-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JoCQNi5kVuxhxlA2jT+q627A72VAlmZs2C+vQpEmvnaiz1Nb4BI3mTwaflvxvXv5 kYR08pd+DN0IBR8Epa7uPw== 0000946275-98-000652.txt : 19981116 0000946275-98-000652.hdr.sgml : 19981116 ACCESSION NUMBER: 0000946275-98-000652 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLS FINANCIAL CORP CENTRAL INDEX KEY: 0000934739 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 411799504 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25342 FILM NUMBER: 98746681 BUSINESS ADDRESS: STREET 1: 53 FIRST ST SW STREET 2: P.O. BOX 310 CITY: WELLS STATE: MN ZIP: 56097 BUSINESS PHONE: 5075533151 MAIL ADDRESS: STREET 1: 53 1ST ST SW STREET 2: PO BOX 310 CITY: WELLS STATE: MN ZIP: 56097 10QSB 1 FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 ------------------- or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ___________________ Commission File Number 0-25342 ------- Wells Financial Corp. ------------------------------------------------------ (Exact name of Registrant as Specified in Its Charter) Minnesota 41-1799504 - --------------------------------------------- ------------------- (State or Other Jurisdiction of Incorporation (I.R.S. Employer or Organization) Identification No.) 53 1st Street S.W., P.O. Box 310, Wells MN 56097 (Address of principal executive offices) (507) 553-3151 ---------------------------------------------------- (Registrant's Telephone Number, including Area Code) N/A ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check by |X| whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No The number of share outstanding of each of the issuer's classes of common stock as of October 30, 1998: Class Outstanding ----- ----------- $.10 par value per share, common stock 1,652,160 Shares ================================================================================ WELLS FINANCIAL CORP. and SUBSIDIARY [OBJECT OMITTED] FORM 10-QSB INDEX PART I - FINANCIAL INFORMATION: Page ------------------------------- ---- Item 1. Consolidated Financial Statements (Unaudited) Consolidated Statements of Financial Condition 1 Consolidated Statements of Income 2 Consolidated Statements of Comprehensive Income 3 Consolidated Statement of Stockholders' Equity 4 Consolidated Statements of Cash Flows 5-6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures ================================================================================ WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Financial Condition September 30, 1998 and December 31, 1997 (Dollars in Thousands) (Unaudited)
ASSETS 1998 1997 --------- --------- Cash, including interest-bearing accounts 9/30/98 $9,436; 12/31/97 $4,838 $ 10,430 $ 5,971 Certificates of deposit 1,150 1,850 Securities available for sale, at fair value 2,608 2,640 Securities held to maturity (approximate market value $3,152 at September 30, 1998 and $3,201 at December 31, 1997) 3,141 3,198 Mortgage-backed securities available for sale -- 86 Loans held for sale 2,788 2,012 Loans receivable, net 162,447 182,724 Accrued interest receivable 1,164 1,106 Foreclosed real estate 69 35 Premises and equipment 1,283 1,425 Other assets 811 389 --------- --------- TOTAL ASSETS $ 185,891 $ 201,436 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $ 152,655 $ 145,378 Borrowed funds 5,000 24,500 Advances from borrowers for taxes and insurance 1,764 1,080 Income taxes: Current 115 111 Deferred 652 474 Accrued interest payable 342 139 Accrued expenses and other liabilities 174 113 --------- --------- TOTAL LIABILITIES 160,702 171,795 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, no par value; 500,000 shares authorized; none outstanding -- -- Common stock, $.10 par value; authorized 7,000,000 shares; issued 2,187,500 shares 219 219 Additional paid in capital 16,812 16,694 Retained earnings, substantially restricted 16,803 15,736 Accumulated other comprehensive income, unrealized appreciation on securities available for sale, net 690 584 Unearned ESOP shares (633) (757) Unearned compensation restricted stock awards (81) (151) Treasury stock, at cost (8,621) (2,684) --------- --------- TOTAL STOCKHOLDERS' EQUITY 25,189 29,641 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 185,891 $ 201,436 ========= =========
