UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 7, 2003:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,135,327 Shares
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
WELLS FINANCIAL CORP. and SUBSIDIARY
[OBJECT OMITTED]
FORM 10-QSB
INDEX
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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 and Use of Proceeds 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 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures
================================================================================
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 2003 and December 31, 2002
(Dollars in Thousands)
(Unaudited)
ASSETS
2003 2002
--------- ---------
Cash, including interest-bearing accounts
September 30, 2003 $39,055; December 31, 2002 $35,178 $ 40,601 $ 36,571
Certificates of deposit 200 200
Securities available for sale, at fair value 24,576 19,856
Federal Home Loan Bank Stock, at cost 1,300 1,875
Loans held for sale 4,577 9,695
Loans receivable, net 143,335 145,586
Accrued interest receivable 1,161 1,387
Foreclosed real estate 195 209
Premises and equipment 3,536 2,975
Mortgage servicing rights, net 2,747 2,179
Other assets 225 83
--------- ---------
TOTAL ASSETS $ 222,453 $ 220,616
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 167,622 $ 169,126
Borrowed funds 23,000 23,000
Advances from borrowers for taxes and insurance 2,251 1,347
Deferred income taxes 1,389 1,376
Accrued interest payable 273 50
Accrued expenses and other liabilities 514 494
--------- ---------
TOTAL LIABILITIES 195,049 195,393
--------- ---------
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 16,938 16,985
Retained earnings, substantially restricted 26,636 24,287
Accumulated other comprehensive income 405 746
Unearned ESOP shares - (29)
Unearned compensation restricted stock awards (80) (138)
Treasury stock, at cost, 1,054,060 shares at September
30, 2003, and 1,062,435 shares at December 31, 2002 (16,714) (16,847)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 27,404 25,223
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 222,453 $ 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest and dividend income
Loans receivable:
First mortgage loans $ 1,674 $ 2,253 $ 5,489 $ 6,951
Consumer and other loans 698 829 2,117 2,395
Investment securities and other
Interest bearing deposits 275 387 928 1,198
---------- ---------- ---------- ----------
Total interest income 2,647 3,469 8,534 10,544
---------- ---------- ---------- ----------
Interest Expense
Deposits 763 1,211 2,643 3,890
Borrowed funds 314 314 931 931
---------- ---------- ---------- ----------
Total interest expense 1,077 1,525 3,574 4,821
---------- ---------- ---------- ----------
Net interest income 1,570 1,944 4,960 5,723
Provision for loan losses - - - 23
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 1,570 1,944 4,960 5,700
---------- ---------- ---------- ----------
Noninterest income
Gain on sale of loans originated for sale 974 319 2,571 1,074
Loan origination and commitment fees 670 426 2,071 926
Loan servicing fees 242 171 691 490
Insurance commissions 135 120 346 300
Fees and service charges 404 177 820 579
Other 66 26 135 60
---------- ---------- ---------- ----------
Total noninterest income 2,491 1,239 6,634 3,429
---------- ---------- ---------- ----------
Noninterest expense
Compensation and benefits 1,068 848 3,034 2,517
Occupancy and equipment 298 211 830 659
Data processing 106 101 358 338
Advertising 73 62 206 162
Amortization and valuation adjustments for
mortgage servicing rights 250 194 854 443
Other 439 344 1,359 940
---------- ---------- ---------- ----------
Total noninterest expense 2,234 1,760 6,641 5,059
---------- ---------- ---------- ----------
Income before taxes 1,827 1,423 4,953 4,070
Income tax expense 692 577 1,926 1,687
---------- ---------- ---------- ----------
Net income $ 1,135 $ 846 $ 3,027 $ 2,383
========== ========== ========== ==========
Cash dividends declared per share $ 0.20 $ 0.18 $ 0.60 $ 0.54
========== ========== ========== ==========
Earnings per share
Basic earnings per share $ 1.00 $ 0.72 $ 2.68 $ 2.02
========== ========== ========== ==========
Diluted earnings per share $ 0.98 $ 0.70 $ 2.62 $ 1.97
========== ========== ========== ==========
Weighted average number of common shares
outstanding:
Basic 1,132,939 1,182,522 1,129,989 1,178,437
========== ========== ========== ==========
Diluted 1,157,877 1,213,478 1,154,927 1,212,180
========== ========== ========== ==========
(See Notes to Consolidated Financial Statements)
2
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------- ------- ------- -------
Net Income $ 1,135 $ 846 $ 3,027 $ 2,383
Other comprehensive income:
Unrealized appreciation on
securities available for sale (334) (15) (578) -
Related deferred income taxes 137 6 237 -
------- ------- ------- -------
Comprehensive income $ 938 $ 837 $ 2,686 $ 2,383
