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 June 30, 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
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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 August 1, 2003:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,133,172 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 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3. Controls and Procedures 17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures
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WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 2003 and December 31, 2002
(Dollars in Thousands)
(Unaudited)
ASSETS
2003 2002
--------- ---------
Cash, including interest-bearing accounts
June 30, 2003 $38,376; December 31, 2002 $35,178 $ 39,439 $ 36,571
Certificates of deposit 200 200
Securities available for sale, at fair value 23,157 19,856
Federal Home Bank Stock 1,875 1,875
Loans held for sale 13,445 9,695
Loans receivable, net 138,362 145,586
Accrued interest receivable 1,342 1,387
Foreclosed real estate 330 209
Premises and equipment 3,421 2,975
Mortgage servicing rights 2,505 2,179
Other assets 106 83
--------- ---------
TOTAL ASSETS $ 224,182 $ 220,616
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 171,257 $ 169,126
Borrowed funds 23,000 23,000
Advances from borrowers for taxes and insurance 1,434 1,347
Deferred Income taxes 1,384 1,376
Accrued interest payable 198 50
Accrued expenses and other liabilities 232 494
--------- ---------
TOTAL LIABILITIES 197,505 195,393
--------- ---------
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 16,970 16,985
Retained earnings, substantially restricted 25,728 24,287
Accumulated other comprehensive income 602 746
Unearned ESOP shares - (29)
Unearned compensation restricted stock awards (96) (138)
Treasury stock, at cost, 1,056,064 shares at June 30, 2003,
and 1,062,435 shares at December 31, 2002 (16,746) (16,847)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 26,677 25,223
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 224,182 $ 220,616
========= =========
(See Notes to Consolidated Financial Statements)
1
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest and dividend income
Loans receivable:
First mortgage loans $ 1,876 $ 2,323 $ 3,815 $ 4,698
Consumer and other loans 709 780 1,419 1,566
Investment securities and other
interest bearing deposits 316 420 653 811
---------- ---------- ---------- ----------
Total interest income 2,901 3,523 5,887 7,075
---------- ---------- ---------- ----------
Interest Expense
Deposits 897 1,290 1,880 2,679
Borrowed funds 310 310 617 617
---------- ---------- ---------- ----------
Total interest expense 1,207 1,600 2,497 3,296
---------- ---------- ---------- ----------
Net interest income 1,694 1,923 3,390 3,779
Provision for loan losses - - - 23
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 1,694 1,923 3,390 3,756
---------- ---------- ---------- ----------
Noninterest income
Gain on sale of loans originated for sale 777 268 1,597 755
Loan origination and commitment fees 814 195 1,401 500
Loan servicing fees 231 165 449 319
Insurance commissions 117 100 211 180
Fees and service charges 196 201 416 402
Other 41 26 69 34
---------- ---------- ---------- ----------
Total noninterest income 2,176 955 4,143 2,190
---------- ---------- ---------- ----------
Noninterest expense
Compensation and benefits 1,054 882 1,966 1,669
Occupancy and equipment 271 215 532 448
Data processing 127 101 252 237
Advertising 74 54 133 100
Amortization & valuation adjustments
for mortgage servicing rights 85 130 604 249
Other 593 298 920 596
---------- ---------- ---------- ----------
Total noninterest expense 2,204 1,680 4,407 3,299
---------- ---------- ---------- ----------
Income before taxes 1,666 1,198 3,126 2,647
Income tax expense 662 514 1,234 1,110
---------- ---------- ---------- ----------
Net Income $ 1,004 $ 684 $ 1,892 $ 1,537
========== ========== ========== ==========
Cash dividends declared per share $ 0.20 $ 0.18 $ 0.40 $ 0.36
========== ========== ========== ==========
Earnings per share
Basic earnings per share $ 0.89 $ 0.58 $ 1.68 $ 1.31
========== ========== ========== ==========
Diluted earnings per share $ 0.87 $ 0.56 $ 1.64 $ 1.27
========== ========== ========== ==========
Weighted average number of common shares outstanding:
Basic 1,131,085 1,179,732 1,128,490 1,172,861
========== ========== ========== ==========
Diluted 1,159,797 1,214,891 1,153,604 1,210,548
========== ========== ========== ==========
