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 March 31, 2003
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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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
53 1st Street S.W., P.O. Box 310, Wells MN 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 shares outstanding of each of the issuer's classes of common stock
as of May 5, 2003:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,130,886 Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
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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 9-14
Item 3. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
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WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, 2003 and December 31, 2002
(Dollars in Thousands)
(Unaudited)
ASSETS
2003 2002
--------- ---------
Cash, including interest-bearing accounts
March 31, 2003 $45,636; December 31, 2002 $35,178 $ 46,560 $ 36,571
Certificates of deposit 200 200
Securities available for sale, at fair value 20,315 19,856
Federal Home Loan Bank Stock, at cost 1,875 1,875
Loans held for sale 14,439 9,695
Loans receivable, net 135,662 145,586
Accrued interest receivable 1,233 1,387
Foreclosed real estate 417 209
Premises and equipment 3,400 2,975
Mortgage servicing rights, net 2,242 2,179
Other assets 115 83
--------- ---------
TOTAL ASSETS $ 226,458 $ 220,616
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 172,671 $ 169,126
Borrowed funds 23,000 23,000
Advances from borrowers for taxes and insurance 2,129 1,347
Deferred income taxes 1,301 1,376
Accrued interest payable 126 50
Accrued expenses and other liabilities 1,348 494
--------- ---------
TOTAL LIABILITIES 200,575 195,393
--------- ---------
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 16,959 16,985
Retained earnings, substantially restricted 24,950 24,287
Accumulated other comprehensive income 627 746
Unearned ESOP shares - (29)
Unearned compensation restricted stock awards (117) (138)
Treasury stock, at cost, 1,056,614 shares at March 31, 2003, and
1,062,435 shares at December 31, 2002 (16,755) (16,847)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 25,883 25,223
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 226,458 $ 220,616
========= =========
(See Notes to Consolidated Financial Statements)
1
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Income
Three Months Ended March 31, 2003 and 2002
(Dollars in thousands, except per share data)
(Unaudited)
2003 2002
---------- ----------
Interest and dividend income
Loans receivable:
First mortgage loans $ 1,939 $ 2,375
Consumer and other loans 721 786
Investment securities and other
interest bearing deposits 340 391
---------- ----------
Total interest income 3,000 3,552
---------- ----------
Interest expense
Deposits 986 1,389
Borrowed funds 307 307
---------- ----------
Total interest expense 1,293 1,696
---------- ----------
Net interest income 1,707 1,856
Provision for loan losses -- 23
---------- ----------
Net interest income after provision for
loan losses 1,707 1,833
---------- ----------
Noninterest income
Gain on sale of loans originated for sale 820 487
Loan origination and commitment fees 587 305
Loan servicing fees 218 154
Insurance commissions 94 80
Fees and service charges 220 201
Other 30 8
---------- ----------
Total noninterest income 1,969 1,235
---------- ----------
Noninterest expense
Compensation and benefits 911 787
Occupancy and equipment 261 233
Data processing 125 136
Advertising 59 46
Amortization and valuation adjustments for
mortgage servicing rights 519 119
Other 341 298
---------- ----------
Total noninterest expense 2,216 1,619
---------- ----------
Income before income taxes 1,460 1,449
Income tax expense 572 596
---------- ----------
Net Income $ 888 $ 853
========== ==========
Cash dividend declared per common share $ 0.20 $ 0.18
========== ==========
Earnings per share
Basic $ 0.79 $ 0.73
========== ==========
Diluted $ 0.77 $ 0.71
========== ==========
Weighted average number of common shares outstanding:
Basic 1,125,866 1,162,394
========== ==========
Diluted 1,147,342 1,194,997
========== ==========
(See Notes to Consolidated Financial Statements)
2
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2003 and 2002
(Dollars in Thousands)