======= ======= ======= =======
(See Notes to Consolidated Financial Statements)
3
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2003
(Dollars in Thousands)
(Unaudited)
Unearned
Employee Unearned
Accumulated Stock Compensation Total
Additional Other Ownership Restricted Stock-
Common Paid-In Retained Comprehensive 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 nine months
ended September 30, 2003 - - 3,027 - - - - 3,027
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - (341) - - - (341)
Options exercised - (111) - - - - 133 22
Tax benefit related to
exercised options - 14 - - - - - 14
Amortization of unearned
compensation - - - - - 58 - 58
Dividends on common stock - - (678) - - - - (678)
Allocated employee stock
ownership plan shares - 50 - - 29 - - 79
---------------------------------------------------------------------------------------------------
Balance September 30, 2003 $ 219 $ 16,938 $ 26,636 $ 405 $ - $ (80) $ (16,714) $ 27,404
===================================================================================================
(See Notes to Consolidated Financial Statements)
4
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 2003 and 2002
(Dollars in Thousands)
(Unaudited)
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,027 $ 2,383
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 (2,571) (1,074)
Compensation on allocation of ESOP shares 79 227
Amortization of restricted stock awards 58 61
Tax benefit from exercised options 14 128
Loss (gain) on the sale of foreclosed real estate 6 (7)
Write-down of foreclosed real estate - 30
Deferred income taxes 250 81
Depreciation and amortization on premises and equipment 262 173
Amortization of deferred loan origination fees (79) (96)
Amortization and valuation adjustments for mortgage
servicing rights 854 443
Amortization of securities premiums and discounts 106 17
Loans originated for sale (191,011) (93,228)
Proceeds from the sale of loans originated for sale 197,278 90,982
Changes in assets and liabilities:
Accrued interest receivable 226 (250)
Other assets (142) (28)
Accrued expenses and other liabilities 243 345
--------- ---------
Net cash provided by operating activities 8,600 210
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans $ 2,075 $ 5,117
Purchase of certificates of deposit (200) (100)
Purchase of securities available for sale (21,403) (17,287)
Purchase of Federal Home Loan Bank stock (14) -
Proceeds from the maturities of certificates of deposit 200 100
Proceeds from the maturities of securities available for sale 15,999 11,229
Proceeds from the sale of Federal Home Loan Bank stock 589 -
Proceeds from the sale and redemption of foreclosed real estate 269 234
Purchase of premises and equipment (823) (389)
Investment in foreclosed real estate (6) (6)
--------- ---------
Net cash used in investment activities (3,314) (1,102)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits $ (1,504) $ (8,581)
Net increase in advances from borrowers
for taxes and insurance 904 470
Options exercised 22 396
Purchase of treasury stock - (172)
Dividends on common stock (678) (631)
--------- ---------
Net cash used in financing activities (1,256) (8,518)
--------- ---------
Net increase (decrease) in cash and cash equivalents 4,030 (9,410)
CASH:
Beginning 36,571 38,070
--------- ---------
Ending $ 40,601 $ 28,660
========= =========
(See Notes to Consolidated Financial Statements)
5
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Nine Months Ended September 30, 2003 and 2002
(Dollars in Thousands)
(Unaudited)
2003 2002
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 2,420 $ 3,738
Interest on borrowed funds 931 931
Income taxes 1,901 1,501
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 255 $ 236
Allocation of ESOP shares to participants 29 95
Net change in unrealized appreciation on securities available for sale (341) -
Building costs in accounts payable - 172
======= =======
(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 September 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 on options awarded under these plans has been recognized, as
all options granted under these 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 the stock option plan 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 Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- -------- --------- ---------
Net income:
As reported $ 1,135 $ 846 $ 3,027 $ 2,383
Deduct total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (6) (7) (17) (21)
--------- -------- --------- ---------
Pro forma 1,129 839 3,010 2,362
========= ======== ========= =========
Basic earnings per share:
As reported $ 1.00 $ 0.72 $ 2.68 $ 2.02
Pro forma 1.00 0.71 2.66 2.00
Diluted earnings per share:
As reported $ 0.98 $ 0.70 $ 2.62 $ 1.97
Pro forma 0.98 0.69 2.61 1.95
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 as 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 September 30, 2003 and December 31, 2002.
