
qualifies as a bank or in the event of a liquidation of the Bank, income would
be created for tax purposes only, which would be subject to the then current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount for financial statement purposes was approximately $736 at December
31, 1999 and 1998.
Note 12. Stockholders' Equity, Regulatory Capital and Dividend Restrictions
The Company has initiated several stock buy back programs. Shares totaling
223,003, 307,200, and 64,500 were purchased during the years ended December 31,
1999, 1998 and 1997, respectively.
On January 18, 2000, the Company declared a dividend of $.15 per common share
payable on February 11, 2000 to stockholders of record as of January 31, 2000.
The scheduled dividend is approximately $213.
36
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 12. Stockholders' Equity, Regulatory Capital and Dividend Restrictions
(Continued)
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
The most recent examination by the Office of Thrift Supervision, as of September
27, 1999, categorized the Bank as "well capitalized" under the regulatory
framework for Prompt Corrective Action. To be categorized as adequately
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios. There are no conditions or events since that
notification that management believes have changed the Bank's category.
37
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 12. Stockholders' Equity, Regulatory Capital and Dividend Restrictions
(Continued)
The following table summarizes the Bank's compliance with its regulatory capital
requirements:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------------------------------
As of December 31, 1999: Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (core) capital (to
adjusted total assets) $16,865 8.70% $7,754 4.00% $9,693 5.00%
Risk-based capital (to risk-
weighted assets) 17,722 13.96 10,154 8.00 12,693 10.00
Tangible (capital to
tangible assets) 16,865 8.70 2,907 1.50 N/A N/A
Tier 1 (core) capital (to
risk-weighted assets) 16,865 13.29 N/A N/A 7,616 6.00
As of December 31, 1998:
Tier 1 (core) capital (to `
adjusted total assets) $15,896 8.70% $5,480 3.00% $9,134 5.00%
Risk-based capital (to risk-
weighted assets) 16,745 14.78 9,066 8.00 11,332 10.00
Tangible capital (to
tangible assets) 15,896 8.70 2,740 1.50 N/A N/A
Tier 1 (core) capital (to
risk-weighted assets) 15,896 14.03 N/A N/A 6,799 6.00
</TABLE>
Under current regulations, the Bank is not permitted to pay dividends on its
stock if its regulatory capital would reduce below (i) the amount required for
the liquidation account established to provide a limited priority claim to the
assets of the bank to certain qualifying depositors who had deposits at the Bank
and who continue to maintain those deposits after its conversion from a Federal
mutual savings and loan association to a Federal stock savings bank pursuant to
its Plan of Conversion (Plan) adopted October 19, 1994, or (ii) the Bank's
regulatory capital requirements. As a "Tier 1" institution (an institution with
capital in excess of its capital requirements, both immediately before the
proposed capital distribution and after giving effect to such distribution),
after a 30 day notice the Bank may make capital distributions without the prior
consent of the Office of Thrift Supervision in any calendar year. However,
without consent, capital distributions during a calendar year must not exceed
the net income of the Bank during the calendar year plus retained net income for
the preceding two years. The Bank paid dividends of $975 and $9,000 to the
Company during the years ended December 31, 1999 and 1998, respectively.
38
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 13. Earnings Per Share (dollars in thousands, except per share data)
Earnings per share (EPS) 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.