(See Notes to Consolidated Financial Statements) 1 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Income (Dollars in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Interest and dividend income Loans receivable: First mortgage loans 2,741 3,064 8,594 9,046 Consumer and other loans 662 637 1,963 1,795 Investment securities and other interest bearing deposits 189 161 783 594 --------- --------- --------- --------- Total interest income 3,592 3,862 11,340 11,435 --------- --------- --------- --------- Interest Expense Deposits 1,884 1,777 5,495 5,180 Borrowed funds 68 396 771 1,149 --------- --------- --------- --------- Total interest expense 1,952 2,173 6,266 6,329 --------- --------- --------- --------- Net interest income 1,640 1,689 5,074 5,106 Provision for loan losses 30 45 90 135 --------- --------- --------- --------- Net interest income after provision for loan losses 1,610 1,644 4,984 4,971 --------- --------- --------- --------- Noninterest income Gain on sale of loans originated for sale 90 22 277 37 Gain on sale of securities available for sale -- 2 -- 9 Loan origination and commitment fees 171 53 625 122 Loan servicing fees 71 49 188 148 Insurance commissions 92 88 245 230 Fees and service charges 92 81 254 213 Other 5 7 16 30 --------- --------- --------- --------- Total noninterest income 521 302 1,605 789 --------- --------- --------- --------- Noninterest expense Compensation and benefits 600 501 1,801 1,497 Occupancy and equipment 190 172 566 480 SAIF deposit insurance premium 23 23 69 71 Data processing 66 59 207 182 Advertising 48 43 135 121 Other 218 194 671 563 --------- --------- --------- --------- Total noninterest expense 1,145 992 3,449 2,914 --------- --------- --------- --------- Income before taxes 986 954 3,140 2,846 Income tax expense 410 399 1,284 1,192 --------- --------- --------- --------- Net Income 576 555 1,856 1,654 ========= ========= ========= ========= Earnings per share Basic earnings per share $ 0.34 $ 0.30 $ 1.03 $ 0.88 ========= ========= ========= ========= Diluted earnings per share $ 0.33 $ 0.29 $ 1.00 $ 0.87 ========= ========= ========= ========= Weighted average number of common shares outstanding: Basic 1,706,993 1,869,430 1,805,235 1,877,086 ========= ========= ========= ========= Diluted 1,758,048 1,909,101 1,858,833 1,909,914 ========= ========= ========= =========
(See Notes to Consolidated Financial Statements) 2 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Comprehensive Income (Dollars in Thousands) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ------- ------- ------- ------- Net Income $ 576 $ 555 $ 1,856 $ 1,654 Other comprehensive income: Unrealized appreciation on securities available for sale 59 17 180 232 Income tax expense (24) (7) (74) (96) ------- ------- ------- ------- Comprehensive income $ 611 $ 565 $ 1,962 $ 1,790 ======= ======= ======= =======
(See Notes to Consolidated Financial Statements) 3 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statement of Stockholders' Equity For the Nine Months Ended September 30, 1998 (Dollars in Thousands) (Unaudited)
Unearned Employee Unearned Accumulated Stock Compensation Total Additional Other Ownership Restricted Stock- Common Paid-In Retained Comprehensive Plan shares Stock Treasury holders' Stock Capital Earnings Income Awards Stock Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 $ 219 $ 16,694 $ 15,736 $ 584 $ (757) $ (151) $ (2,684) $29,641 Net income for the nine months ended September 30, 1998 - - 1,856 - - - - 1,856 Net change in unrealized appreciation on securities available for sale, net of related deferred taxes - - - 106 - - - 106 Treasury stock purchases (5,937) (5,937) Amortization of unearned compensation - - - - - 70 - 70 Dividends on common stock - - (789) - - - - (789) Allocated employee stock ownership plan shares - - - 242 118 124 - - ----------------------------------------------------------------------------------------------------- Balance September 30, 1998 $ 219 $ 16,812 $ 16,803 $ 690 $ (633) $ (81) $ (8,621) $25,189 =====================================================================================================
(See Notes to Consolidated Financial Statements) 4 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Cash Flow Nine Months Ended September 30, 1998 and 1997 (Dollars in Thousands) (Unaudited)
1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,856 $ 1,654 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 90 135 Gain on the sale of loans originated for sale (277) (37) Compensation on allocation of ESOP shares 242 157 Amortization of restricted stock awards 70 102 Write-down of foreclosed real estate 1 2 Gain on the sale of foreclosed real estate -- (10) Gain on the sale of securities available for sale -- (9) Unrealized gain on loans held for sale (14) (11) Gain on disposal of leasehold improvements (28) -- Deferred income taxes 104 (46) Depreciation and amortization on premises and equipment 207 200 Amortization of deferred loan origination fees (176) (99) Amortization of excess servicing fees, mortgage servicing rights and bond premiums and discounts 96 30 Loans originated for sale (57,194) (7,920) Proceeds from the sale of loans originated for sale 56,260 6,963 Changes in assets and liabilities: Accrued interest receivable (58) (147) Other assets (80) (30) Income taxes payable, current 4 114 Accrued expenses and other liabilities 265 316 -------- -------- Net cash provided by operating activities 1,368 1,364 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in