September 30, 2003 December 31, 2002
Amount Percent Amount Percent
-------------------------------------------------------------------
(Dollars in Thousands)
Tier 1 (Core) Capital
Required $ 8,587 4.00% $ 8,629 4.00%
Actual 19,716 9.18% 19,245 8.92%
Excess 11,129 5.18% 10,616 4.92%
Risk-based Capital
Required 11,790 8.00% 10,956 8.00%
Actual 20,621 13.99% 20,153 14.72%
Excess 8,831 5.99% 9,197 6.72%
8
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 weighted average number of common shares used
in the calculation of basic and diluted earnings per share is presented in the
following chart.
Number of Shares
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------
2003 2002 2003 2002
------------------------ -----------------------
Basic EPS 1,132,939 1,182,522 1,129,989 1,178,437
Effect of dilutive securities:
Stock options 24,938 30,956 24,938 33,743
------------------------ -----------------------
Diluted EPS 1,157,877 1,213,478 1,154,927 1,212,180
======================== =======================
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 Wells, Blue Earth,
Mankato, Fairmont, North Mankato, Albert Lea, St. Peter and Owatonna, Minnesota
and a loan origination office in Farmington, Minnesota. During the fourth
quarter of 2003 the Bank leased a facility and opened a loan origination office
in Mason City, Iowa.
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 September 30, 2003 and December 31, 2002:
Total assets increased by $1,837,000, from $220,616,000 at December 31,
2002 to $222,453,000 at September 30, 2003. The increase in assets was primarily
due to increases of $4,030,000 and $4,720,000 in cash and securities available
for sale, respectively, being partially offset by decreases of $5,118,000 and
$2,251,000 in loans held for sale and loans receivable, respectively. 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 nine months of 2003. Included in the loans that were
originated and sold during the first nine months 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 available
for sale and in loans receivable was used to increase securities available for
sale.
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 September 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 $905,000 and
$908,000 and 0.61% and 0.58%, respectively.
11
Activity in the Company's allowance for loan losses for the nine months
ended September 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) (65,000)
Recoveries 14,000 18,000
--------- ---------
Balance on September 30, $ 905,000 $ 928,000
========= =========
Loans on which the accrual of interest has been discontinued amounted
to $912,000 and $428,000 at September 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 September 30, 2003 and December 31, 2002.
Mortgage servicing rights are capitalized and then amortized over the
period of estimated servicing income. Mortgage loans serviced by the Company for
the secondary market increased by $103 million from $272 million at September
30, 2002 to $375 million at September 30, 2003 which resulted in an increase in
mortgage servicing rights of $613,000. The amortization of mortgage servicing
rights increased by $221,000 and $856,000 for the quarter and nine months ended
September 30, 2003 when compared to the same periods in 2002. The amortization
of mortgage servicing rights results from scheduled amortization and from the
immediate amortization of any remaining mortgage servicing right that is
attached to a loan that is prepaid. During 2003, the Company experienced an
increase in amortization due to prepayments as relatively low market interest
rates on residential mortgages resulted in refinances of loans the Company
services for the secondary market. As stated above the Company's portfolio of
loans it services for the secondary market increased in 2003. As a result,
scheduled amortization in future periods will be higher than it was in 2003.
Future amortization due to prepayments will, in large part, be determined by
future market interest rates. Management periodically evaluates its capitalized
mortgage servicing rights for impairment. Due to changes in the estimates used
to value its mortgage servicing rights, which resulted from changes in market
conditions, the Company was able to recapture $165,000 and $445,000 of
previously recorded impairments during the three and nine month periods ended
September 30, 2003, respectively. Further changes in market conditions may allow
the Company to recapture the remaining valuation reserve of $215,000. The table
below summarizes capitalization, amortization and change in valuation of the
Company's mortgage servicing rights during the periods indicated.
