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, 2004
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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 3, 2004:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,162,951 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 and Use of Proceeds 10-16
Item 3. Disclosure 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
March 31, 2004 and December 31, 2003
(Dollars in Thousands)
(Unaudited)
ASSETS
2004 2003
--------- ---------
Cash, including interest-bearing accounts
March 31, 2004 $9,268; December 31, 2003 $17,655 $ 17,567 $ 25,318
Certificates of deposit 125 200
Securities available for sale, at fair value 26,005 27,410
Federal Home Loan Bank Stock, at cost 1,304 1,303
Loans held for sale 6,393 1,997
Loans receivable, net 167,562 160,049
Accrued interest receivable 1,239 1,209
Premises and equipment, net 3,798 3,585
Mortgage servicing rights, net 2,518 2,681
Other assets 193 53
--------- ---------
TOTAL ASSETS $ 226,704 $ 223,805
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 170,902 $ 169,662
Borrowed funds 23,000 23,000
Advances from borrowers for taxes and insurance 2,558 1,585
Deferred income taxes 1,507 1,456
Accrued interest payable 126 34
Accrued expenses and other liabilities 316 200
--------- ---------
TOTAL LIABILITIES 198,409 195,937
--------- ---------
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 17,146 17,154
Retained earnings, substantially restricted 27,145 26,922
Accumulated other comprehensive income 614 525
Unearned compensation restricted stock awards (583) (561)
Treasury stock, at cost, 1,024,549 shares at March
31, 2004, and 1,033,673 shares at December 31, 2003 (16,246) (16,391)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 28,295 27,868
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 226,704 $ 223,805
========= =========
(See Notes to Consolidated Financial Statements)
1
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Income
Three Months Ended March 31, 2004 and 2003
(Dollars in thousands, except per share data)
(Unaudited)
2004 2003
---------- ----------
Interest and dividend income
Loans receivable:
First mortgage loans $ 1,730 $ 1,939
Consumer and other loans 976 721
Investment securities and other
interest bearing deposits 226 340
---------- ----------
Total interest income 2,932 3,000
---------- ----------
Interest expense
Deposits 661 986
Borrowed funds 310 307
---------- ----------
Total interest expense 971 1,293
---------- ----------
Net interest income 1,961 1,707
Provision for loan losses - -
---------- ----------
Net interest income after provision for loan losses 1,961 1,707
---------- ----------
Noninterest income
Gain on sale of loans originated for sale 279 1,407
Loan servicing fees 241 218
Insurance commissions 188 94
Fees and service charges 181 220
Other 30 30
---------- ----------
Total noninterest income 919 1,969
---------- ----------
Noninterest expense
Compensation and benefits 1,022 911
Occupancy and equipment 264 261
Data processing 140 125
Advertising 81 59
Amortization and valuation adjustments for
mortgage servicing rights 240 519
Other 387 341
---------- ----------
Total noninterest expense 2,134 2,216
---------- ----------
Income before income taxes 746 1,460
Income tax expense 269 572
---------- ----------
Net Income $ 477 $ 888
========== ==========
Cash dividend declared per common share $ 0.22 $ 0.20
========== ==========
Earnings per share
Basic $ 0.41 $ 0.79
========== ==========
Diluted $ 0.40 $ 0.77
========== ==========
Weighted average number of common shares outstanding:
Basic 1,158,546 1,125,866
========== ==========
Diluted 1,196,291 1,147,342
========== ==========
(See Notes to Consolidated Financial Statements)
2
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2004 and 2003
(Dollars in Thousands)
(Unaudited)
2004 2003
----- -----
Net Income $ 477 $ 888
Other comprehensive income:
Unrealized appreciation (depreciation) on
securities available for sale 151 (202)
Related deferred income taxes (62) 83
----- -----
Comprehensive income $ 566 $ 769
===== =====
(See Notes to Consolidated Financial Statements)
3
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2004
(Dollars in Thousands)
(Unaudited)
Unearned
Accumulated Compensation
Additional Other Restricted Total
Common Paid-In Retained Comprehensive Stock Treasury Stockholders'
Stock Capital Earnings Income Awards Stock Equity
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 219 $ 17,154 $ 26,922 $ 525 $ (561) $(16,391) $ 27,868
Net income for the three months
ended March 31, 2004 - - 477 - - - 477
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - 89 - - 89
Options exercised - (81) - - - 94 13
Award of management stock
bonus plan shares, 3,200
shares - 56 - - (107) 51 -
Tax benefit related to
exercised options - 17 - - - - 17
Amortization of unearned
compensation - - - - 85 - 85
Dividends on common stock - - (254) - - - (254)
----------------------------------------------------------------------------------------------
Balance March 31, 2004 $ 219 $ 17,146 $ 27,145 $ 614 $ (583) $(16,246) $ 28,295
==============================================================================================
(See Notes to Consolidated Financial Statements)
4
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
(Dollars in Thousands)
(Unaudited)
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 477 $ 888
Adjustments to reconcile net income to net cash
used in operating activities:
(Gain) on the sale of loans originated for sale (279) (1,407)
Amortization and valuation adjustments for mortgage
servicing rights 240 519
Compensation on allocation of ESOP shares - 79
Amortization of unearned compensation 85 21
Tax benefit from exercised options 17 -
Deferred income taxes 51 (75)
Depreciation and amortization on premises and equipment 105 79
Amortization of deferred loan origination fees (14) (21)
Amortization of excess servicing fees, bond premiums and
discounts 80 19
Loans originated for sale (16,470) (54,876)
Proceeds from the sale of loans originated for sale 12,276 50,957
Changes in assets and liabilities:
Accrued interest receivable (30) 154
Other assets (94) 51
Accrued expenses and other liabilities 208 930
-------- --------
Net cash used in operating activities (3,348) (2,682)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans $ (7,601) $ 9,731
Purchase of certificates of deposit (25) (100)
Purchase of securities available for sale (1,932) (6,480)
Proceeds from the maturities of certificates of deposit 100 100
Proceeds from the maturities of securities available for sale 3,407 5,800
Purchase of premises and equipment (318) (504)
Proceeds from the sale and redemption of foreclosed real estate - 10
Investment in foreclosed real estate (6) (4)
-------- --------
Net cash provided by (used in) investing activities (6,375) 8,553
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 1,240 $ 3,545
Net increase in advances from borrowers
for taxes and insurance 973 782
Options exercised 13 16
Dividends on common stock (254) (225)
-------- --------
Net cash provided by financing activities 1,972 4,118
-------- --------
Net increase in cash and cash equivalents (7,751) 9,989
CASH AND CASH EQUIVALENTS:
Beginning 25,318 36,571
-------- --------
Ending $ 17,567 $ 46,560
======== ========
(See Notes to Consolidated Financial Statements)
5
WELLS FINANCIAL CORP. and SUBSIDIARY
Three Months Ended March 31, 2004 and 2003
(Dollars in Thousands)
(Unaudited)
2004 2003
----- -----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 569 $ 910
Interest on borrowed funds 310 307
Income taxes 137 174
===== =====
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 102 $ 214
Allocation of ESOP shares to participants - 29
Net change in unrealized appreciation on
securities available for sale 89 (119)
===== =====
(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 March 31, 2004, 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
March 31,
--------------------
2004 2003
-------- --------
Net income:
As reported $ 477 $ 888
Deduct total stock-based employee compensation
expense determined under fair value based method for all
awards, net of related tax effects
(28) (5)
-------- --------
Pro forma 449 883
======== ========
Basic earnings per share:
As reported $ 0.41 $ 0.79
Pro forma 0.39 0.78
Diluted earnings per share:
As reported $ 0.40 $ 0.77
Pro forma 0.38 0.77
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 March 31, 2004 and December 31, 2003.
March 31, 2004 December 31, 2003
Amount Percent Amount Percent
- --------------------------------------------------------------------
(Dollars in Thousands)
Tier 1 (Core) Capital
Required $ 8,856 4.00% $ 8,666 4.00%
Actual 20,256 9.15% 19,516 9.01%
Excess 11,400 5.15% 10,850 5.01%
Risk-based Capital
Required 13,279 8.00% 12,700 8.00%
Actual 21,143 12.74% 20,420 12.86%
Excess 7,864 4.74% 7,720 4.86%
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
March 31,
---------------------
2004 2003
--------- ---------
Basic EPS 1,158,546 1,125,866
Effect of dilutive securities:
Stock options 37,745 21,476
--------- ---------
Diluted EPS 1,196,291 1,147,342
========= =========
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 loan origination offices in Farmington, Minnesota and 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 March 31, 2004 and December 31, 2003:
Total assets increased by $2,899,000, from $223,805,000 at December 31,
2003 to $226,704,000 at March 31, 2004 due, primarily, from cash that was
received from increases in deposits and advances from borrowers for taxes and
insurance being used to fund loan growth. Loans held for sale and loans
receivable increased by $4,396,000 and $7,513,000, respectively, while cash and
securities available for sale decreased by $7,751,000 and $1,405,000,
respectively. A decrease in interest rates on residential mortgages during the
latter part of March 2004 resulted in increased originations of loans held for
sale as of March 31, 2004. On March 31, 2004 and December 31, 2003, the Company
had firm commitments to sell the loans that were classified as held for sale.
The increase in loans receivable resulted, primarily, from increases in
commercial and agricultural mortgage loans and, to a lesser extent, an increase
in construction loans. In order to increase interest rate spreads, the Company
has changed the composition of its loan portfolio. From December 31, 1999 to
March 31, 2004, one-to-four family real estate loans decreased from 60.82% to
25.47%, while commercial real estate loans increased from 18.27% to 40.82% and
commercial business loans increased from 1.71% to 5.44% of the Company's loan
portfolio.
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. The increase in the
Company's loan portfolio and the change in the composition of the Company's loan
portfolio mentioned above could require an increase in the allowance for loan
losses in future periods. As of March 31, 2004 and December 31, 2003 the
balances in the allowance for loan losses and the allowance for loan losses as a
percentage of total loans were $888,000 and $904,000 and 0.51% and 0.56%,
respectively.
11
Activity in the Company's allowance for loan losses for the three
months ended March 31, 2004 and 2003 is summarized as follows:
2004 2003
--------- ---------
Balance on January 1, $ 904,000 $ 908,000
Provision for loan losses - -
Charge-offs (18,000) -
Recoveries 2,000 9,000
--------- ---------
Balance on March 31, $ 888,000 $ 917,000
========= =========
Loans on which the accrual of interest has been discontinued amounted
to $553,000 and $829,000 at March 31, 2004 and December 31, 2003, 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. Information about impaired loans as of March 31, 2004 and
December 31, 2003 is as follows:
March 31, 2004 December 31, 2003
-------------- -----------------
Total impaired loans $ 437,000 $791,000
Related allowance for loan loss $ 60,000 $179,000
Mortgage servicing rights decreased by $163,000, from $2,681,000 at
December 31, 2003 to $2,518,000 at March 31, 2004 due to the amortization and
valuation adjustment exceeding the capitalization of new servicing rights.
Mortgage servicing rights are capitalized and then amortized over the period of
estimated servicing income. 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.
When comparing the first quarter of 2004 to the first quarter of 2003, the
amortization of mortgage servicing rights decreased by $156,000. During the
first quarter of 2003, the Company experienced an increase in amortization due
to prepayments as relatively low market interest rates on residential mortgages
resulted in refinancing of loans the Company services for the secondary market.
The capitalization of mortgage servicing rights decreased by $505,000 during the
first quarter of 2004 when compared to the first quarter of 2003, due to the low
market interest rates mentioned above resulting in a larger amount of mortgage
loan originations during the first quarter of 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 recorded a
$27,000 and a $150,000 impairment of its mortgage servicing rights during the
first quarter of 2004 and 2003, respectively. Changes in market conditions could
result in the recovery of the impairment or additional impairment in future
periods.
12
The table below summarizes capitalization, amortization and change in
valuation of the Company's mortgage servicing rights during the periods
indicated.
Three months ended
March 31,
2004 2003
----------- -----------
Mortgage servicing rights
Balance at beginning of period $ 2,896,000 $ 2,839,000
Mortgage servicing rights capitalized 77,000 582,000
Amortization expense (213,000) (369,000)
----------- -----------
Balance at end of period $ 2,760,000 $ 3,052,000
Valuation reserve
Balance at beginning of period $ (215,000) $ (660,000)
Additions (27,000) (150,000)
Subtractions - -
----------- -----------
Balance at end of period $ (242,000) $ (810,000)
=========== ===========
Mortgage Servicing Rights, net $ 2,518,000 $ 2,242,000
=========== ===========
Liabilities increased by $2,472,000 from $195,937,000 at December 31,
2003 to $198,409,000 at March 31, 2004. This increase is primarily due to a
$1,240,000 increase in deposits and a $973,000 increase in advances from
borrowers for taxes and insurance. The increase in advances from borrowers for
taxes and insurance resulted, primarily, from the timing of payment of real
estate taxes.
Equity increased by $427,000 from $27,868,000 at December 31, 2003 to
$28,295,000 at March 31, 2004. The increase in equity was primarily the result
of net income for the first quarter of 2004 of $477,000 being partially offset
by the payment of $254,000 in cash dividends. On April 21, 2004, the Board of
Directors of the Company declared a $0.22 per share cash dividend to be paid on
May 21, 2004 to stockholders of record on May 5, 2004. 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-Month Periods Ended March 31, 2004
and March 31, 2003.
Net Income. Net income decreased by $411,000, or 46.3% for the
three-month period ended March 31, 2004 when compared to the same period during
2003. The decrease in net income was primarily due a decrease of $1,048,000 in
noninterest income partially offset by a $265,000 increase in net interest
income and a $303,000 decrease in income tax expense for the three months ended
March 31, 2004 when compared to the same period in 2003.
Interest Income. Interest income decreased by $54,000, or 1.81%, for
the three-month period ended March 31, 2004 when compared to the same period in
2003. This decrease was primarily the result of a decrease of $111,000 in
interest income from the Company's investment securities and interest bearing
deposits being partially offset by a $57,000 increase in interest income from
the Company's loan portfolio. The decrease in interest income from the Company's
investment securities and interest bearing deposits resulted from a decrease in
the average balance from $56.3 million during the first quarter of 2003 to $41.2
million during the first quarter of 2004. This decrease was primarily the result
of the Company using its interest bearing cash deposits to fund loan growth. The
increase in interest income from the Company's loan portfolio resulted from an
increase in the average balance of the loan portfolio being partially offset by
a decrease in the yield during the first quarter of 2004 when compared to the
same period in 2003. The average balance of the Company's loan portfolio
increased by $15.7 million, from $152.0 million to $167.7 million. The average
yield on the loan portfolio decreased by 0.54%, from 7.00% during the first
quarter of 2003 to 6.46% during the first quarter of 2004.
13
Interest Expense. Total interest expense decreased by $319,000, or
24.7%, for the quarter ended March 31, 2004 when compared to the same period in
2003. The decrease in interest expense was primarily the result of a decrease in
the weighted average rate paid on deposits of 0.74%, from 2.31% for the three
months ended March 31, 2003, to 1.57% for the three months ended March 31, 2004.
Net Interest Income. Net interest income increased by $265,000, or
15.6%, for the quarter ended March 31, 2004 when compared to the same period in
2003 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, increased from 3.28% for the three months ended March
31, 2003 to 3.76% for the three months ended March 31, 2004.
Provision for Loan Losses. The Company made no provision for loan
losses during the first quarter of 2004 or 2003. 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 1.2% and 1.6% of
total loans at March 31, 2004 and December 31, 2003, respectively. Nonaccrual
loans were $553,000 and $829,000 at March 31, 2004 and December 31, 2003,
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. Due to the increase in the loan
portfolio and the changes in the composition of the loan portfolio, it is likely
that the provision for loan losses will increase in future periods. 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 decreased by $1,048,000, or
53.3%, for the three months ended March 31, 2004 when compared to the same
period in 2003 primarily due to decreases 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 three 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 2004. 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. During the last half of 2003 and the first quarter of
2004, interest rates on residential mortgages increased. If this trend
continues, the amount of loan originations and sales to the secondary market
will likely decrease, which would result in a reduction in the gain on sale of
loans originated for sale in future periods.
Noninterest Expense. Noninterest expense decreased by $69,000, or 3.1%,
for the three months ended March 31, 2004 when compared to the same period
during 2003. This decrease was primarily the result of a decrease of $279,000 in
the amortization and valuation adjustments for mortgage servicing rights being
partially offset by an increase of $110,000 in compensation and benefits. 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 the first quarter of 2003,
the Company experienced an increase in amortization due to prepayments as
relatively low market interest rates on residential mortgages resulted in
refinancing of loans the Company services for the secondary market. 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 three months of 2004, which resulted
from changes in market conditions, the Company recorded a $27,000 impairment.
Income Tax Expense. Income tax expense decreased by $303,000 for the
three-month period ended March 31, 2004 when compared to the same period in
2003. This change was the result of a decrease in income before taxes for the
period ended March 31, 2004 when compared to the same period in 2003.
14
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at March 31, 2004 and December 31, 2003.
March 31, 2004 December 31, 2003
-----------------------------------
(Dollars in Thousands)
Non-accrual loans
One to four family real estate $ 108 $ 281
All other mortgage loans 295 295
Commercial 65 182
Consumer 85 71
------ ------
Total $ 553 $ 829
------ ------
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $ 87 $ 171
------ ------
Consumer - 1
------ ------
Total $ 87 $ 172
------ ------
Total non-accrual and accruing loans
past due 90 days or more $ 640 $1,001
====== ======
Repossessed and non-performing assets
Repossessed property $ 108 $ -
Other non-performing assets - -
------ ------
Total repossessed and non-performing assets $ 108 $ -
------ ------
Total non-performing assets $ 748 $1,001
====== ======
Total non-accrual and accruing loans
past due 90 days or more to total loans 0.38% 0.63%
====== ======
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.28% 0.45%
====== ======
Total nonperforming assets to total assets 0.33% 0.45%
====== ======
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 March 31, 2004 and December 31, 2003, the value of
loans that were classified as impaired was $437,000 and $791,000, respectively.
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.
The Bank's most liquid asset is cash, including investments in interest
bearing accounts at United Bankers Bank and the FHLB of Des Moines that have no
withdrawal restrictions. The levels of these assets are dependent on the Bank's
operating, financing and investing activities during any given period. At March
31, 2004 and December 31, 2003, the Bank's noninterest bearing cash was $8.3
million and $7.7 million, respectively.
The Company paid a cash dividend of $0.22 per share on February 16,
2004. On April 21, 2004 the Company declared a cash dividend of $0.22 per share
payable on May 21, 2004 to stockholders of record on May 5, 2004. 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, 2004, 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 9.15% at March 31, 2004.
16
WELLS FINANCIAL CORP. and SUBSIDIARIES
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 period 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
March 31, 2004
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 certifications
(ii) Exhibit 32 - Section 906 certification
b. (i) The Registrant filed a Form 8-K on March 10, 2004
pursuant to items 7 and 9 to report earnings for
the year ended December 31, 2003.
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: May 3, 2004
-------------------------------------------------------- -----------
Lonnie R. Trasamar
President and Chief Executive Officer
By: /s/ James D. Moll Date: May 3, 2004
-------------------------------------------------------- -----------
James D. Moll
Treasurer and Principal Financial & Accounting Officer