A reconciliation of the income and common stock share amounts used in the
calculation of basic and diluted earnings per share follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
---------------------------------------------------------
Per Share
Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income $ 1,874 1,485,301 $ 1.26
===================
Effect of Dilutive Securities
Stock options 33,165
--------------------------------------
Diluted EPS
Net income plus assumed conversions $ 1,874 1,518,466 $ 1.23
=========================================================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
---------------------------------------------------------
Per Share
Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income $ 2,476 1,747,325 $ 1.42
===================
Effect of Dilutive Securities
Stock options 49,966
--------------------------------------
Diluted EPS
Net income plus assumed conversions $ 2,476 1,797,291 $ 1.38
=========================================================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
---------------------------------------------------------
Per Share
Income Shares Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income $ 2,220 1,873,499 $ 1.18
===================
Effect of Dilutive Securities
Stock options 37,016
--------------------------------------
Diluted EPS
Net income plus assumed conversions $ 2,220 1,910,515 $ 1.16
=========================================================
</TABLE>
39
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 14. Employee Benefit Plans
Defined Contribution 401(k) Plan: The Bank provides a 401(k) plan which covers
substantially all of the Bank's employees who are eligible as to age and length
of service. A participant may elect to make contributions of up to 15 percent of
the participant's annual compensation. At the discretion of the Board of
Directors, the Bank may make matching contributions of up to 4 percent of each
participant's contribution. No contributions were made by the Bank for the years
ended December 31, 1999, 1998 and 1997.
Employee Stock Ownership Plan: An Employee Stock Ownership Plan (ESOP) was
adopted on April 11, 1995 covering all full-time employees of the Company who
have attained age 21 and completed one year of service during which they work at
least 1,500 hours.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service. The ESOP's debt was incurred when the Company loaned the ESOP $1,120
which was used by the ESOP to purchase common stock of the Company. All
dividends received by the ESOP on unallocated shares are used to pay additional
principal on the debt. The ESOP shares initially were pledged as collateral for
its debt. As the debt is repaid, shares are released from collateral and
allocated to employees based on the proportion of debt service paid in the year.
The shares pledged as collateral are deducted from stockholders' equity as
unearned ESOP shares in the accompanying statement of financial condition. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as compensation expense.
Compensation expense for the ESOP was $255, $312 and $218 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Shares of the Company held by the ESOP at December 31, 1999 and 1998 are as
follows:
1999 1998
- --------------------------------------------------------------------------------
Shares released for allocation 81,833 62,991
Unreleased (unearned) shares 54,355 73,897
----------------------------
136,188 136,888
============================
Fair value of unreleased (unearned) shares $ 629 $ 1,164
============================
Stock Option Plan: The Company, effective November 15, 1995, adopted a stock
option plan (Plan). Pursuant to the Plan, stock options for 218,750 common
shares may be granted to directors, officers and key employees of the Bank.
Options granted under the Plan may be either options that qualify as Incentive
Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986,
as amended, or options that do not so qualify.
40
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 14. Employee Benefit Plans (Continued)
The exercise price under the awards was established at $11.00 per share which
was the fair market price on the date of adoption. Under APB Opinion No. 25, no
expense has been recorded for these options for the years ended December 31,
1999, 1998 and 1997 as the option price is the quoted market price of the shares
at the date of the award.
Grants under the Plan are accounted for following APB Opinion No. 25 and related
Interpretations. Accordingly, no compensation cost has been recognized, as noted
above, for this Plan. Had compensation cost for the Plan been determined based
on the grant date fair values of awards (the method described in FASB Statement
No. 123), additional compensation cost charged to income would have been $34,
$61 and $100 for the years ended December 31, 1999, 1998 and 1997, respectively.
Reported net income and earnings per common share would have been reduced to the
pro forma amounts shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 1,874 $ 2,476 $ 2,220
Pro forma 1,854 2,440 2,161
Basic earnings per share:
As reported $ 1.26 $ 1.42 $ 1.18
Pro forma 1.25 1.40 1.15
Diluted earnings per share:
As reported $ 1.23 $ 1.38 $ 1.16
Pro forma 1.22 1.36 1.14
</TABLE>
The Plan may grant options to purchase up to 218,750 shares of common stock,
with a maximum term of 10 years, at the market price on the date of grant. The
options vest at the rate of 20% per year.
The fair value of the options granted was estimated at the grant date using the
Black-Scholes option-pricing model using a dividend rate of 0%, price volatility
of 10%, a risk-free interest rate of 5.65%, and an estimated life of 6 years.
The estimated fair value was $408 at November 15, 1995, the grant date.
41
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 14. Employee Benefit Plans (Continued)
The status of the Company's fixed stock option plan as of December 31, 1999 and
1998, and changes during the years ended on those dates are presented below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 125,405 $ 11 125,405 $ 11
Granted - - - -
Exercised - - - -
Forfeited - - - -
--------------------------------------------------------------------
Outstanding at end of year 125,405 $ 11 125,405 $ 11
====================================================================
</TABLE>
As of December 31, 1999, there were 125,405 options outstanding, all options had
an exercise price of $11 per share, and their remaining contractual life was 5.8
years. As of December 31, 1999 and 1998, 100,324 and 75,243 shares,
respectively, were exercisable.
Management Stock Bonus Plan: The Bank adopted a Management Stock Bonus Plan
(Plan) which was approved by the Company's stockholders on November 15, 1995.
Restricted stock awards covering shares representing an aggregate of up to 4%
(87,500 shares) of the common stock issued by the Company in the mutual to stock
conversion may be granted to directors and employees of the Bank. These awards
vest at the rate of 20% per year of continuous service with the Bank. The status
of shares awarded as of December 31, 1999 and 1998 and the changes during the
years ended on those dates is presented below:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year 17,440 28,785
Granted - -
Vested and distributed (8,720) (11,345)
Forfeited - -
-----------------------------
Outstanding at end of year 8,720 17,440
=============================
</TABLE>
The Bank recorded expense of $40, $84 and $129 relating to this Plan for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Company contributed funds to the Plan's trust to allow the trust to purchase
all 87,500 shares on the open market. The trust purchased these shares in 1996.
49,735 shares were purchased for outstanding awards and the remaining 37,765
shares are recorded as treasury stock. Unearned compensation cost, recognized in
an amount equal to the fair value of the awarded shares at the award date, is
recorded in stockholders' equity and amortized to operations as the shares vest.
42
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 15. Lease Commitments
The Company leases certain branch facilities under operating leases. Some leases
require the Company to pay related insurance, maintenance and repairs, and real
estate taxes. Future minimum rental commitments under operating leases as of
December 31, 1999 are as follows:
Years Ending
- --------------------------------------------------------------------------------
2000 $ 186
2001 129
2002 118
2003 80
2004 76
---------
$ 589
=========
Total rental expense related to operating leases was approximately $213, $206
and $174 for the years ended December 31, 1999, 1998 and 1997, respectively.
Note 16. Financial Instruments with Off-Statement of Financial Condition Risk
The Company is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include primarily commitments to
extend credit. Those instruments involve, to varying degrees, elements of credit
risk and interest-rate risk in excess of the amount recognized in the
consolidated statement of financial condition. The contract or notional amounts
of those instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented by
the contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-statement of financial condition instruments.
Commitments to extend credit on loans totaled approximately $20,200 and $22,685
at December 31, 1999 and 1998, respectively. The portion of commitments to
extend credit that related to fixed rate loans is $2,661 and $7,280 as of
December 31, 1999 and 1998, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
normally includes real estate and personal property.
43
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 17. Concentrations
Concentration by geographic location: The Company makes agricultural,
commercial, residential and consumer loans to customers primarily in south
central Minnesota. Although the Company's loan portfolio is diversified, there
is a relationship in this region between the agricultural economy and the
economic performance of loans made to nonagricultural customers. The Company's
lending policies for agricultural and nonagricultural customers require loans to
be well-collateralized and supported by cash flows. Collateral for agricultural
loans includes equipment, crops, livestock and land. Credit losses from loans
related to the agricultural economy are consistent with credit losses
experienced in the portfolio as a whole. The concentration of credit in the
regional agricultural economy is taken into consideration by management in
determining the allowance for loan losses.
Concentration by institution: As of December 31, 1999 the Company had $2,320 on
deposit with the FHLB of Des Moines.
Note 18. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash $ 4,200 $ 4,200 $ 19,446 $ 19,446
Certificates of deposit 400 400 500 500
Securities available for sale 2,551 2,551 2,968 2,968
Securities held to maturity 15,559 15,090 5,539 5,542
Loans receivable, net 172,713 172,198 154,305 155,650
Loans held for sale 521 521 6,097 6,097
Mortgage servicing rights 772 815 703 722
Accrued interest receivable 1,350 1,350 843 843
Financial liabilities
Deposits 156,984 157,039 158,441 158,509
Borrowed funds 17,000 16,292 5,000 4,930
Advances from borrowers for
taxes and insurance 1,262 1,262 1,220 1,220
Accrued interest payable 116 116 100 100
====================================================================
</TABLE>
44
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 19. Financial Information of Wells Financial Corp. (Parent Only)
The Company's condensed statements of financial condition as of December 31,
1999 and 1998 and related condensed statements of income and cash flows for each
of the years in the three year period ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash, including deposits with Wells Federal
Bank, fsb 1999 $131; 1998 $195 $ 623 $ 5,081
Certificates of deposit 200 200
Securities held to maturity 3,747 2,499
Investment in Wells Federal Bank, fsb 18,733 18,091
Accrued interest receivable and other assets 154 21
--------------------------------------
Total assets $ 23,457 $ 25,892
======================================
Liabilities and Stockholders' Equity
Liabilities $ - $ -
Stockholders' equity 23,457 25,892
--------------------------------------
Total liabilities and stockholders' equity $ 23,457 $ 25,892
======================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 392 $ 261 $ 402
Other expenses 142 125 52
-------------------------------------------------
Income before income taxes 250 136 350
Income tax expense 101 55 87
-------------------------------------------------
Net income before equity in net
income of subsidiary 149 81 263
Equity in net income of subsidiary 1,725 2,395 1,957
-------------------------------------------------
Net income $ 1,874 $ 2,476 $ 2,220
=================================================
</TABLE>
45
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 19. Financial Information of Wells Financial Corp. (Parent Only)
(Continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,874 $ 2,476 $ 2,220
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,725) (2,395) (1,957)
(Increase) decrease in accrued interest receivable (132) (10) 3
Decrease in other liabilities - (6) (55)
-------------------------------------------------
Net cash provided by
operating activities 17 65 211
-------------------------------------------------
Cash Flows From Investing Activities
Purchase of certificates of deposit (200) (100) (350)
Purchase of securities held to maturity (3,747) (2,499) (1,750)
Proceeds from the maturities of
certificates of deposit 200 250 200
Proceeds from maturity of securities
held to maturity 2,499 750 1,499
Dividends from subsidiaries 975 9,000 -
Decrease in loan to Wells Federal Bank, fsb - 4,000 -
-------------------------------------------------
Net cash provided by (used in)
investing activities (273) 11,401 (401)
-------------------------------------------------
Cash Flows From Financing Activities
Payments relating to ESOP stock 156 166 139
Purchase of treasury stock (3,462) (5,937) (921)
Dividends paid (896) (1,001) (470)
-------------------------------------------------
Net cash (used in) financing activities (4,202) (6,772) (1,252)
-------------------------------------------------
Net (decrease) increase in cash (4,458) 4,694 (1,442)
Cash:
Beginning of year 5,081 387 1,829
-------------------------------------------------
End of year $ 623 $ 5,081 $ 387
=================================================
</TABLE>
46
<PAGE>
Wells Financial Corp. and Subsidiary
Notes to consolidated financial statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Note 20. Selected Quarterly Financial Data (Unaudited) (dollars in thousands,
except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------------------------
First Second Third Fourth
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 3,509 $ 3,489 $ 3,556 $ 3,660
Net interest income 1,611 1,604 1,650 1,651
Provision for loan losses 23 4 - -
Net income 541 473 444 416
Earnings per share
Basic 0.34 0.31 0.31 0.30
Diluted 0.34 0.30 0.30 0.29
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
- -------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 3,942 $ 3,806 $ 3,592 $ 3,550
Net interest income 1,751 1,683 1,640 1,638
Provision for loan losses 30 30 30 30
Net income 658 622 576 620
Earnings per share
Basic 0.35 0.34 0.34 0.39
Diluted 0.34 0.33 0.33 0.38
</TABLE>
47
<PAGE>
48
OFFICE LOCATION AND OTHER CORPORATE INFORMATION
CORPORATE OFFICE
Wells Financial Corp.
53 First Street, S.W.
Wells, Minnesota 56097
Board of Directors of Wells Financial Corp.
<TABLE>
<CAPTION>
<S> <C>
Lawrence H. Kruse David Buesing
President, Wells Federal Bank President, Wells Concrete Products, Inc.
Gerald D. Bastian Randel I. Bichler
Branch Manager, Wells Federal Bank Attorney, Bichler Law Office
Dale E. Stallkamp Richard Mueller
Dale E. Stallkamp, CPA Pharmacist, Wells Drug, Co
Executive Officers of Wells Financial Corp.
Lawrence H. Kruse James D. Moll, CPA
President and Chief Treasurer and Principal Financial
Executive Officer and Accounting Officer
Gerald D. Bastian Richard Mueller
Vice President Secretary
[GRAPHIC OMITTED]
Corporate Counsel: Independent Auditors:
Randel I. Bichler, Esq. McGladrey & Pullen, LLP
28 South Broadway Suite 400
Wells, Minnesota 56097 102 South Broadway
Rochester, Minnesota 55904
Special Counsel: Transfer Agent and Registrar:
Malizia Spidi & Fisch, PC Registrar and Transfer Company
One Franklin Square 10 Commerce Drive
Suite 700 East Cranford, New Jersey 07016
1301 K Street, N.W.
Washington, D.C. 20005
[GRAPHIC OMITTED]
</TABLE>
The Company's Annual Report for the Year Ended December 31, 1999, filed with the
Securities and Exchange Commission on Form 10-KSB is available without charge
upon written request. For a copy of the Form 10-KSB or any other investor
information, please write the Secretary of the Company, at the Company's
corporate office in Wells, Minnesota. The annual meeting of stockholders will be
held on April 19, 2000 at 4:00 p.m. at the Corporate Office, Wells, Minnesota.
48
EXHIBIT 23
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-3520 of Wells Financial Corp. on Form S-8 (filed with the Securities and
Exchange Commission on April 12, 1996) of our report, dated February 10, 2000,
included in this Annual Report on Form 10-KSB of Wells Financial Corp. for the
year ended December 31, 1999.
/s/ McGladrey & Pullen, LLP
-------------------------------
McGLADREY & PULLEN, LLP
Rochester, Minnesota
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,880
<INT-BEARING-DEPOSITS> 2,720
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,551
<INVESTMENTS-CARRYING> 15,559
<INVESTMENTS-MARKET> 15,090
<LOANS> 173,234
<ALLOWANCE> 857
<TOTAL-ASSETS> 199,836
<DEPOSITS> 156,984
<SHORT-TERM> 17,000
<LIABILITIES-OTHER> 2,395
<LONG-TERM> 0
0
0
<COMMON> 219
<OTHER-SE> 23,238
<TOTAL-LIABILITIES-AND-EQUITY> 199,836
<INTEREST-LOAN> 12,831
<INTEREST-INVEST> 1,383
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,214
<INTEREST-DEPOSIT> 7,313
<INTEREST-EXPENSE> 385
<INTEREST-INCOME-NET> 6,516
<LOAN-LOSSES> 27
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,054
<INCOME-PRETAX> 3,144
<INCOME-PRE-EXTRAORDINARY> 3,144
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,874
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 3.45
<LOANS-NON> 111
<LOANS-PAST> 11
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 209
<ALLOWANCE-OPEN> 853
<CHARGE-OFFS> 43
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 857
<ALLOWANCE-DOMESTIC> 857
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