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------------------------- --------------------------
Mortgage servicing rights
Balance at beginning of period $ 2,885,000 $ 2,248,000 $ 2,839,000 $ 1,850,000
Mortgage servicing rights capitalized 492,000 295,000 1,422,000 942,000
Amortization expense (415,000) (194,000) (1,299,000) (443,000)
-------------------------- --------------------------
Balance at end of period $ 2,962,000 $ 2,349,000 $ 2,962,000 $ 2,349,000
========================== ==========================
Valuation reserve
Balance at beginning of period $ (380,000) $ - $ (660,000) $ -
Additions - - (150,000) -
Subtractions 165,000 - 595,000 -
Balance at end of period $ (215,000) $ - $ (215,000) $ -
-------------------------- --------------------------
Mortgage Servicing Rights, net $ 2,747,000 $ 2,349,000 $ 2,747,000 $ 2,349,000
========================== ==========================
12
Liabilities decreased by $344,000 from $195,393,000 at December 31,
2002 to $195,049,000 at September 30, 2003. This decrease is primarily due to a
$1,504,000 decrease in deposits being partially offset by a $904,000 increase in
advances from borrowers for taxes and insurance. The increase in advances from
borrowers for taxes and insurance resulted from the increase in loans serviced
described above and from the timing of payment of real estate taxes.
Equity increased by $2,181,000 from $25,223,000 at December 31, 2002 to
$27,404,000 at September 30, 2003. The increase in equity was primarily the
result of net income for the first nine months of 2003 of $3,027,000 being
partially offset by the payment of $678,000 in cash dividends. On October 21,
2003, the Board of Directors of the Company declared a $0.20 per share cash
dividend to be paid on November 17, 2003 to stockholders of record on November
3, 2003. Subject to the Company's earnings and capital requirements, it is the
current intention of the Company to continue to pay regular quarterly cash
dividends.
Comparison of Operating Results for the Three and Nine-Month Periods Ended
September 30, 2003 and September 30, 2002.
Net Income. Net income increased by $289,000, or 34.2% for the
three-month period ended September 30, 2003 when compared to the same period
during 2002. The increase in net income was primarily due an increase of
$1,252,000 in noninterest income being partially offset by a $374,000 decrease
in net interest income and a $474,000 increase in noninterest expense for the
three months ended September 30, 2003 when compared to the same period in 2002.
Net income for the nine months ended September 30, 2003 increased by
$644,000, or 27.0%, when compared to the first nine months of 2002. This
increase in net income was primarily the result of increase of $3,205,000 in
noninterest income being partially offset by a decrease of $763,000 in net
interest income and a $1,582,000 increase in noninterest expense.
Interest Income. Interest income decreased by $822,000 and $2,010,000,
or 23.7% and 19.1%, for the three and nine-month periods ended September 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 nine months of 2003 when compared to the first
nine months of 2002. This decrease was due to a decrease of $12.6 million in the
average balance of the Company's loan portfolio and to a decrease of 0.9% in the
yield on the Company's loan portfolio, from 7.6% for the nine months ended
September 30, 2002 to 6.7% for the nine months ended September 30, 2003. Also
contributing to the decrease in interest income was a $112,000 and $270,000
decrease in interest income from investment securities and interest bearing
deposits for the three and nine months ended September 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 $448,000 and
$1,247,000, or 29.4% and 25.9%, for the quarter and nine months ended September
30, 2003 when compared to the same periods in 2002. The decrease in interest
expense was primarily the result of a decrease in the weighted average rate paid
on deposits and borrowed funds of 0.7%, from 3.2% for the nine months ended
September 30, 2002 to 2.5% for the nine months ended September 30, 2003.
Net Interest Income. Net interest income decreased by $374,000 and
763,000, or 19.2% and 13.3% for the quarter and the nine-months ended September
30, 2003 when compared to the same periods in 2002 due to the changes in
interest income and interest expense described above. The Company's net interest
margin, the ratio of net interest income to average interest earning assets,
decreased by 11.0% from 3.45% for the nine months ended September 30, 2002 to
3.07% for the nine months ended September 30, 2003.
13
Provision for Loan Losses. The Company made no provision for loan
losses during the third quarter of 2003 or 2002. The provision for loan losses
decreased by $23,000 for the nine months ended September 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 1.8% and 1.1% of total loans at
September 30, 2003 and December 31, 2002, respectively. Nonaccrual loans were
$912,000 and $428,000 at September 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 $1,252,000 and
$3,205,000, or 101.0% and 93.5%, for the three and nine months ended September
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 nine months of 2003, the Company originated and
sold to the secondary market a larger volume of loans during that period when
compared to the same period in 2002. Because the company retains servicing on a
majority of these loans, a larger amount of servicing assets were capitalized in
2003. These servicing assets are reported as a component of gain on sale of
loans originated for sale in the Consolidated Statements of Income. Market
conditions during the first nine months of 2003 when compared to the same period
in 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. During the third quarter of 2003, interest
rates on residential mortgages began increasing slightly. If this trend of
increased interest rates continues, the amount of loan originations and sales to
the secondary market would decrease which would result in a reduction in the
gain on sale of loans originated for sale and loan origination and commitment
fees in future periods. Also contributing to the increase in noninterest income
was a $71,000 and $201,000 increase in loan servicing fees for the quarter and
nine months ended September 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.
Noninterest Expense. Noninterest expense increased by $474,000 and
$1,582,000, or 26.9% and 31.3%, for the three and nine months ended September
30, 2003, respectively, when compared to the same periods during 2002. These
increases were primarily the result of increases in compensation and benefits
and in other noninterest expense. The increase in compensation and benefits
resulted from annual compensation adjustments and increases in commissions paid
to loan officers for the origination of loans. 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. Also affecting noninterest expense was the
amortization and valuation adjustments for mortgage servicing rights. The
amortization and valuation adjustments of mortgage servicing rights increased by
$56,000 and $411,000 for the three and nine-month periods ended September 30,
2003, respectively, 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 first nine months of 2003, which resulted from changes in
market conditions, the Company recorded a $445,000 recovery of previously
recorded impairments.
Income Tax Expense. Income tax expense increased by $115,000 and
increased by $239,000 for the three and nine-month periods ended September 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 September 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. The Company expects its current tax rate to remain
relatively constant in future periods.
14
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at September 30, 2003 and December 31, 2002.
September 30, 2003 December 31, 2002
-----------------------------------------
(Dollars in Thousands)
Non-accrual loans
One to four family real estate $ 320 $ 287
Commercial real estate 294 -
Commercial 196 -
Consumer 102 141
------ ------
Total $ 912 $ 428
------ ------
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $ 316 $ 249
------ ------
Total $ 316 $ 249
------ ------
Total non-accrual and accruing loans
past due 90 days or more $1,228 $ 677
====== ======
Repossessed and non-performing assets
Repossessed property $ 195 $ 209
Other non-performing assets - -
------ ------
Total repossessed and non-performing assets $ 195 $ 209
------ ------
Total non-performing assets $1,423 $ 886
====== ======
Total non-accrual and accruing loans
past due 90 days or more to total loans 0.83% 0.44%
====== ======
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.55% 0.31%
====== ======
Total nonperforming assets to total assets 0.64% 0.40%
====== ======
Generally accepted accounting principles require that impaired loans 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, 2003 and December 31, 2002, the value
of loans that would be classified as impaired 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 the first three months of 2002 the Company completed this buy back
program.
The Company paid a cash dividend of $0.20 per share on February 24,
2003, May 15, 2003 and August 15, 2003. On October 21, 2003 the Company declared
a cash dividend of $0.20 per share payable on November 17, 2003 to stockholders
of record on November 3, 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 September 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 9.18% at September 30, 2003.
16
WELLS FINANCIAL CORP. and SUBSIDIARIES
Controls and Procedures
Item 3. Disclosure Controls and Procedures.
- ------- -----------------------------------
(a) Evaluation of disclosure controls and procedures. Based on their
-----------------------------------------------------
evaluation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) under the Securities Exchange Act of 1934
(the "Exchange Act")), the Company's principal executive officer and
the principal financial officer have concluded that as of the end of
the periods covered by this Quarterly Report on Form 10-QSB such
disclosure controls and procedures 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. During the quarter under report, there
----------------------------
was no change in the Company's internal control over financial
reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
17
WELLS FINANCIAL CORP. and SUBSIDIARIES
September 30, 2002
FORM 10-QSB
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other information
-----------------
None
Item 6. Exhibits and Reports of Form 8-K
--------------------------------
a. Exhibits:
(i) Exhibit 31 - Section 302 certification
(ii) Exhibit 32 - Section 906 certification
b. (i) The Registrant filed a Form 8-K on July 30, 2003
pursuant to items 7 and 9 to report earnings for the
quarter ended June 30, 2003, respectively.
No other information is required to be filed under Part II of the form
- --------------------------------------------------------------------------------
18
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: November 7, 2003
-------------------------------------------------------- ----------------
Lonnie R. Trasamar
President and Chief Executive Officer
By: /s/ James D. Moll Date: November 7, 2003
-------------------------------------------------------- ----------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer