UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 1996
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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 ____________________
Commission File Number 0-25342
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Wells Financial Corp.
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(Exact name of Registrant as Specified in Its Charter)
Minnesota 41-1799504
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
53 1st Street SW, PO Box 310, Wells Minnesota 56097
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(Address of principal executive offices)
(507)553-3151
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(Registrant's Telephone Number, including Area Code)
N/A
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(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 November 4, 1996:
Class Outstanding
----- -----------
$.10 par value per share, common stock 2,078,125 Shares
WELLS FINANCIAL CORP. and SUBSIDIARIES
[GRAPHIC OMITTED]
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
September 30, 1996 and December 31, 1995
(Dollars in Thousands)
(Unaudited)
ASSETS
1996 1995
---------- ----------
Cash and cash equivalents $ 5,803 $ 8,192
Certificates of deposit 200 800
Securities available for sale 6,901 6,753
Securities held to maturity (approximate
market value $5,329 at September 30, 1996
and $4,190 at December 31, 1995) 5,349 4,199
Mortgage-backed securities available for sale 532 867
Loans held for sale 1,247 1,944
Loans receivable, net 177,752 169,670
Accrued interest receivable 1,212 1,120
Foreclosed real estate 147 29
Premises and equipment 1,589 1,237
Deferred income taxes 206 --
Other assets 378 347
-------- -------
TOTAL ASSETS $ 201,316 $ 195,158
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 147,078 $ 146,686
Borrowed funds 23,500 18,000
Advances from borrowers for taxes and insurance 1,096 683
Income taxes:
Current 117 54
Deferred -- 340
Accrued interest payable 416 221
Accrued expenses and other liabilities 256 322
SAIF premium assessment payable 1,085 --
-------- -------
TOTAL LIABILITIES $ 173,548 $ 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 16,571 16,537
Retained earnings, substantially
restricted 13,505 12,786
Unrealized appreciation on securities
available for sale, net of related
deferred taxes 274 318
Unearned ESOP shares (924) (1,008)
Unearned compensation restricted stock
awards (724) --
Treasury stock at cost (1,153) --
-------- -------
TOTAL STOCKHOLDERS' EQUITY $ 27,768 $ 28,852
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 201,316 $ 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 Nine Months Ended
September 30 September 30
-------------------------- ------------------------
1996 1995 1996 1995
------------ ------------ ------------ -----------
Interest and dividend income
Loans receivable:
First mortgage loans ................... $ 2,949 $ 2,771 $ 8,560 $ 8,012
Consumer and other loans ............... 529 462 1,502 1,231
Investment securities and certificates of
deposit................................. 237 256 814 677
--------- --------- --------- ---------
Total interest income..... $ 3,715 $ 3,489 $ 10,876 $ 9,920
Interest Expense
Deposits .................................. $ 1,760 $ 1,790 $ 5,332 $ 5,193
Borrowed funds ............................ 269 294 729 900
--------- --------- --------- ---------
Total interest expense.... $ 2,029 $ 2,084 $ 6,061 $ 6,093
--------- --------- --------- ---------
Net interest income....... $ 1,686 $ 1,405 $ 4,815 $ 3,827
Provision for loan losses .................... 45 45 135 121
--------- --------- --------- ---------
Net interest income after
provision for loan losses $ 1,641 $ 1,360 $ 4,680 $ 3,706
Non-interest income
Gain (loss) on sale of loans originated for
sale................................... $ (11) $ 9 $ 68 $ 21
Gain on sale of other assets .............. -- -- 19 --
Loan origination and commitment fees....... 44 25 104 30
Loan servicing fees ....................... 51 45 153 138
Insurance commissions ..................... 79 78 246 185
Fees and service charges .................. 64 58 175 162
Other ..................................... 7 19 25 45
--------- --------- --------- ---------
Total non-interest income $ 234 $ 234 $ 790 $ 581
--------- --------- --------- ---------
Non-interest expense
Compensation and benefits ................. $ 455 $ 452 $ 1,408 $ 1,345
Occupancy and equipment ................... 157 129 474 402
SAIF deposit insurance premium ............ 88 84 256 252
SAIF premium assessment ................... 1,085 -- 1,085 --
Data processing ........................... 59 64 299 198
Professional fees ......................... 18 18 55 55
Advertising ............................... 35 33 107 103
Other ..................................... 196 147 542 436
--------- --------- --------- ---------
Total non-interest expense $ 2,093 $ 927 $ 4,226 $ 2,791
--------- --------- --------- ---------
Income (loss) before taxes $ (218) $ 667 $ 1,244 $ 1,496
Income tax expense ........................... (74) 267 525 596
========= ========= ========= =========
Net Income (loss)......... $ (144) $ 400 $ 719 $ 900
========= ========= ========= =========
Earnings (loss) per share
Primary and fully diluted (1) .......... $ (0.07) $ 0.20 $ 0.36 $ 0.32
========= ========= ========= =========
Weighted average number of common
shares outstanding:
Primary and fully diluted ........... 2,012,780 2,051,875 2,004,186 2,051,875
(1). Earnings per common share for the three and nine month periods ended
September 30, 1995 are based on earnings from April 11, 1995, the date of
conversion, to September 30, 1995.
(See Notes to Consolidated Financial Statements)
Page 2
WELLS FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1996
(Dollars in Thousands)
(Unaudited)
Net unrealized
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
------ ----------- -------- -------------- ----------- ------------- --------- -------------
Balance,
December 31, 1995 $ 219 $ 16,537 $ 12,786 $ 318 $ (1,008) $ - $ - $ 28,852
Net income for the nine
months ended September
30, 1996 - - 719 - - - - 719
Net change in unrealized
appreciation
(depreciation) on
securities available for
sale, net of related
deferred taxes - - - (44) - - - (44)
Treasury stock
purchases - - - - - - (1,153) (1,153)
Purchase of unearned
compensation restricted
stock awards - - - - - (940) - (940)
Amortization of
restricted stock
awards - - - - - 216 - 216
Earned employee
stock ownership
plan shares - 34 - - 84 - - 118
------ ------- ------ -------- -------- -------- ------ ---------
Balance,
September 30,
1996 $ 219 $ 16,571 $13,505 $ 274 $ (924) $ (724) $(1,153) $ 27,768
====== ======= ====== ======== ======== ======== ====== =========
(See Notes to Consolidated Financial Statements)
Page 3
WELLS FINANCIAL CORP. and SUBSIDIARIES
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 1996 and 1995
(Dollars in Thousands)
(Unaudited)
1996 1995
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 719 $ 900
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 135 121
Gain on the sale of loans originated
for sale (68) (21)
Compensation on allocation of ESOP
shares 118 84
Amortization of restricted stock awards 185 -
Write-down of foreclosed real estate 14 14
(Gain) loss on the sale of foreclosed
real estate 1 (10)
Loss on loans held for sale 36 -
Loss on disposal of equipment 6 -
Deferred income taxes (519) 11
Depreciation and amortization on
premises and equipment 181 143
Amortization of deferred loan
origination fees (114) (104)
Amortization of excess servicing fees 10 11
Amortization of mortgage servicing
rights 10 -
Amortization of bond premiums and
discounts (3) -
Recognition of SAIF premium assessment 1,085 -
Loans originated for sale (15,810) (5,946)
Proceeds from the sale of loans
originated for sale 16,489 6,081
Changes in assets and liabilities:
Accrued interest receivable (92) (285)
Other assets 34 (113)
Income taxes payable, current 63 157
Accrued expenses and other
liabilities 159 435
------- ------
Net cash provided by operating
activities $ 2,639 $ 1,478
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan origination's and principal payments (8,272) (8,006)
Purchase of certificates of deposit (200) (800)
Purchase of securities available for sale (213) (210)
Purchase of securities held to maturity (3,749) (1,994)
Proceeds from principal repayments of
mortgage backed securities 332 68
Proceeds from the maturities of certificates
of deposit 800 100
Proceeds from the maturities of securities
held to maturity 2,600 2,000
Purchase of premises and equipment (538) (31)
Proceeds from the sale and redemption of
foreclosed real estate - 150
------- ------
Net cash (used in) investment activities $ (9,240) $(8,723)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 392 (1,473)
Net increase in advances from borrowers for
taxes and insurance 413 375
Proceeds from borrowed funds 16,000 2,500
Repayments on borrowed funds (10,500) (8,150)
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 financing activities 4,212 8,857
------- ------
Net increase (decrease) in cash and cash
equivalents (2,389) 1,612
CASH AND CASH EQUIVALENTS:
Beginning 8,192 1,480
------- ------
Ending $ 5,803 $ 3,092
======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments for:
Interest on deposits $ 5,147 $ 4,852
Interest on advances 725 914
Income taxes 981 374
======= ======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Transfers from loans to foreclosed real
estate $ 133 $ 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 84 70
======= ======
(See Notes to Consolidated Financial Statements)
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 September 30, 1996 and December 31, 1995.
September 30, 1996 December 31, 1995
--------------------- --------------------
Amount Percent Amount Percent
--------- ---------- -------- ----------
(Dollars in Thousands)
Tangible Capital:
Required $ 2,979 1.5% $ 2,898 1.50%
Actual 19,924 10.03% 20,029 10.37%
Excess 16,945 8.53% 17,131 8.87%
Core Capital
Required (1) $ 5,957 3.00% $ 5,796 3.00%
Actual 19,924 10.03% 20,029 10.37%
Excess 13,967 7.03% 14,233 7.37%
Risk-based Capital
Required $ 9,075 8.00% $ 8,610 8.00%
Actual 20,497 18.07% 20,511 19.06%
Excess 11,422 10.07% 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 September 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. EARNINGS PER SHARE
Earnings per share for the periods during 1996 were computed by dividing
net income or loss for the period by the weighted average common shares and
common share equivalents outstanding during the period. The earnings for the
periods during 1995 were computed by dividing net income from the date of
conversion, April 11, 1995, by the weighted average common shares outstanding
for the period.
NOTE 5. SELECTED FINANCIAL DATA
For the nine months
ended
September 30,
------------------------
1996 1995
---------- ---------
Return on assets
(ratio of net income to average total assets) (1) 0.49% 0.63%
(1)
Return on equity
(ratio of net income to average equity) (1) 3.38% 5.81%
Equity to assets ratio
(ratio of average equity to average total assets 14.53% 10.90%
Net interest margin
(ratio of net interest income to average
interest earning assets) (1) 3.35% 2.77%
(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 September 30, 1996 and December 31, 1995:
On September 30, 1996, a law was enacted which requires savings
institutions insured by the Savings Association Insurance Fund (SAIF) to pay a
none time special assessment to recapitalize the SAIF. The Bank's assessment
amounted to $1,085,000 which is recognized on the balance sheet as "SAIF premium
assessment payable". Total assets increased by $6,158,000 from $195,158,000 to
$201,316,000 at December 31, 1995 and September 30, 1996, respectively. Cash and
cash equivalents decreased by $2,389,000 during the first nine months of 1996 as
cash was used to fund new loan growth. Certificates of deposit declined by
$600,000 due to the maturity of these deposits. Securities that are classified
as held-to-maturity increased by $1,150,000 as additional securities were
purchased because of higher rates of return. Mortgage-backed securities that are
available for sale decreased by $335,000 primarily due to the repayment of
principal. Loans receivable increased by $8,082,000, from $169,670,000 at
December 31, 1995 to $177,752,000 at September 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 nine months
of 1996 and also due to an increase in consumer loans. Premises and equipment
increased by $352,000 during the first nine months of 1996. This increase is
primarily due to the upgrading by the Bank of 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 September 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
$599,616 and 0.24% and 0.34% respectively.
Page 7
Activity in the Company's allowance for loan losses for the nine months
ended September 30, 1996 and 1995 is summarized as follows:
1996 1995
---------------------------------
Balance on January 1, $ 512,430 $ 375,787
Provision for loan losses 135,000 121,000
Charge-off (54,604) (26,117)
Recoveries 6,790 7,417
---------- ---------
Balance on September 30, $ 599,616 $ 475,087
---------- ---------
Deposits increased by $392,000 from December 31, 1995 to September 30,
1996. Borrowed funds increased by $5,500,000 during the same period and were
used to fund the increase in loans receivable and the purchase of investment
securities.
Equity decreased by $1,084,000 from $28,852,000 at December 31, 1995 to
$27,768,000 at September 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 $44,000 decrease
in the unrealized appreciation on securities that are available for sale. These
decreases were partially offset by net income of $719,000 and the allocation of
$118,000 of employee stock ownership plan shares and the amortization of
$185,000 of restricted stock awards.
Comparison of Operating Results for the Three and Nine Month Periods Ended
September 30, 1996 and September 30, 1995.
Net Income. Net interest income increased by $281,000 and $988,000 for the
three and nine month periods, respectively, ended September 30, 1996 when
compared to the same periods in 1995 which resulted from an increase in the
Bank's loan portfolio and from the upward repricing of the Bank's adjustable
rate loan portfolio. These increases should have resulted in net income for the
three month and nine month periods ended September 30, 1996 of approximately
$456,000 and $1,319,000, respectively. As a result of the special SAIF
assessment, the Company reported a net operating loss for the quarter ended
September 30, 1996 of $144,000, or $0.07 per share and earnings of $719,000, or
$0.36 per share for the nine months ended September 30, 1996.
Interest Income. The Company's interest income increased by $226,000 and
$956,000 for the three and nine month periods ended September 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 and the
increase in loans receivable. To a lesser extent, the increase in interest
income was the result of an increase in investment securities.
Interest Expense. Interest rates on deposits increased during the first
nine months of 1995 and then remained relatively steady through January of 1996.
Beginning in February of 1996, interest rates on deposits began to decrease and
have continued to do so through September of 1996. Deposits increased during the
first quarter of 1996 by $1,983,000, from $146,686,000 on December 31, 1995 to
$148,669,000 on March 31, 1996. Since March 31, 1996, deposits have decreased by
$1,565,000 to $147,104,000 at September 30, 1996. The timing of the increase in
deposits during the first quarter of 1996 when interest rates on deposits were
relatively consistent with the interest rates on deposits during 1995, along
with the decrease in interest rates on deposits since February 1996, resulted in
an increase in interest expense on deposits of $139,000 for the nine month
period ended September 30, 1996 and a decrease of $30,000 in interest expense on
deposits for the three month period ended September 30, 1996 when compared to
the same periods in 1995. Interest on borrowed funds decreased by $25,000 and
$171,000 for the three and nine month periods ended September 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 nine months of 1996 when compared to the same
period in 1995 and to a lesser extent due to a decrease in the cost of borrowed
funds during 1996.
Page 8
Net Interest income. Net interest income increased by $281,000 and
$988,000 for the three and nine month periods ended September 30, 1996,
respectively, when compared to the three and nine month periods ended September
30, 1995. Again, this is primarily the result of the increase in loans
receivable and 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.
Provision for loan losses. The provision for loan losses remained constant
for the quarter ended September 30, 1996 and increased by $14,000 for the nine
month period ended September 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 remained constant for the quarter
ended September 30, 1996 and increased by $209,000 for the nine month period
ended September 30, 1996 when compared to the same periods during 1995. The
increase for the nine 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 capitalization of mortgage
servicing rights on the loans sold during the period. Insurance commissions
increased by $61,000 during the nine month period when compared to the same
period in 1995 due to the acquisition of additional local accounts by the Bank's
insurance subsidiary.
Non-interest Expense. As described above, the legislation that was signed
into law on September 30, 1996 resulted in a one time assessment to the Bank of
$1,085,000. This assessment is the primary reason for non-interest expense
increasing by $1,166,000 and $1,435,000 for the three and nine month periods
ended September 30, 1996, respectively, when compared to the same periods during
1995. Also, 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 nine month period ended
September 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 decreased by $341,000
for the quarter ended September 30, 1996 and by $71,000 for the nine month
period ended September 30, 1996 when compared to the same periods in 1995. These
decreases were the result of decreased income before taxes which resulted from
the special SAIF assessment.
Page 9
Non-performing Assets. The following table sets forth the amounts and categories
of non-performing assets at September 30, 1996 and December 31, 1995.
September 30, December 31,
1996 1995
------------- ------------
(Dollars in Thousands)
Non-accruing loans
One to four family real estate $ 317 $ 265
Non-residential property 19 0
Commercial - 7
Consumer 62 26
------- -------
Total $ 398 $ 298
------- -------
Accruing loans delinquent 90 days or more
One to four family real estate $ 142 $ -
Consumer - 1
------- -------
Total non-accrual and accrual loans $ 540 $ 299
======= =======
Repossessed property $ 147 $ 29
Other non-performing assets - -
------- -------
Total repossessed and non-performing
assets $ 147 $ 29
------- -------
Total non-performing assets $ 687 $ 328
======= =======
Total non-performing assets as a
percent of total assets 0.34% 0.17%
======= =======
Total non-performing loans $ 540 $ 299
======= =======
Total non-performing loans as
a percentage of total loans
receivable, net 0.30% 0.18%
======= =======
While the total amount of non-performing loans increased significantly at
September 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 September 30, 1996 were
$540,000 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 September 30, 1996 and 1995,
the amount 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 September
30, 1996, the Bank's liquidity, as measured for regulatory purposes, was 6.49%.
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 September 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 $532,000 at September 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 September 30, 1996, the Bank's tangible capital totaled
$19.9 million, or 10.03% of adjusted total assets, and core capital totaled
$19.9 million, or 10.03% of adjusted total assets, which substantially exceeded
the respective 1.5% tangible capital and 3.0% core capital requirements at that
date by $16.9 million and $14.0 million, respectively, or 8.53% and 7.03% of
adjusted total assets, respectively. The Bank's risk-based capital totaled $20.5
million at September 30, 1996 or 18.07% of risk-weighted assets, which exceeded
the current requirements of 8.0% of risk-weighted assets by $11.4 million or
10.07% 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 member of the Bank Insurance Fund (BIF) to $2,000 while maintaining an
average annual insurance premium of 0.23% of deposits for members of the Savings
Association Insurance Fund (SAIF). Legislation signed into law on September 30,
1996 provides for the recapitalization of SAIF by a one-time special assessment
of SAIF members of 0.657% of deposits on hand as of March 31, 1995. This
legislation also provides for the annual insurance premium for SAIF members to
decline from 0.23% to 0.064% of deposits effective January 1, 1997 with a
further reduction to 0.24% of deposits by January 1, 2000.
Page 11
WELLS FINANCIAL CORP. and SUBSIDIARIES
September 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. None.
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.
By: /s/ Lawrence H. Kruse Date: November 13, 1996
--------------------- -----------------------
Lawrence H. Kruse
President and Chief Executive Officer
By: /s/ James D. Moll Date: November 13, 1996
--------------------- -----------------------
James D. Moll
Treasurer and Principal Financial
& Accounting Officer
Page 13