(See Notes to Consolidated Financial Statements)
2
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Net Income $ 1,004 $ 684 $ 1,892 $ 1,537
Other comprehensive income:
Unrealized appreciation (depreciation) on
securities available for sale (42) 227 (244) 15
Related deferred income taxes 17 (93) 100 (6)
------- ------- ------- -------
Comprehensive income $ 979 $ 818 $ 1,748 $ 1,546
======= ======= ======= =======
(See Notes to Consolidated Financial Statements)
3
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2003
(Dollars in Thousands)
(Unaudited)
Unearned
Accumu- Employee Unearned
lated Stock Compen-
Other Owner- sation Total
Additional Compre- ship Restricted Stock
Common Paid-In Retained hensive Plan Stock Treasury holders'
Stock Capital Earnings Income shares Awards Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 219 $ 16,985 $ 24,287 $ 746 $ (29) $ (138) $(16,847) $ 25,223
Net income for the six months
ended June 30, 2003 - - 1,892 - - - - 1,892
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - (144) - - - (144)
Options exercised - (79) - - - - 101 22
Tax benefit related to
exercised options - 14 - - - - - 14
Amortization of unearned
compensation - - - - - 42 - 42
Dividends on common stock - - (451) - - - - (451)
Allocated employee stock
ownership plan shares - 50 - - 29 - - 79
----------------------------------------------------------------------------------------------------
Balance June 30, 2003 $ 219 $ 16,970 $ 25,728 $ 602 $ - $ (96) $ (16,746) $ 26,677
====================================================================================================
(See Notes to Consolidated Financial Statements)
4
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Six Months Ended June 30, 2003 and 2002
(Dollars in Thousands)
(Unaudited)
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,892 $ 1,537
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 (1,597) (755)
Compensation on allocation of ESOP shares 79 151
Amortization of restricted stock awards 42 34
Tax benefit from exercised options 14 128
Gain on the sale of foreclosed real estate (2) (7)
Write-down of foreclosed real estate - 30
Deferred income taxes 108 71
Depreciation on premises and equipment 172 115
Amortization of deferred loan origination fees (32) (70)
Amortization and valuation adjustments for mortgage servicing
rights 604 249
Amortization of securities premiums and discounts 57 9
Loans originated for sale (128,354) (48,807)
Proceeds from the sale of loans originated for sale 125,270 55,690
Changes in assets and liabilities:
Accrued interest receivable 45 (453)
Other assets (22) 13
Accrued expenses and other liabilities (114) 284
--------- ---------
Net cash provided by (used in) operating activities (1,838) 8,242
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans $ 7,042 $ 4,762
Purchase of certificates of deposit (100) -
Purchase of securities available for sale (13,974) (15,302)
Proceeds from the maturities of certificates of deposit 100 -
Proceeds from the maturities of securities available for sale 10,372 5,595
Proceeds from the sale and redemption of foreclosed real estate 102 220
Purchase of premises and equipment (618) (130)
Investment in foreclosed real estate (7) (4)
--------- ---------
Net cash provided by (used in) investment activities 2,917 (4,859)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 2,131 $ (5,792)
Net increase (decrease) in advances from borrowers
for taxes and insurance 87 (31)
Options exercised 22 396
Purchase of treasury stock - (172)
Dividends on common stock (451) (420)
--------- ---------
Net cash (used in) financing activities 1,789 (6,019)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,868 (2,636)
CASH:
Beginning 36,571 38,070
--------- ---------
Ending $ 39,439 $ 35,434
========= =========
(See Notes to Consolidated Financial Statements)
5
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Six Months Ended June 30, 2003 and 2002
(Dollars in Thousands)
(Unaudited)
2003 2002
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 1,732 $ 2,569
Interest on borrowed funds 617 617
Income taxes 1,156 801
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 214 $ 158
Allocation of ESOP shares to participants 29 63
Net change in unrealized appreciation on securities available for sale (144) 9
======= =======
(See Notes to Consolidated Financial Statements)
6
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
NOTE 1. SELECTED ACCOUNTING POLICIES
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.