loans $ 20,344 $ (6,197) Purchase of certificates of deposit (5,300) (100) Purchase of securities available for sale -- (171) Purchase of securities held to maturity (2,840) (3,298) Proceeds from principal repayments of mortgage backed securities 86 253 Proceeds from the maturities of certificates of deposit 6,000 200 Proceeds from the maturities of securities held to maturity 2,893 2,999 Proceeds from the sale of securities available for sale 212 2,535 Proceeds from the disposal of leasehold improvements 75 -- Proceeds from the sale and redemption of foreclosed real estate -- 103 Investment in foreclosed real estate (2) (32) Purchase of premises and equipment (112) (111) -------- -------- Net cash provided by (used in) investment activities 21,356 (3,819) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits $ 7,277 $ (855) Net increase in advances from borrowers for taxes and insurance 684 398 Proceeds from borrowed funds -- 15,000 Repayments on borrowed funds (19,500) (12,500) Purchase of treasury stock (5,937) (921) Dividends on common stock (789) (222) -------- -------- Net cash provided by (used in) financing activities (18,265) 900 -------- -------- Net increase (decrease) in cash and cash equivalents 4,459 (1,555) CASH: Beginning 5,971 8,301 -------- -------- Ending $ 10,430 $ 6,746 ======== ========
(See Notes to Consolidated Financial Statements) 5 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Cash Flow (continued) Nine Months Ended September 30, 1998 and 1997 (Dollars in Thousands) (Unaudited SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for: Interest on deposits $5,262 $5,050 Interest on borrowed funds 801 1,138 Income taxes 1,176 1,108 ====== ====== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Transfers from loans to foreclosed real estate $ 33 $ 27 Allocation of ESOP shares to participants 124 97 Net change in unrealized appreciation on securities available for sale 106 136 ====== ====== (See Notes to Consolidated Financial Statements) 6 WELLS FINANCIAL CORP. and SUBSIDIARY Notes To Consolidated Financial Statements (Dollars in thousands) (Unaudited) NOTE 1. BASIS OF PRESENTATION The foregoing consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (which consist of normal recurring accruals) necessary for a fair presentation of the consolidated financial statements have been included. Results for any interim period are not necessarily indicative of results to be expected for the year. The interim consolidated financial statements include the accounts of Wells Financial Corp. (Company), its subsidiary, Wells Federal Bank (Bank), and the Bank's subsidiaries, Greater Minnesota Mortgage, Inc. and Wells Insurance Agency, Inc. NOTE 2. REGULATORY CAPITAL The following table presents the Bank's regulatory capital amounts and percents at September 30, 1998 and December 31, 1997. September 30, 1998 December 31, 1997 Amount Percent Amount Percent ----------------------------------------------------------------------- (Dollars in Thousands) Tier 1 (Core) Capital: Required $ 5,516 3.00% $ 5,990 3.00% Actual 22,387 12.18% 22,790 11.41% Excess 16,871 9.18% 16,800 8.41% Risk-based Capital Required $ 9,038 8.00% $ 9,417 8.00% Actual 23,225 20.56% 23,544 20.00% Excess 14,187 12.56% 14,127 12.00% 7 WELLS FINANCIAL CORP. and SUBSIDIARY Notes to consolidated Financial Statements Continued (Unaudited) NOTE 3. EARNINGS PER SHARE Effective December 31, 1997, the Company adopted FASB Statement No. 128, Earnings per Share. The Statement requires the presentation of earnings per share by all entities that have common stock or potential common stock, such as options, warrants and convertible securities, outstanding that trade in a public market. Those entities that have only common stock outstanding are required to present basic earnings per-share amounts. All other entities are required to present basic and diluted earnings per-share amounts. Diluted per-share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless the effect is to reduce a loss or increase the income per common share from continuing operations. The weighted average number of shares of common stock used to compute the basic earnings per share were 1,805,235 and 1,877,086 for the nine month periods ended September 30, 1998 and 1997, respectively. The weighted average number of shares of common stock were increased by 53,598 and 32,828 for the nine month periods ended September 30, 1998 and 1997, respectively, for the assumed exercise of the employee stock options in computing the diluted per-share data. NOTE 4. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted FASB Statement No. 130, Reporting Comprehensive Income. This Statement requires an entity to include a statement of comprehensive income in its full set of general-purpose financial statements. Comprehensive income consists of the net income or loss of the entity plus or minus the change in equity for the entity during the period from transactions, other events, and circumstances resulting from nonowner sources. Statement No. 130 is effective for years beginning after December 15, 1997 and requires financial statements of earlier periods that are presented for comparative purposes to be reclassified. NOTE 5. SELECTED FINANCIAL DATA
For the nine months ended September 30, 1998 1997 ------- ------- Return on assets (ratio of net income to average total assets) (1) 1.25% 1.09% Return on equity (ratio of net income to average equity) (1) 8.62% 7.70% Equity to assets ratio (ratio of average equity to average total assets) 14.47% 14.16% Net interest margin (ratio of net interest income to average interest earning assets) (1) 3.48% 3.44%
(1) Net income and net interest income have been annualized 8 WELLS FINANCIAL CORP. and SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations General: Wells Financial Corp. (Company) was incorporated under the laws of the State of Minnesota in December 1994 for the purpose of owning all of the outstanding stock of Wells Federal Bank, fsb (Bank) issued in the mutual to stock conversion of the Bank. On April 11, 1995, the conversion was completed and $8.4 million of the net proceeds from the sale of the stock was provided to the Bank in exchange for all of the Bank's stock. The consolidated financial statements included herein are for the Company, the Bank and the Bank's wholly owned subsidiaries, Greater Minnesota Mortgage, Inc. and Wells Insurance Agency, Inc. The income of the Company is derived primarily from the operations of the Bank and the Bank's subsidiaries, and to a lesser degree from interest income from securities and certificates of deposit with other banks that the Company has purchased. The Bank's net income is primarily dependent upon the difference (or spread) between the average yield earned on loans, investments and mortgage-backed securities and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Net income is also affected by, among other things, provision for loan losses, gains on the sale of interest earning assets, service charges, servicing fees, subsidiary activities, operating expenses, and income taxes. The Bank has eight full service offices located in Faribault, Martin, Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota. Comparison of Financial Condition at September 30, 1998 and December 31, 1997: Total assets decreased by $15,545,000, from $201,436,000 at December 31, 1997 to $185,891,000 at September 30, 1998 primarily due to a $20,277,000 decrease in loans receivable, from $182,724,000 at December 31, 1997 to $162,447,000 at September 30, 1998. Due to lower interest rates on residential mortgages, management elected to sell the majority of the residential loans originated during the first nine months of 1998 to the secondary market. Included in the loans that were originated and sold during the first nine months of 1998 were loans from the Company's mortgage loan portfolio that were refinanced. This is the primary reason for the decrease in loans receivable. In accordance with the Bank's internal classification of assets policy, management evaluates the loan portfolio on a quarterly basis to identify and determine the adequacy of the allowance for loan losses. As of September 30, 1998 and December 31, 1997 the balances in the allowance for loan losses and the allowance for loan losses as a percentage of total loans were $841,000 and $763,000 and 0.51% and 0.41% respectively. Loans on which the accrual of interest has been discontinued amounted to $84,000 and $237,000 at September 30, 1998 and December 31, 1997, respectively. The effect of nonaccrual loans was not significant to the results of operations. The Company includes all loans considered impaired under FASB Statement No. 114 in nonaccrual loans. The amount of impaired loans was not material at September 30, 1998 and December 31, 1997. 9 Activity in the Company's allowance for loan losses for the nine months ended September 30, 1998 and 1997 is summarized as follows: 1998 1997 --------- --------- Balance on January 1, $ 763,292 $ 615,372 Provision for loan losses 90,000 135,000 Charge-offs (23,047) (48,705) Recoveries 10,886 31,022 --------- --------- Balance on September 30, $ 841,131 $ 732,689 ========= ========= Liabilities decreased by $11,093,000, from $171,795,000 at December 31, 1997 to $160,702,000 at September 30, 1998. The decrease in liabilities was primarily the result of a $19,500,000 decrease in borrowed funds being partially offset by a $7,277,000 increase in deposits. Cash obtained from the increase in deposits and from the sale of loans that were refinanced during the first nine months of 1998 to the secondary market was used to reduce borrowed funds. Equity decreased by $4,452,000 from $29,641,000 at December 31, 1997 to $25,189,000 at September 30, 1998. This change in equity is primarily due to net income of $1,856,000 for the nine months ended September 30, 1998 being offset by the purchase of 307,200 shares of treasury stock at a total cost of $5,937,000. Also affecting equity were payments on February 13, 1998, May 11, 1998 and August 13, 1998 of $235,000, $287,904 and $266,096, or $0.12, $0.15 and $0.15 per share, respectively, in cash dividends. On October 21, 1998, the Board of Directors of the Company declared a $0.15 per share cash dividend to be paid on November 13, 1998 to the stockholders of record on October 30, 1998. Subject to the Company's earnings and capital, it is the current intention of the Company to continue to pay regular quarterly cash dividends. Comparison of Operating Results for the Three and Nine Month Periods Ended September 30, 1998 and September 30, 1997. Net Income. Net income increased by $21,000 and $202,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the same periods in 1997 primarily due to increases in noninterest income of $219,000 and $816,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the same periods in 1997. These increases were partially offset by increases in noninterest expense of $153,000 and $535,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the same periods in 1997. Interest Income. Interest income from the loan portfolio decreased by $298,000 and $284,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the same periods in 1997. Interest income from investments in securities, certificates of deposit and interest earned on interest bearing cash accounts increased by $28,000 and $189,000 for the three and nine month periods ended September 30, 1998 when compared to the same periods in 1997. The decrease in interest income from the loan portfolio for the three and nine month periods ended September 30,1998 when compared to the same periods in 1997 was primarily the result of a decrease in the average amount of the loan portfolio during the first three quarters of 1998 when compared to the same period in 1997. Due to lower interest rates on residential mortgages, management elected to sell the majority of the residential loans originated during the first nine months of 1998 to the secondary market. Included in the loans originated and sold during the first nine months of 1998 were loans from the Company's mortgage loan portfolio that were refinanced. This is the primary reason for the decrease in the average amount of the loan portfolio. The increase in interest income from investment securities, certificates of deposit and other interest bearing deposits was primarily the result of increases in the average amounts of these investments during the first three quarters of 1998 when compared to the same period in 1997. 10 Interest Expense. Interest expense on deposits increased by $107,000 and $315,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the same periods in 1997. The increase in interest expense on deposits was primarily the result of increases in the average amounts of deposits during the first nine months of 1998 when compared to the first nine months of 1997. Interest expense on borrowed funds decreased by $328,000 and $378,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the three and nine month periods ended September 30, 1997. As described above, cash obtained from the sale of loans that were refinanced during the first three quarters of 1998 to the secondary market was used to reduce borrowed funds which resulted in a decrease in the average amounts of borrowed funds during the nine months ended September 30, 1998 when compared to the nine months ended September 30, 1997. Net Interest income. Net interest income decreased by $49,000 for the quarter ended September 30, 1998 and decreased by $32,000 for the nine month period ended September 30, 1998 when compared to the same periods in 1997 due to the changes in interest income and interest expense described above. Provision for loan losses. The provision for loan losses decreased by $15,000 and $45,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the same periods in 1997. Management evaluates the quality of the loan portfolio on a quarterly basis to identify and determine the adequacy of the allowance for loan loss. Based on these continuing reviews, management decreased the monthly provision for loan loss beginning in January of 1998. While the Company maintains its allowance for loan losses at a level that is considered to be adequate to provide for potential losses, there can be no assurance that further additions will not be made to the loss allowance and that losses will not exceed estimated amounts. Noninterest Income. Noninterest income increased by $219,000 and $816,000 for the three and nine month periods ended September 30, 1998 when compared to the same periods in 1997. The increases in noninterest income were primarily due to increases in loan origination and commitment fees of $118,000 and $503,000 for the three and nine month periods ended September 30, 1998, respectively, and the gain on sale of loans originated for sale of $68,000 and $240,000 for the three and nine months ended September 30, 1998, respectively, when compared to the same periods in 1997. These increases resulted from a greater amount of loans originated and sold to the secondary market during the first nine months of 1998 when compared to the first nine months of 1997. Also affecting noninterest income were increases in loan servicing fees of $22,000 and $40,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the same periods during 1997. At September 30, 1998, loans serviced for others by the Company exceeded $116,600,000, a 54% increase over loans serviced for others at December 31, 1997. Noninterest Expense. Noninterest expense increased by $153,000 for the quarter ended September 30, 1998 and increased by $535,000 for the nine months ended September 30, 1998 when compared to the same periods in 1997 primarily due to increases in compensation and benefits and occupancy and equipment. Late in the second quarter of 1997, the Company converted its loan origination office in Owatonna, Minnesota to a full service banking facility by employing additional staff and moving to a larger facility which resulted in increased compensation and benefits and occupancy and equipment. Also affecting compensation and benefits were annual compensation increases and an increase in the Employee Stock Ownership Plan expense that resulted from the appreciation of the Company's stock. Other noninterest expense increased by $24,000 and $108,000 for the three and nine month periods ended September 30, 1998, respectively, when compared to the same periods in 1997 primarily due to an increase in the amortization of mortgage servicing rights. The increase in the amortization of mortgage servicing rights was $26,000 and $63,000 for the three and nine months ended September 30, 1998, respectively, when compared to the same periods in 1997. Income Tax Expense. Income tax expense increased by $11,000 and $92,000 for the three and nine month periods ended September 30, 1998 when compared to the same periods in 1997. This increase was the result of an increase in income before income taxes for the three and nine month periods ended September 30, 1998 when compared to the same periods in 1997. 11 Non-performing Assets. The following table sets forth the amounts and categories of non-performing assets at September 30, 1998 and December 31, 1997. September 30, 1998 December 31, 1997 ------------------------------------- (Dollars in Thousands) Non-accruing loans One to four family real estate $ 24 $219 Consumer 60 18 ---- ---- Total $ 84 $237 ---- ---- Accruing loans which are contractually past due 90 days or more One to four family real estate $224 $201 Consumer 1 -- ---- ---- Total $225 $201 ---- ---- Total non-accrual and accruing loans past due 90 days or more $309 $438 ==== ==== Repossessed and non-performing assets Repossessed property $ 69 $ 35 Other non-performing assets -- -- ---- ---- Total repossessed and non-performing assets $ 69 $ 35 ---- ---- Total non-performing assets $378 $473 ==== ==== Total non-accrual and accruing loans past due 90 days or more to net loans 0.19% 0.24% ==== ==== Total non-accrual and accruing loans past due 90 days or more to total assets 0.17% 0.22% ==== ==== Total nonperforming assets to total assets 0.20% 0.23% ==== ==== Financial Standards Board Statement No. 114, Accounting by Creditors for Impairment of a Loan, and Statement No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, requires that impaired loans within the scope of these Statements be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate; or as a practical expedient, either at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. At September 30, 1998 and December 31, 1997, the value of loans that would be classified as impaired under these Statements is considered to be immaterial. Liquidity and Capital Resources: The Bank is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of US Government, federal agency and other investments having maturities of five years or less. Current OTS regulations require that a savings association maintain liquid assets of not less than 4% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. At September 30, 1998, the Bank's liquidity, as measured for regulatory purposes, was 8.01%. The Bank adjusts liquidity as appropriate to meet its asset/liability objectives. 12 The Bank's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans, maturities of investment securities and funds provided from operations. While scheduled loan repayments are a relatively predictable source of funds, deposit flows and loan prepayments are significantly influenced by general interest rates, economic conditions and competition. If needed, the Bank's source of funds can be supplemented by wholesale funds obtained through additional advances from the Federal Home Loan Bank system. The Bank invests excess funds in overnight deposits, which not only serve as liquidity, but also earn interest income until funds are needed to meet required loan funding. In 1996 and 1998, the Company approved stock buy back programs in which up to 535,340 shares of the common stock of the Company could be acquired. These stock buy back programs were completed during the third quarter of 1998. The Company paid a cash dividend of $0.12 per share on February 13, 1998 and $0.15 per share on April 15, 1998 and August 13, 1998. The Company declared a cash dividend of $0.15 per share payable on November 13, 1998 to stockholders of record on October 30, 1998. Subject to the Company's earnings and capital, it is the current intention of the Company to continue to pay regular quarterly cash dividends. Savings institutions insured by the Federal Deposit Insurance Corporation are required by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) to meet prescribed regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization plan. At September 30, 1998, the Bank met all current capital requirements. The Office of Thrift Supervision (OTS) has adopted a core capital requirement for savings institutions comparable to the requirement for national banks. The OTS core capital requirement is 3% of adjusted assets for thrifts that receive the highest supervisory rating for safety and soundness. The Bank had core capital of 12.18% at September 30, 1998. Pursuant to FDICIA, the federal banking agencies, including the OTS, have also proposed regulations authorizing the agencies to require a depository institution to maintain additional total capital to account for concentration of credit risk and the risk of non-traditional activities. No assurance can be given as to the final form of any such regulation or its effect on the Bank. Year 2000 Issue: The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is heavily dependent on computer processing in its business activities and the Year 2000 issue creates risk for the Company from unforeseen problems in the Company's computer system and from third parties whom the Company uses to process information. Such failures of the Company's computer system and/or third parties computer systems could have a material impact on the Company's ability to conduct its business. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test the systems for the year 2000 compliance. The Company has identified the software and hardware that requires testing for year 2000 compliance and has established procedures and a time line for testing the software and hardware. Confirmations have been received from the Company's primary processing vendors that plans are being developed to address processing of transactions in the year 2000. The Company began testing its hardware during the first quarter of 1998 and testing of the software that is provided by the Company's primary processing vendors began in September 1998. Progress reports on the year 2000 action plan are produced monthly by management and reviewed by the Board of Directors. Based on the Company's review of its computer system, management believes the cost to upgrade and test its computer system to be Year 2000 compliant will be approximately $115,000. 13 WELLS FINANCIAL CORP. and SUBSIDIARIES September 30, 1998 FORM 10-QSB PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings ----------------- None Item 2. Changes in Securities --------------------- None Item 3. Defaults upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other information ----------------- None Item 6. Exhibits and Reports of Form 8-K -------------------------------- a. Exhibits: 27 - Financial data schedule b. No reports on Form 8-K were filed No other information is required to be filed under Part II of the form - -------------------------------------------------------------------------------- 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WELLS FINANCIAL CORP. By: /s/ Lawrence H. Kruse Date: November 9, 1998 --------------------------------------- ---------------- Lawrence H. Kruse President and Chief Executive Officer By: /s/ James D. Moll Date: November 9, 1998 --------------------------------------- ---------------- James D. Moll Treasurer and Principal Financial & Accounting Officer EX-27 2 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000 9-MOS Dec-31-1998 Sep-30-1998 994 9,436 0 0 2,608 3,141 3,152 165,235 841 185,891 152,655 5,000 3,047 0 0 0 219 24,970 185,891 10,557 783 0 11,340 5,495 771 5,074 90 0 3,449 3,140 3,140 0 0 1,856 1.03 1.00 3.48 84 225 0 321 763 23 11 841 841 0 0
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