(Unaudited)
2003 2002
---------- ----------
Net Income $ 888 $ 853
Other comprehensive income:
Unrealized appreciation (depreciation) on
securities available for sale (202) (212)
Related deferred income taxes 83 87
---------- ----------
Comprehensive income $ 769 $ 728
========== ==========
(See Notes to Consolidated Financial Statements)
3
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2003
(Dollars in Thousands)
(Unaudited)
Unearned Unearned
Accumulated Employee Compensation Total
Additional Other Stock Restricted Stock-
Common Paid-In Retained Comprehensive Ownership Stock Treasury holders'
Stock Capital Earnings Income Plan shares Awards Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 219 $ 16,985 $ 24,287 $ 746 $ (29) $ (138) $(16,847) $25,223
Net income for the three
months ended March 31, 2003 - - 888 - - - - 888
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - (119) - - - (119)
Options exercised - (76) - - - - 92 16
Amortization of unearned
compensation - - - - - 21 - 21
Dividends on common stock - - (225) - - - - (225)
Allocated employee stock
ownership plan shares - 50 - - 29 - - 79
-------------------------------------------------------------------------------------------------
Balance March 31, 2003 $ 219 $ 16,959 $ 24,950 $ 627 $ - $ (117) $(16,755) $25,883
=================================================================================================
(See Notes to Consolidated Financial Statements)
4
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002
(Dollars in Thousands)
(Unaudited)
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 888 $ 853
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses - 23
(Gain) on the sale of loans originated for sale (820) (487)
Amortization and valuation adjustments for mortgage
servicing rights 519 119
Compensation on allocation of ESOP shares 79 72
Amortization of unearned compensation 21 17
Write-down of foreclosed real estate - 23
Deferred income taxes (75) (45)
Depreciation and amortization on premises and equipment 79 58
Amortization of deferred loan origination fees (21) (40)
Amortization of excess servicing fees, bond premiums and
discounts 19 1
Loans originated for sale (54,876) (28,781)
Proceeds from the sale of loans originated for sale 50,370 35,477
Changes in assets and liabilities:
Accrued interest receivable 154 (41)
Other assets 51 89
Accrued expenses and other liabilities 930 506
-------- --------
Net cash provided by (used in) operating activities (2,682) 7,844
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans $ 9,731 $ 3,350
Purchase of certificates of deposit (100) -
Purchase of securities available for sale (6,480) (11,044)
Proceeds from the maturities of certificates of deposit 100 -
Proceeds from the maturities of securities available for sale 5,800 2,773
Purchase of premises and equipment (504) (69)
Proceeds from the sale and redemption of foreclosed real estate 10 -
Investment in foreclosed real estate (4) (4)
-------- --------
Net cash provided by (used in) investing activities 8,553 (4,994)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 3,545 $ (1,573)
Net increase in advances from borrowers
for taxes and insurance 782 885
Options exercised 16 391
Purchase of treasury stock - (172)
Dividends on common stock (225) (209)
-------- --------
Net cash provided by (used in) financing activities 4,118 (678)
-------- --------
Net increase in cash and cash equivalents 9,989 2,172
CASH AND CASH EQUIVALENTS:
Beginning 36,571 38,070
-------- --------
Ending $ 46,560 $ 40,242
======== ========
(See Notes to Consolidated Financial Statements)
5
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
Three Months Ended March 31, 2003 and 2002
(Dollars in Thousands)
(Unaudited)
2003 2002
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 910 $ 1,334
Interest on borrowed funds 307 307
Income taxes 174 95
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 214 $ 73
Allocation of ESOP shares to participants 29 32
Net change in unrealized appreciation on securities available for sale (119) (125)
======= =======
(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., Wells Insurance Agency, Inc and
Wells REIT Holding, LLC.
NOTE 2. REGULATORY CAPITAL
The following table presents the Bank's regulatory capital amounts and
percents at March 31, 2003 and December 31, 2002.
March 31, 2003 December 31, 2002
Amount Percent Amount Percent
------------------------------------------------------------------
Tier 1 (Core) Capital
Required $ 8,809 4.00% $ 8,629 4.00%
Actual 19,459 8.84% 19,245 8.92%
Excess 10,650 4.84% 10,616 4.92%
Risk-based Capital
Required 10,853 8.00% 10,956 8.00%
Actual 20,376 15.02% 20,153 14.72%
Excess 9,523 7.02% 9,197 6.72%
7
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to consolidated Financial Statements Continued
(Unaudited)
NOTE 3. EARNINGS PER SHARE
Earnings per share are calculated and presented in accordance with FASB
Statement No. 128, Earnings per Share. The Statement requires the presentation
of earnings per share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic earnings per-share amounts. All other entities are
required to present basic and diluted earnings per-share amounts. Diluted
per-share amounts assume the conversion, exercise or issuance of all potential
common stock instruments unless the effect is to reduce a loss or increase the
income per common share from continuing operations.
A reconciliation of the common stock share amounts used in the
calculation of basic and diluted earnings per share is presented in the
following chart.
Number of Shares
Three months ended
March 31,
-------------------------------
2003 2002
-------------------------------
Basic EPS 1,125,866 1,162,394
Effect of dilutive securities:
Stock options 21,476 32,603
-------------------------------
Diluted EPS 1,147,342 1,194,997
===============================
NOTE 4. SELECTED FINANCIAL RATIOS
For the three months ended
March 31,
2003 2002
--------------------------
Return on assets
(ratio of net income to average total assets) (1) 1.59% 1.48%
Return on equity
(ratio of net income to average equity) (1) 13.86% 14.18%
Equity to assets ratio
(ratio of average equity to average total assets) 11.43% 10.45%
Net interest margin
(ratio of net interest income to average interest earning assets) (1) 3.17% 3.42%
(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 were provided to
the Bank in exchange for all of the Bank's stock. The consolidated financial
statements included herein are for the Company, the Bank and the Bank's wholly
owned subsidiaries, Greater Minnesota Mortgage, Inc., Wells Insurance Agency,
Inc and Wells REIT Holding, LLC.
The income of the Company is derived primarily from the operations of
the Bank and the Bank's subsidiaries, and to a lesser degree from interest
income from securities and certificates of deposit with other banks. The Bank's
net income is primarily dependent upon the difference (or spread) between the
average yield earned on loans, investments and mortgage-backed securities and
the average rate paid on deposits and borrowings, as well as the relative
amounts of such assets and liabilities. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. Net income is also affected by, among other things,
provision for loan losses, gains on the sale of interest earning assets, service
charges, servicing fees, subsidiary activities, operating expenses, and income
taxes.
The Bank has eight full service offices located in Faribault, Martin,
Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota and one loan
origination office in Dakota County, Minnesota.
The Company may from time to time make written or oral "forward-looking
statements" including statements contained in this report and in other
communications by the Company which are made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements, such as statements of the Company's plans,
objectives, estimates and intentions, involve risks and uncertainties and are
subject to change based on various important factors (some of which are beyond
the Company's control). The following factors, among others, could cause the
Company's financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements: the strength of the United States economy in general and the
strength of the local economies in which the Company conducts operations; the
effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System, inflation, interest rate, market and monetary fluctuations; the
timely development of and acceptance of new products and services of the Company
and the perceived overall value of the products and services by users, including
the features, pricing and quality compared to competitor's products and
services; the willingness of users to substitute competitors' products and
services for the Company's products and services; the success of the Company in
gaining regulatory approval of its products and services, when required; the
impact of changes in financial services' laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; changes in consumer spending and savings habits; and the success
of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
9
Critical Accounting Estimates:
The consolidated financial statements include amounts that are based on
informed judgments of management. These estimates and judgments are the result
of management's need to estimate the effect of matters that are inherently
uncertain. Therefore, actual results could vary significantly from the estimates
used. Management considers the following items to be the critical accounting
estimates contained in the consolidated financial statements.
Allowance for Loan Loss. The allowance for loan loss is based on
management's periodic review of the loan portfolio. In evaluating the adequacy
of the allowance for loan loss, management considers factors including, but not
limited to, specific loan impairment, historical loss experience, the size and
composition of the loan portfolio and current economic conditions. Although
management believes that the allowance for loan loss is maintained at an
adequate level, there can be no assurance that further additions will not be
made to the allowance and that losses will not exceed the estimated amounts.
Mortgage Servicing Rights. Mortgage servicing rights are capitalized
and then amortized over the period of estimated servicing income. Management
periodically evaluates its capitalized mortgage servicing rights for impairment.
The valuation of mortgage servicing rights is based on estimated prepayment
speeds, ancillary income received from servicing the loans and current interest
rates. Changes in these factors from the estimates used may have a material
effect on the valuation of the mortgage servicing rights. Although management
believes that the assumptions used to determine the value of the mortgage
servicing rights are reasonable, future material adjustments may be necessary if
economic conditions vary from those used to estimate the value of the mortgage
servicing rights.
Comparison of Financial Condition at March 31, 2003 and December 31, 2002:
Total assets increased by $5,842,000, from $220,616,000 at December 31,
2002 to $226,458,000 at March 31, 2003. This increase was primarily the result
of an increase of $9,989,000 in cash. Cash increased, primarily, due to an
increase in deposits by the Company's customers of $3,545,000 and a decrease in
total loans of $5,180,000. Due to the continued refinance market, loans held for
sale increased by $4,744,000 from December 31, 2002 to March 31, 2003 while
loans receivable decreased by $9,924,000 during the same period. Due to lower
interest rates on residential mortgages, management continued to sell to the
secondary market the majority of the residential mortgage loans that were
originated during the first quarter of 2003. Included in the loans that were
originated and sold during the quarter were loans from the Company's mortgage
loan portfolio that were refinanced resulting in 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. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of the
underlying collateral, and current economic conditions. As of March 31, 2003 and
December 31, 2002, the balances in the allowance for loan losses and the
allowance for loan losses as a percentage of total loans were $917,000 and
$908,000 and 0.61% and 0.62%, respectively.
Loans on which the accrual of interest has been discontinued amounted
to $619,000 and $428,000 at March 31, 2003 and December 31, 2002, 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 March 31,
2003 and December 31, 2002.
Liabilities increased by $5,182,000 from $195,393,000 at December 31,
2002 to $200,575,000 at March 31, 2003. This increase was primarily due to a
$3,545,000 increase in deposits. The Company has been actively promoting its
demand deposit and saving accounts as they provide a lower cost of funds than
other deposit accounts. During the first quarter of 2003, the balance in the
Company's demand deposit and savings accounts increased by $4,169,000 and
$1,711,000, respectively. Partially offsetting this increase was a $2,335,000
decrease in certificates of deposit.
10
Equity increased by $660,000 from $25,223,000 at December 31, 2002 to
$25,883,000 at March 31, 2003. The increase in equity was primarily the result
of net income for the first three months of 2003 of $888,000 being partially
offset by the payment of $225,000 in cash dividends. On April 16, 2003, the
Board of Directors of the Company declared a $0.20 per share cash dividend to be
paid on May 15, 2003 to the stockholders of record on May 1, 2003. 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-Month Periods Ended March 31, 2003
and March 31, 2002.
Net Income. Net income increased by $35,000, or 4.1% for the quarter
ended March 31, 2003 when compared to the same quarter during 2002. The increase
in net income for the first quarter of 2003 when compared to the first quarter
of 2002 was primarily due to an increase of $734,000 in noninterest income being
offset by an increase of $597,000 in noninterest expense and a decrease in net
interest income after provision for loan losses of $126,000.
Interest Income. Interest income decreased by $552,000, or 15.5% for
the quarter ended March 31, 2003 when compared to the same period in 2002. The
decrease in interest income resulted from a $501,000 decrease in interest income
from the Company's loan portfolio which was the result of a decrease in the
average balance of the Company's loan portfolio during the first quarter of 2003
when compared to the first quarter of 2002 and, to a lesser extent, due to a
general decrease in the yield on the Company's loan portfolio. Also contributing
to the decrease in interest income was a $51,000 decrease in interest income
from investment securities and interest bearing deposits. The decrease in
interest income from investment securities and interest bearing deposits was the
result of a general decrease in the yield on these investments during the first
quarter of 2003 when compared to the same period in 2002.
Interest Expense. Total interest expense decreased by $403,000, or
23.8%, for the quarter ended March 31, 2003 when compared to the same quarter in
2002 due to a decrease in interest expense on deposits. The decrease in interest
expense on deposits was primarily the result of a decrease in the average rate
paid on deposits.
Net Interest income. Net interest income decreased by $149,000, or
8.0%, for the three month period ended March 31, 2003 when compared to the same
period in 2002 due to the changes in interest income and interest expense
described above.
Provision for loan losses. The provision for loan losses decreased by
$23,000 for the quarter ended March 31, 2003 when compared to the same period in
2002. Management evaluates the quality of the loan portfolio on a quarterly
basis to identify and determine the adequacy of the allowance for loan loss.
Classified loans were 1.3% and 1.1% of total loans at March 31, 2003 and
December 31, 2002, respectively. Nonaccrual loans were $619,000 and $428,000 at
March 31, 2003 and December 31, 2002, respectively. The provision reflects
management's monitoring of the allowance for loan losses in relation to the size
and quality of the loan portfolio and adjusts the provision for loan losses to
adequately provide for loan losses. Management determines the amounts of the
allowance for loan losses in a systematic manner that includes self-correcting
policies that adjust loss estimation methods on a periodic basis. 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.
11
Activity in the Company's allowance for loan losses for the three
months ended March 31, 2003 and 2002 is summarized as follows:
2003 2002
--------- ---------
Balance on January 1, $ 908,111 $ 951,862
Provision for loan losses - 22,500
Charge-offs (201) (29,472)
Recoveries 9,198 5,862
--------- ---------
Balance on March 31, $ 917,108 $ 950,752
========= =========
Noninterest Income. Noninterest income increased by $734,000, or 59.4%,
for the three month period ended March 31, 2003 when compared to the same period
in 2002 primarily due to increases in the gain on sale of loans originated for
sale and loan origination and commitment fees. Due to continued low interest
rates on residential mortgage loans during the first three months of 2003, the
Company sold to the secondary market a larger volume of loans during that period
when compared to the same period in 2002. Market conditions during the first
quarter of 2003 when compared to the first quarter of 2002 allowed the Company
to obtain a more favorable price on the loans sold to the secondary market which
also contributed to the increase in gain on sale of loans originated for sale
and loan origination and commitment fees. Also contributing to the increase in
noninterest income was a $64,000 increase in loan servicing fees which resulted
from an increase in the average amount of loans serviced by the Company during
the first quarter of 2003 when compared to the same period in 2002.
Noninterest Expense. Noninterest expense increased by $597,000, or
36.9%, for the three months ended March 31, 2003 when compared to the same
period during 2002 primarily due to an increase of $400,000 in the amortization
and valuation adjustments for mortgage servicing rights. The amortization of
mortgage servicing rights increased by $250,000 and the valuation allowance
increased by $150,000 for the first quarter of 2003 when compared to the first
quarter of 2002. The increase in the amortization and valuation adjustments in
mortgage servicing rights is primarily due to increased prepayments resulting
from refinancing due to the low interest rate environment. Management
anticipates that prepayments will continue if rates remain at these historically
low levels.
Income Tax Expense. Income tax expense decreased by $24,000 for the
three month period ended March 31, 2003 when compared to the same period in
2002. The decrease in income tax expense was primarily due to the Company
reducing its effective income tax rate by using certain tax strategies to reduce
its taxable income.
12
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at March 31, 2003 and December 31, 2002.
March 31, 2003 December 31, 2002
-------------- -----------------
(Dollars in Thousands)
Non-accruing loans
One to four family real estate $ 221 $ 287
Agricultural real estate - -
Commercial 341 -
Consumer 57 141
------ ------
Total $ 619 $ 428
------ ------
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $ 252 $ 249
Commercial real estate - -
------ ------
Total $ 252 $ 249
------ ------
Total non-accrual and accruing loans
past due 90 days or more $ 871 $ 677
====== ======
Repossessed and non-performing assets
Repossessed property $ 417 $ 209
Other non-performing assets - -
------ ------
Total repossessed and non-performing assets $ 417 $ 209
------ ------
Total non-performing assets $1,288 $ 886
====== ======
Total non-accrual and accruing loans
past due 90 days or more to net loans 0.58% 0.44%
====== ======
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.38% 0.31%
====== ======
Total nonperforming assets to total assets 0.57% 0.40%
====== ======
Financial Standards Board Statement No. 114, Accounting by Creditors
for Impairment of a Loan, and Statement No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, require that impaired
loans within the scope of these Statements be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate; or as a practical expedient, either at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent. At
March 31, 2003 and December 31, 2002, the amount of loans that would be
classified as impaired under these Statements is considered to be immaterial.
13
Liquidity and Capital Resources:
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.
On December 21, 2000, the Company approved a stock buy back program in
which up to 125,000 shares of the common stock of the Company could be acquired.
During 2001 and 2002 the Company bought 116,140 shares and 8,860 shares,
respectively, which completed this buy back program. During 2002 the Company
approved stock buy back programs in which up to 120,000 shares of the common
stock of the Company could be acquired. During 2002 the Company bought 80,000
shares of its common stock under these buy back programs.
The Company paid a cash dividend of $0.20 per share on February 24,
2003. On April 16, 2003 the Company declared a cash dividend of $0.20 per share
payable on May 15, 2002 to stockholders of record on May 1, 2003. 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 like the Bank are required 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 March 31, 2003, the Bank exceeded all current capital
requirements. See Note 2 in the notes to Consolidated Financial Statements.
14
WELLS FINANCIAL CORP. and SUBSIDIARIES
Item 3. Controls and Procedures.
- ------- ------------------------
a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-QSB, the Registrant's principal executive
officer and principal financial officer have concluded that the
Registrant's disclosure controls and procedures (as defined in Rules
13a-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules
and forms.
b) Changes in internal controls. There were no significant changes in the
Registrant's internal controls or other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
15
WELLS FINANCIAL CORP. and SUBSIDIARIES
March 31, 2003
FORM 10-QSB
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
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: 99.1 Certification pursuant to 18 U.S.C. ss.
1350 of the Sarbanes Oxley Act of 2002
b. No reports on Form 8-K were filed
No other information is required to be filed under Part II of the form
- --------------------------------------------------------------------------------
16
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/ Lonnie R. Trasamar Date: May 5, 2003
------------------------------------------------------ -----------
Lonnie R. Trasamar
President and Chief Executive Officer
By: /s/ James D. Moll Date: May 5, 2003
------------------------------------------------------ -----------
James D. Moll
Treasurer and Principal Financial & Accounting Officer
SECTION 302 CERTIFICATION
I, Lonnie R. Trasamar, President and Chief Executive Officer of Wells
Financial Corp., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Wells Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 5, 2003 /s/ Lonnie R. Trasamar
- ------------------ ----------------------
Lonnie R. Trasamar
President and Chief Executive Officer
SECTION 302 CERTIFICATION
I, James D. Moll, Treasurer and Principal Financial and Accounting
Officer of Wells Financial Corp., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Wells Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 5, 2003 /s/ James D. Moll
- ------------------ ----------------------------
James D. Moll
Treasurer and Principal Financial and Accounting Officer