Employee stock plans
At June 30, 2003, the Company had three stock-based compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Account for Stock Issued to Employees, and
related interpretations. Accordingly, no stock-based employee compensation cost
has been recognized, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share had compensation cost for all of the stock-based compensation plans been
determined based on the grant date fair values of awards (the method described
in FASB Statement No. 123, Accounting for Stock-Based Compensation):
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- -------- --------- ---------
Net Income:
As reported $ 1,004 $ 684 $ 1,892 $ 1,537
Deduct total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (6) (7) (11) (14)
--------- -------- --------- ---------
Pro Forma 998 677 1,881 1,523
========= ======== ========= =========
Basic earnings per share:
As reported $ 0.89 $ 0.58 $ 1.68 $ 1.31
Pro forma 0.88 0.57 1.67 1.30
Diluted earnings per share:
As reported $ 0.87 $ 0.56 $ 1.64 $ 1.27
Pro forma 0.86 0.56 1.63 1.26
7
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
Use of estimates
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities s of the date of the statements of financial condition
and revenues and expenses for the reporting period. Actual results could differ
from those estimates. Two material estimates that are particularly susceptible
to significant change in the near term relate to the determination of the
allowance for loan losses and the valuation of mortgage servicing rights.
Management believes that the allowance for loan loss is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowances may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
loss. Such agencies may require the Company to recognize additions to the
allowance for loan loss based on their judgments about information available to
them at the time of their examination.
Mortgage servicing rights are subject to change based primarily on
changes in the mix of loans, interest rates, prepayment speeds, or default rates
from the estimates used in the valuation of the mortgage servicing rights. Such
changes may have a material effect on the amortization and valuation of mortgage
servicing rights. Although management believes that the assumptions used to
evaluate the mortgage servicing rights for impairment are reasonable, future
adjustment may be necessary if future conditions differ substantially from the
economic estimates used to determine the value of the mortgage servicing rights.
NOTE 2. REGULATORY CAPITAL
The following table presents the Bank's regulatory capital amounts and
percents at June 30, 2003 and December 31, 2002.
June 30, 2003 December 31, 2002
Amount Percent Amount Percent
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Tier 1 (Core) Capital
Required $ 8,709 4.00% $ 8,629 4.00%
Actual 19,573 8.99% 19,245 8.92%
Excess 10,864 4.99% 10,616 4.92%
Risk-based Capital
Required 11,189 8.00% 10,956 8.00%
Actual 20,476 14.64% 20,153 14.72%
Excess 9,287 6.64% 9,197 6.72%
8
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(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 June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Basic EPS 1,131,085 1,179,732 1,128,490 1,172,861
Effect of dilutive securities:
Stock options 28,712 35,159 25,114 37,687
--------------------- ---------------------
Diluted EPS 1,159,797 1,214,891 1,153,604 1,210,548
===================== =====================
NOTE 4. SELECTED FINANCIAL DATA
For the six months ended
June 30,
2003 2002
----------------------
Return on assets
(ratio of net income to average total assets) (1) 1.69% 1.34%
Return on equity
(ratio of net income to average equity) (1) 14.57% 12.57%
Equity to assets ratio
(ratio of average equity to average total assets) 11.59% 10.67%
Net interest margin
(ratio of net interest income to average interest earning assets) (1) 3.14% 3.48%
(1) Net income and net interest income have been annualized.
9
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. and 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.
10
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 estimates may have a material effect on the valuation of
the mortgage servicing rights. Although management believes that the estimates
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 June 30, 2003 and December 31, 2002:
Total assets increased by $3,566,000, from $220,616,000 at December 31,
2002 to $224,182,000 at June 30, 2003. The increase in assets was primarily due
to increases of $2,868,000, $3,301,000 and $3,750,000 in cash, securities
available for sale and loans held for sale, respectively, being partially offset
by a $7,224,000 decrease in loans receivable. The decrease in loans receivable
resulted from the continued refinance market. 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
half of 2003. Included in the loans that were originated and sold during the
first half of 2003 were loans from the Company's mortgage loan portfolio that
were refinanced resulting in the decrease in loans receivable. Cash that was
received from the decrease in loans receivable and from an increase in deposits
was used to increase securities available for sale and cash.
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 any
underlying collateral, and current economic conditions. As of June 30, 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 $903,000 and
$908,000 and 0.59% and 0.58%, respectively.
Activity in the Company's allowance for loan losses for the six months
ended June 30, 2003 and 2002 is summarized as follows:
2003 2002
--------- ---------
Balance on January 1, $ 908,000 $ 952,000
Provision for loan losses - 23,000
Charge-offs (17,000) (57,000)
Recoveries 12,000 14,000
--------- ---------
Balance on June 30, $ 903,000 $ 932,000
========= =========
11
Loans on which the accrual of interest has been discontinued amounted
to $780,000 and $428,000 at June 30, 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 June 30,
2003 and December 31, 2002.
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 table below summarizes
capitalization, amortization and change in valuation of the Company's mortgage
servicing rights during the periods indicated.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Mortgage servicing rights
Balance at beginning of period $ 3,052,000 $ 2,140,000 $ 2,839,000 $ 1,850,000
Mortgage servicing rights capitalized 348,000 238,000 930,000 647,000
Amortization expense (515,000) (130,000) (884,000) (249,000)
----------- ----------- ----------- -----------
Balance at end of period $ 2,885,000 $ 2,248,000 $ 2,885,000 $ 2,248,000
=========== =========== =========== ===========
Valuation reserve
Balance at beginning of period $ (810,000) $ - $ (660,000) $ -
Additions - - (150,000) -
Subtractions 430,000 - 430,000 -
----------- ----------- ----------- -----------
Balance at end of period $ (380,000) $ - $ (380,000) $ -
=========== =========== =========== ===========
Mortgage Servicing Rights, net $ 2,505,000 $ 2,248,000 $ 2,505,000 $ 2,248,000
=========== =========== =========== ===========
Liabilities increased by $2,112,000 from $195,393,000 at December 31,
2002 to $197,505,000 at June 30, 2003. This increase is primarily due to a
$2,131,000 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 six months of 2003, the balance in the
Company's demand deposit and savings accounts increased by $5,270,000 and
$3,273,000, respectively. Partially offsetting the increases in demand deposit
and savings accounts was a $6,412,000 decrease in certificates of deposit.
Equity increased by $1,451,000 from $25,223,000 at December 31, 2002 to
$26,677,000 at June 30, 2003. The increase in equity was primarily the result of
net income for the first half of 2003 of $1,892,000 being partially offset by
the payment of $451,000 in cash dividends. On July 15, 2003, the Board of
Directors of the Company declared a $0.20 per share cash dividend to be paid on
August 15, 2003 to the stockholders of record on August 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 and Six-Month Periods Ended June
30, 2003 and June 30, 2002.
Net Income. Net income increased by $320,000, or 46.8% for the
three-month period ended June 30, 2003 when compared to the same period during
2002. The increase in net income for the second quarter of 2003 when compared to
the second quarter of 2002 was primarily due to an increase of $1,221,000 in
noninterest income being partially offset by an increase of $524,000 in
noninterest expense and a decrease in net interest income after provision for
loan losses of $229,000.
