UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number 0-25342
Wells Financial Corp.
(Exact name of Registrant as Specified in Its Charter)
Minnesota 41-1799504
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.
53 1st Street S.W., P.O. Box 310, Wells MN 56097
(Address of principal executive offices)
(507)553-3151
(Registrant's Telephone Number, including Area Code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check by x whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
The number of share outstanding of each of the issuer's classes of common
stock as of July 22, 1996:
Class Outstanding
$.10 par value per share, common stock 2,078,125 Shares
WELLS FINANCIAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION: Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition 1
Consolidated Statements of Income 2
Consolidated Statement of Stockholders equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
WELLS FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1996 and December 31, 1995
(Dollars in Thousands)
(Unaudited)
ASSETS
1996 1995
Cash and cash equivalents $ 3,509 $ 8,192
Certificates of deposit 200 800
Securities available for sale 6,742 6,753
Securities held to maturity (approximate
market value $4,753 at June 30, 1996
and $4,190 at December 31, 1995) 4,800 4,199
Mortgage-backed securities available for
sale 658 867
Loans held for sale 387 1,944
Loans receivable, net 172,168 169,670
Accrued interest receivable 1,193 1,120
Foreclosed real estate 33 29
Premises and equipment 1,632 1,237
Other assets 465 347
------- -------
TOTAL ASSETS $191,787 $195,158
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $147,792 $146,686
Borrowed funds 14,500 18,000
Advances from borrowers for taxes
and insurance 686 683
Income taxes:
Current 84 54
Deferred 261 340
Accrued interest payable 337 221
Accrued expenses and other
liabilities 367 322
------- -------
TOTAL LIABILITIES $164,027 $166,306
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value;
authorized 7,000,000 shares;
issued 2,187,500 shares $ 219 $ 219
Additional paid in capital 16,557 16,537
Retained earnings, substantially
restricted 13,649 12,786
Unrealized appreciation (depreciation)
on securities available for sale,
net of related deferred taxes 224 318
Unearned ESOP shares (952) (1,008)
Unearned compensation restricted stock
awards (784) -
Treasury stock at cost (1,153) -
------- -------
TOTAL STOCKHOLDERS' EQUITY $ 27,760 $ 28,852
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $191,787 $195,158
======= =======
(See Notes to Consolidated Financial Statements)
Page 1
WELLS FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Income
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1996 1995 1996 1995
----------- ------------ ----------- ------------
Interest and dividend income
Loans receivable:
First mortgage loans $ 2,784 $ 2,659 $ 5,611 $ 5,241
Consumer and other loans 489 408 973 769
Investment securities and
certificates of deposit 310 232 277 421
----- ----- ----- -----
Total interest income $ 3,583 $ 3,299 $ 7,161 $ 6,431
----- ----- ----- -----
Interest Expense
Deposits $ 1,784 $ 1,764 $ 3,572 $ 3,403
Borrowed funds 222 233 460 606
----- ----- ----- -----
Total interest expense $ 2,006 $ 1,997 $ 4,032 $ 4,009
----- ----- ----- -----
Net interest income $ 1,577 $ 1,302 $ 3,129 $ 2,422
Provision for loan losses 45 45 90 76
----- ----- ----- -----
Net interest income after
provision for loan losses $ 1,532 $ 1,257 $ 3,039 $ 2,346
----- ----- ----- -----
Non-interest income
Gain on sale of loans originated
for sale $ 22 $ 10 $ 79 $ 12
Gain on sale of other assets 16 - 19 -
Loan origination and commitment
fees 33 4 60 5
Loan servicing fees 53 46 102 93
Insurance commissions 65 58 167 107
Fees and service charges 56 53 111 104
Other 12 16 18 23
----- ----- ----- -----
Total non-interest income $ 257 $ 187 $ 556 $ 347
----- ----- ----- -----
Non-interest expense
Compensation and benefits $ 478 $ 459 $ 953 $ 893
Occupancy and equipment 179 138 317 273
SAIF deposit insurance premium 84 84 168 168
Data processing 169 63 240 134
Professional fees 19 19 37 37
Advertising 40 35 72 70
Other 219 145 346 289
Total non-interest expense $ 1,188 $ 943 $ 2,133 $ 1,864
----- ----- ----- -----
Income before taxes $ 601 $ 501 $ 1,462 $ 829
Income tax expense 238 198 599 329
----- ----- ----- -----
Net Income $ 363 $ 303 $ 863 $ 500
===== ===== ===== =====
Earnings per common share
Primary and fully diluted (1) $ 0.19 $ 0.13 $ 0.43 $ 0.13
===== ===== ===== =====
Weighted average number of common
shares outstanding:
Primary and fully diluted 2,022,701 2,049,250 2,022,701 2,049,250
========= ========= ========= =========
<FN>
(1). Earnings per common share for the three and six month periods ended June
30, 1995 are based on earnings from April 11, 1995, the date of conversion,
to June 30, 1995.
</FN>
(See Notes to Consolidated Financial Statements)
Page 2
WELLS FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 1996
(Dollars in Thousands)
(Unaudited)
Net unrealized
appreciation Unearned
Net unrealized Employee
appreciation Unearned Unearned
(depreciation) Employee Compensation
Additional on securities Stock Restricted Total
Common Paid-In Retained available Ownership Stock Treasury Stockholders'
Stock Capital Earnings for sale Plan shares Awards Stock Equity
------ ---------- -------- --------------- ----------- ------------ -------- ------------
December 31, 1995 $ 219 $ 16,537 $ 12,786 $ 318 $ (1,008) $ - $ - $ 28,852
Net income for the
six months ended
June 30, 1996 - - 863 - - - - 863
Net change in
unrealized
appreciation
(depreciation)
on securities
available for
sale, net of
related deferred
taxes - - - (94) - - - (94)
Treasury stock
purchases - - - - - - (1,153) (1,153)
Purchase of
unearned
compensation
restricted stock
awards - - - - - (940) - (940)
Amortization of
restricted stock
awards - - - - - 156 - 156
Earned employee
stock ownership
plan shares - 20 - - 56 - - 76
------ --------- --------- --------- --------- --------- -------- ----------
Balance,
June 30, 1996 $ 219 $ 16,557 $ 13,649 $ 224 $ (952) $ (784) $ (1,153) $ 27,760
====== ========= ========= ========= ========= ========= ======== ==========
(See Notes to Consolidated Financial Statements)
Page 3
WELLS FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Cash Flow
Six Months Ended June 30, 1996 and 1995
(Dollars in Thousands)
(Unaudited)
1996 1995
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 863 $ 500
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 90 76
Gain on the sale of loans originated
for sale (79) (12)
Compensation on allocation of ESOP
shares 76 32
Amortization of restricted stock
awards 125 -
Write-down of foreclosed real estate 1 -
Gain on the sale of foreclosed real
estate - (3)
Deferred income taxes (17) 10
Depreciation and amortization on
premises and equipment 114 96
Amortization of deferred loan
origination fees (87) (59)
Amortization of excess servicing fees 7 7
Amortization of mortgage servicing
rights 6 -
Amortization of bond premiums and
discounts (2) 2
Loans originated for sale (13,137) (2,054)
Proceeds from the sale of loans
originated for sale 14,694 2,180
Changes in assets and liabilities:
Accrued interest receivable (73) (68)
Other assets (53) 70
Income taxes payable, current 30 146
Accrued expenses and other
liabilities 171 190
------- ------
Net cash provided by operating
activities $ 2,729 $ 1,113
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan origination's and principal payments (2,506) (6,078)
Purchase of certificates of deposit (200) (800)
Purchase of securities available for sale (140) (139)
Purchase of securities held to maturity (2,500) (1,197)
Proceeds from principal repayments of
mortgage backed securities 206 13
Proceeds from the maturities of certificates
of deposit 800 -
Proceeds from the maturities of securities
held to maturity 1,900 1,000
Purchase of premises and equipment (509) (24)
Proceeds from the sale and redemption of
foreclosed real estate - 83
------- ------
Net cash provided by (used in) investment
activities $ (2,949) $ (7,142)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,127 (1,699)
Net increase in advances from borrowers for
taxes and insurance 3 34
Repayments on borrowed funds (3,500) (3,650)
Proceeds from issuance of common stock - 15,605
Repurchase of common stock (1,153) -
Purchase of restricted stock plan shares (940) -
------- ------
Net cash provided by (used in) financing
activities (4,463) 10,290
------- ------
Net increase (decrease) in cash and
cash equivalents (4,683) 4,261
CASH AND CASH EQUIVALENTS:
Beginning 8,192 1,480
------- ------
Ending $ 3,509 $ 5,741
======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments for:
Interest on deposits $ 3,464 $ 3,194
Interest on advances 463 619
Income taxes 586 174
======= ======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Transfers from loans to foreclosed real
estate 5 58
Issuance of shares to Employee Stock
Ownership Plan (ESOP) in conjunction
with conversion from mutual stock
form - 1,120
Allocation of ESOP shares to participants
56 28
======= ======
Page 4
WELLS FINANCIAL CORP. and SUBSIDIARIES
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
subsidiary, Wells Insurance Agency, Inc.
NOTE 2. REGULATORY CAPITAL
The following table presents the Bank's regulatory capital amounts
and percents at June 30, 1996 and December 31, 1995.
June 30, 1996 December 31, 1995
Amount Percent Amount Percent
------------------- --------------------
(Dollars in Thousands)
Tangible Capital:
Required $ 2,843 1.50% $ 2,898 1.50%
Actual 20,073 10.59% 20,029 10.37%
Excess 17,230 9.09% 17,131 8.87%
Core Capital
Required (1) $ 5,686 3.00% $ 5,796 3.00%
Actual 20,073 10.59% 20,029 10.37%
Excess 14,387 7.59% 14,233 7.37%
Risk-based Capital
Required $ 8,718 8.00% $ 8,610 8.00%
Actual 20,630 18.93% 20,511 19.06%
Excess 11,912 10.93% 11,901 11.06%
(1) The OTS is expected to adopt a core capital requirement for savings
institutions comparable to the requirement for national banks that became
effective December 31, 1990. The OTS core capital requirement is anticipated to
be at least 3% of total adjusted assets for thrifts that receive the highest
supervisory rating for safety and soundness, with a 4% to 5% core capital
requirement for all other thrifts. No prediction can be made as to the exact
nature of any new OTS core capital regulation, or the date of its effectiveness,
and the core capital requirement to be applicable to the Bank under such
regulation.
Page 5
WELLS FINANCIAL CORP. and SUBSIDIARIES
Notes to consolidated Financial Statements Continued
(Unaudited)
NOTE 3. CONVERSION AND SALE OF COMMON STOCK
Effective April 11, 1995, Wells Federal Bank, fsb converted from a
federally chartered mutual savings bank to a federally chartered stock savings
bank with all of its stock being issued to Wells Financial Corp. (Company) which
issued 2,047,500 shares of its common stock to the public and 140,000 shares to
an employee stock ownership plan (ESOP), with a $.10 per share par value. The
stock issued to the ESOP was paid by the ESOP with a note due to the Company.
Net proceeds of the Company's stock issuance after costs were $16.7 million,
$15.6 million net of ESOP shares, of which approximately $7.2 million was
retained by the Company and the remaining proceeds were used to purchase the
stock of the Bank. The acquisition of the Bank by the Company was accounted for
at cost, similar to the pooling of interest method.
As part of the conversion, the Company established an ESOP. The ESOP was
funded by a $1,120,000 loan from the Company, which the ESOP immediately used to
purchase 140,000 shares of the Company's stock. The loan owed by the ESOP is
presented as a liability on the Bank's statement of financial condition with an
offsetting charge against unearned ESOP shares, a contra stockholders' equity
account.
The Company adopted a Management Stock Bonus 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. As of June 30, 1996, 49,735 shares had been
awarded under the Plan. The awards vest at the rate of 20% per year of
continuous service with the Bank. The Management Stock Bonus Plan Trust
purchased 87,500 shares of the Company's common stock in open market
transactions at an average cost of $10.75 per share.
NOTE 4. NET INCOME PER SHARE
Net income per share is computed based upon $863,000 of net income since
January 1, 1996. Weighted average shares outstanding includes all shares
outstanding, adjusted for 118,998 shares not yet committed to be released to
ESOP participants.
NOTE 5. SELECTED FINANCIAL DATA
For the six months
ended
June 30,
1996 1995
--------- --------
Return on assets
(ratio of net income to average total assets)(1) 0.89% 0.53%
Return on equity
(ratio of net income to average equity)(1) 6.04% 5.39%
Equity to assets ratio
(ratio of average equity to average total assets) 14.72% 9.87%
Net interest margin
(ratio of net interest income to average interest
earning assets)(1) 3.22% 2.66%
(1) Net income and net interest income
have been annualized.
Page 6
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 subsidiary, Wells Insurance Agency, Inc.
The income of the Company is derived primarily from the operations of the
Bank and the Bank's subsidiary, 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 seven full service offices located in Faribault, Martin, Blue
Earth, Nicollet, and Freeborn Counties, Minnesota and one loan origination
office located in Steele County, Minnesota. The Bank has received approval to
convert the loan origination office in Steele County to a full service office
that will offer the Bank's complete line of deposit as well as loan products. It
is anticipated that this conversion from a loan origination office to a full
service office will be completed in the spring of 1997.
Comparison of Financial Condition at June 30, 1996 and December 31, 1995:
Total assets decreased by $3,400,000 from $195,158,000 to $191,787,000 at
December 31, 1995 and June 30, 1996, respectively. Cash and cash equivalents
decreased by $4,700,000 during the first six months of 1996 as cash was used to
fund new loan growth and to reduce borrowed funds. Certificates of deposit
declined by $600,000 due to the maturity of these deposits. Securities that are
classified as held-to-maturity increased by $601,000 as additional securities
were purchased because of higher rates of return. Mortgage-backed securities
that are available for sale decreased by $209,000 primarily due to the repayment
of principal. Loans receivable increased by $2,500,000, from $169,670,000 at
December 31, 1995 to $172,168,000 at June 30, 1996. The increase in loans
receivable is the result of management's decision to retain higher yielding
thirty year fixed rate loans that were originated during the first six months of
1996. Premises and equipment increased by $395,000 during the first six months
of 1996. This increase is primarily due to the replacement by the Bank of
obsolete computer hardware with new computer hardware and software.
In accordance with the Bank's internal classification of assets policy,
management evaluates the loan portfolio on a quarterly basis to identify and
determine the adequacy of the allowance for loan loses. As of December 31, 1995
and June 30, 1996 the balance in the allowance for loan losses and the allowance
for loan losses as a percentage of total loans was $401,227 and $584,296 and
0.24% and 0.34% respectively.
Page 7
Activity in the Company's allowance for loan losses for the six months
ended June 30, 1996 and 1995 is summarized as follows:
1996 1995
----------------- ---------------
Balance on January 1, $ 512,430 $ 375,787
Provision for loan losses 90,000 76,000
Charge-offs (21,729) (9,766)
Recoveries 3,595 6,254
------- -------
Balance on June 30, $ 584,296 $ 448,275
======= =======
Deposits increased by $1,100,000 from December 31, 1995 to June 30, 1996.
Borrowed funds decreased by $3,500,000 during the same period as excess cash was
used to repay Federal Home Loan Bank (FHLB) advances.
Equity decreased by $1,100,000 from $28,852,000 at December 31, 1995 to
$27,760,000 at June 30, 1996. This decrease is primarily due to the repurchase
of 109,375 shares of treasury stock, at a cost of $1,153,000, and the purchase
of 87,500 of the Company's shares, at a cost of $940,000, by the Management
Stock Bonus Plan Trust and, to a lesser degree, by a $94,000 decrease in the
unrealized appreciation on securities that are available for sale. These
decreases were partially offset by net income of $863,000 and the allocation of
$76,000 of employee stock ownership plan shares and the amortization of $156,000
of restricted stock awards.
Comparison of Operating Results for the Three and Six Month Periods Ended June
30, 1996 and June 30, 1995.
Net Income. Net income increased by $60,000 and $363,000 for the three and
six month periods ended June 30, 1996, respectively, when compared to the same
periods in 1995. During the first nine months of 1994, the Bank's adjustable
rate loan portfolio, which constitutes approximately 60% of the Bank's total
loan portfolio was repricing downward due to the lagging indices that are used.
As these loans reprice annually, the lower rates continued into the first six
months of 1995 which resulted in lower interest income for the three and six
month periods ended June 30, 1995. Starting in October of 1994, the adjustable
rate loan portfolio began repricing upward and continued to do so through
September 1995 which, because of lagging indices, resulted in additional
interest income for the three and six month periods ended June 30, 1996. The
Bank's interest expense remained relatively constant for the first six months of
1996 when compared to the same period in 1995, primarily due to the use of
proceeds from the sale of common stock to reduce borrowings.
Interest Income. The Company's interest income increased by $284,000 and
$730,000 for the three and six month periods ended June 30, 1996, respectively,
when compared to the same periods during 1995. This is primarily the result of
the repricing of the Bank's adjustable rate loan portfolio as described above.
To a lesser extent, the increase in interest income was the result of an
increase in yield on other interest earning assets.
Interest Expense. Interest expense increased by $9,000 and $23,000 for the
three and six month periods ended June 30, 1996, respectively, when compared to
the same periods during 1995. Interest on deposits increased by $20,000 and
$168,000 for the three and six month periods ended June 30, 1996, respectively,
when compared to the same periods in 1995, primarily due to an increase in the
average amount of deposits during the first six months of 1996 when compared to
the first six months of 1995. The increase in interest expense on deposits was
partially offset by a decrease in interest expense on borrowed funds of $11,000
and $146,000 for the three and six month periods ended June 30, 1996,
respectively, when compared to the same periods in 1995. The decrease in
interest on borrowed funds is primarily due to a decrease in the average amount
of borrowed funds during the first six months of 1996 when compared to the same
period in 1995. The decrease in the average amount of borrowed funds resulted
from the use of proceeds from the sale of common stock during the conversion to
reduce borrowings.
Net Interest income. Net interest income increased by $275,000 and $707,000
for the three and six month periods ended June 30, 1996, respectively, when
compared to the three and six month periods ended June 30, 1995. Again, this is
primarily the result of the repricing of the Bank's adjustable rate loan
portfolio as described above. Absent a repetition of these circumstances,
interest income and therefore net interest income, could decline in future
periods.
Page 8
Provision for loan losses. The provision for loan losses remained constant
for the quarter ended June 30, 1996 and increased by $14,000 for the six month
period ended June 30, 1996 when compared to the same periods during 1995. 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.
Non-interest Income. Non-interest income increased by $70,000 and $209,000
for the three and six month periods ended June 30, 1996, respectively, when
compared to the same periods in 1995. The increase for the three month period is
primarily due to a gain on the sale of other assets and an increase in loan
origination and commitment fees. The increase for the six month period was
primarily due to an increase in the gain on the sale of loans originated for
sale, the gain on sale of other assets, an increase in loan origination and
commitment fees and an increase in insurance commissions. The increase in loan
origination and commitment fees was the result of increased loan origination
activity. The increase in the gain on sale of loans originated for the sale
resulted from the gain realized due to the capitalization of mortgage servicing
rights on the loans sold during the period. Insurance commissions increased by
$7,000 and $60,000 for the three and six month periods, respectively, when
compared to the same periods in 1995 due to the acquisition of additional local
accounts by the Bank's insurance subsidiary.
Non-interest Expense. Non-interest expense increased by $245,000 and
$269,000 for the three and six month periods ended June 30, 1996 when compared
to the same periods in 1995. As part of management's commitment to provide
competitive products and excellent service to the Bank's customers, the Bank
converted to a new data processing software system during the second quarter of
1996. The decision to convert the data processing software was based upon
management's desire to improve marketing of the Bank's products to current as
well as potential customers. The software conversion resulted in non-recurring
expenses of approximately $132,000 that were realized during the six month
period ended June 30, 1996. In addition, approximately $498,000 in hardware and
software costs were capitalized and will be depreciated over their useful lives.
Income Tax Expense. The Company's income tax expense increased by $40,000
for the quarter ended June 30, 1996 and by $270,000 for the six month period
ended June 30, 1996 when compared to the same periods in 1995. This increase is
reflective of the increase in net income before tax for the three and six month
periods ended June 30, 1996 when compared to the same periods in 1995.
Page 9
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at June 30, 1996 and December 31, 1995.
June 30, 1996 December 31, 1995
----------------- -----------------
(Dollars in Thousands)
Non-accruing loans
One to four family real estate $ 566 $ 265
Non-residential property 0 0
Commercial 5 7
Consumer 103 26
----------- -----------
Total $ 674 $ 298
----------- -----------
Accruing loans delinquent 90 days or
more
One to four family real estate $ - $ -
Consumer - 1
----------- -----------
Total non-accrual and accrual
loans 674 299
=========== ===========
Repossessed property $ 33 $ 29
Other non-performing assets - -
----------- -----------
Total repossessed and
non-performing assets $ 33 $ 29
----------- -----------
Total non-performing assets $ 764 $ 328
Total non-performing assets as
a percent of total assets 0.37% 0.17%
=========== ===========
Total non-performing loans $ 674 $ 299
Total non-performing loans as
a percentage of total loans
receivable, net 0.39% 0.18%
============ ===========
While the total amount of non-performing loans increased significantly at
June 30, 1996 when compared to December 31, 1995, management does not believe
that the quality of the loan portfolio has declined but that the non-performing
loans as of December 31, 1995 were lower than average for the Company's loan
portfolio. Non-performing loans at June 30, 1996 were $674,000 which is less
than $731,000, the average non-performing loans at the end of the four quarters
prior to December 31, 1995.
Effective January 1, 1995, the Bank adopted 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, which require that impaired loans within the scope
of these Statements be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate; or as a practical
expedient, either at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. At June 30, 1996 and 1995, the
value of loans that would be classified as impaired under these Statements is
considered to be immaterial.
Liquidity and Capital Resources:
Wells Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of US Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 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 June 30, 1996, the Bank's
liquidity, as measured for regulatory purposes, was 5.27%. The Bank adjusts
liquidity as appropriate to meet its asset/liability objectives.
Page 10
The Bank's primary sources of funds are deposits, borrowed funds,
amortization and prepayment of loans, maturities of investment securities and
funds provided from operations. While scheduled loan repayments are a relatively
predictable source of funds, deposit flows and loan prepayments are
significantly influenced by general interest rates, economic conditions and
competition. If needed, the Bank's source of funds can be supplemented by
wholesale funds obtained through additional advances from the Federal Home Loan
Bank system. The Bank invests excess funds in overnight deposits, which not only
serve as liquidity, but also earn interest as income until funds are needed to
meet required loan funding.
The Bank has other sources of liquidity if a need for additional funds
arises although the Bank has not used them. Additional sources of funds include
borrowing against mortgage-backed or other securities. At June 30, 1996, the
mortgage-backed securities portfolio consisted solely of collateralized mortgage
obligations guaranteed as to principal by FNMA or FHLMC. These securities are
considered non-high-risk securities under applicable criteria. These securities
had a market value of $658,000 at June 30, 1996 and the carrying value of these
securities are adjusted quarterly to reflect market value.
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 June 30, 1996, the Bank's tangible capital totaled $20.1
million, or 10.59% of adjusted total assets, and core capital totaled $20.1
million, or 10.59% of adjusted total assets, which substantially exceeded the
respective 1.5% tangible capital and 3.0% core capital requirements at that date
by $17.2 million and $14.4 million, respectively, or 9.09% and 7.59% of adjusted
total assets, respectively. The Bank's risk-based capital totaled $20.6 million
at June 30, 1996 or 18.93% of risk-weighted assets, which exceeded the current
requirements of 8.0% of risk-weighted assets by $11.9 million or 10.93% of
risk-weighted assets.
Savings Association Insurance Fund
Due to a disparity in the capitalization of federal deposit insurance
funds, effective January 1, 1996 the FDIC lowered the annual insurance premium
for members of the Bank Insurance Fund (BIF) to $2,000 while maintaining the
current range of between 0.23% and 0.31% of deposits for members of the Savings
Association Insurance Fund (SAIF). A reduction in insurance premiums for BIF
members could place SAIF members, such as the Bank, at a material competitive
disadvantage to BIF members. Proposals under consideration for addressing this
disparity include a possible one-time assessment on deposits of .85% on SAIF
members, sufficient to recapitalize SAIF to a level that would approach that of
BIF. While there can be no assurance that this or any other proposal will be
effected, a one-time assessment would have an adverse impact on the Bank's
results of operations during the period in which it was assessed. Based on
outstanding deposits as of March 31, 1995, the proposed measurement date, a
0.85% assessment would result in expense to the Bank of approximately $1,404,000
on a pre-tax basis.
In connection with the consideration of the BIF/SAIF disparity, various
bills have been introduced in Congress which would call for eventual combination
of the insurance funds and would address the tax deductibility of a proposed
one-time assessment. Certain bills introduced call for conversion of the thrift
charter into a bank charter. The tax impact of elimination of the thrift charter
could be significant if it resulted in recapture of existing tax bad debt
reserves in excess of those allowed for banks. As of June 30, 1996, tax bad debt
reserves for which no deferred or current tax liability has been accrued
amounted to approximately $1,819,000.
Page 11
WELLS FINANCIAL CORP. and SUBSIDIARIES
June 30, 1996
FORM 10-Q
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. During the quarter ended March 31, 1996 a Form 8-K (Items 5 and
7), dated January 17, 1996, was filed.
No other information is required to be filed under Part II of the form
Page 12
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.
Date: August 8, 1996 By: /s/ Lawrence H. Kruse
Lawrence H. Kruse
President and Chief Executive Officer
Date: August 8, 1996 By: /s/ James D. Moll
James D. Moll
Treasurer and Principal Financial
and Accounting Officer
Page 13