Net income for the six months ended June 30, 2003 increased by
$355,000, or 23.1%, when compared to the first six months of 2002. This increase
in net income was primarily due to an increase of $1,953,000 in noninterest
income being partially offset by an increase of $1,108,000 in noninterest
expense and a decrease in net interest income after provision for loan losses of
$366,000.
12
Interest Income. Interest income decreased by $622,000 and $1,188,000,
or 17.7% and 16.8%, for the three and six-month periods ended June 30, 2003,
respectively, when compared to the same periods in 2002. These decreases were
primarily the result of a decrease in interest income from the Company's loan
portfolio during the first six months of 2003 when compared to the same period
in 2002 due to a decrease in the average balance of the Company's loan portfolio
during the first six months of 2003 when compared to the first six months 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 $104,000 and $158,000 decrease in interest income from investment
securities and interest bearing deposits for the three and six months ended June
30, 2003, respectively. 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.
Interest Expense. Total interest expense decreased by $393,000 and
$799,000, or 24.6% and 24.2%, for the quarter and six months ended June 30,
2003, respectively, when compared to the same periods in 2002. The decrease in
interest expense was primarily the result of a decrease in the average rate paid
on deposits that resulted from a change in the composition of the Company's
deposits and a general decrease in market interest rates.
Net Interest income. Net interest income decreased by $229,000 and
$389,000, or 11.9% and 10.3%, for the three and six-month periods ended June 30,
2003, respectively, when compared to the same periods in 2002 due to the changes
in interest income and interest expense described above.
Provision for loan losses. The Company made no provision for loan
losses during the second quarter of 2003 or 2002. The provision for loan losses
decreased by $23,000 for the six months ended June 30, 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 1.6% and 1.1% of total loans at June 30, 2003 and
December 31, 2002, respectively. Nonaccrual loans were $780,000 and $428,000 at
June 30, 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.
Noninterest Income. Noninterest income increased by $1,221,000 and
$1,953,000, or 127.9% and 89.2%, for the three and six-month periods ended June
30, 2003, respectively, when compared to the same periods in 2002 primarily due
to increases in the gain on sale of loans originated for sale and loan
origination and commitment fees. Due to low interest rates on residential
mortgage loans during the first half 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 half of 2003 when compared to
the first half 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
the gain on sale of loans originated for sale and loan origination and
commitment fees. Also contributing to the increase in noninterest income was a
$66,000 and $130,000 increase in loan servicing fees for the quarter and six
months ended June 30, 2003, respectively, when compared to the same periods in
2002 which resulted from an increase in the average amount of loans serviced by
the Company during 2003.
13
Noninterest Expense. Noninterest expense increased by $524,000 and
$1,108,000, or 31.2% and 33.6%, for the three and six-months ended June 30,
2003, respectively, when compared to the same periods during 2002. These
increases were primarily the result of increases in other noninterest expense
and in compensation and benefits. The increase in other noninterest expense
resulted primarily from a $175,000 loss realized by the Company on one of its
customer's deposit accounts. The increase in compensation and benefits resulted
from annual compensation adjustments and increases in commissions paid to loan
officers for the origination of loans. Also affecting noninterest expense was
the amortization and valuation adjustments for mortgage servicing rights. The
amortization and valuation adjustments of mortgage servicing rights decreased by
$45,000 and increased by $355,000 for the quarter and six months ended June 30,
2003 when compared to the same periods in 2002. On a quarterly basis, the
Company evaluates its mortgage servicing rights for impairment. Due to changes
in estimates used to calculate the fair value of mortgage servicing rights
during the second quarter of 2003, the Company recorded a $430,000 recovery of
previously recorded impairments.
Income Tax Expense. Income tax expense increased by $148,000 and
$124,000 for the three and six-month periods ended June 30, 2003, respectively,
when compared to the same periods in 2002. These changes are the result of
increased income before taxes for the periods ended June 30, 2003 when compared
to the same periods in 2002. During 2003 the Company was able to reduce its
effective income tax rate by using certain tax strategies to reduce its taxable
income.
14
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at June 30, 2003 and December 31, 2002.
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in Thousands)
Non-accruing loans
One to four family real estate $ 260 $ 287
Commercial 295 -
Consumer 225 141
------ ------
Total $ 780 $ 428
------ ------
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $ 102 $ 249
------ ------
Total $ 102 $ 249
------ ------
Total non-accrual and accruing loans
past due 90 days or more $ 882 $ 677
====== ======
Repossessed and non-performing assets
Repossessed property $ 330 $ 209
Other non-performing assets - -
------ ------
Total repossessed and non-performing assets $ 330 $ 209
====== ======
Total non-performing assets $1,212 $ 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 0.39% 0.31%
====== ======
Total nonperforming assets to total assets 0.54% 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 June
30, 2003 and December 31, 2002, the value of loans that would be classified as
impaired under these Statements is considered to be immaterial.
15
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 and May 15, 2003. On July 15, 2003 the Company declared a cash dividend of
$0.20 per share payable on August 15, 2003 to stockholders of record on August
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 June 30, 2003, the Bank exceeded all current capital
requirements. See Note 2 in the notes to Consolidated Financial Statements.
The Office of Thrift Supervision (OTS) has adopted a core capital
requirement for savings institutions comparable to the requirement for national
banks. The OTS core capital requirement for the Bank is 4% of adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness. The Bank had core capital of 8.99% at June 30, 2003.
16
WELLS FINANCIAL CORP. and SUBSIDIARIES
Controls and Procedures
Item 3. Controls and Procedures.
- ------- ------------------------
a) Evaluation of disclosure controls and procedures. Based on their
-----------------------------------------------------
evaluation as of the end of the period covered by 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-15(e)
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.
17
WELLS FINANCIAL CORP. and SUBSIDIARIES
June 30, 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
---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on
April 16, 2003 at 4:00 p.m. The Meeting was for the purpose of
the election of two directors for terms to expire in 2006 and
ratification of the appointment of McGladrey & Pullen, LLP as
the Company's independent Auditors for the fiscal year ending
December 31, 2003.
The following is a record of the votes cast in the election of
directors of the Company:
For Withheld
--- --------
Lonnie R. Trasamar 982,869 24,305
Gerald D. Bastian 978,830 28,344
Accordingly, Lonnie R. Trasamar and Gerald D. Bastian were
declared to be duly elected directors of the Company for terms
terms to expire as stated above.
The following Directors continued in office - Randel I. Bichler,
Dale E. Stallkamp, Richard Mueller and David Buesing.
The following is a record of the votes cast for the
ratification of the appointment of McGladrey & Pullen, LLP as
the Company's independent auditors for 2003.
For: 999,661, Against: 6,328, Abstain: 1,185
18
WELLS FINANCIAL CORP. and SUBSIDIARIES
June 30, 2003
FORM 10-QSB
PART II. OTHER INFORMATION (continued)
- --------------------------
Item 5. Other information
- ------- -----------------
None
Item 6. Exhibits and Reports of Form 8-K
- ------- --------------------------------
a. Exhibits:
(i) Exhibit 31 - Section 302 certification
(ii) Exhibit 32 - Section 906 certification
b. (i) The Registrant filed a Form 8-K on April 28, 2003
pursuant to items 7 and 9 to report earnings for the
quarter ended March 31, 2003.
No other information is required to be filed under Part II of the form
================================================================================
19
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: August 1, 2003
------------------------------------------------ --------------
Lonnie R. Trasamar
President and Chief Executive Officer
By: /s/ James D. Moll Date: August 1, 2003
------------------------------------------------ --------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer