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, 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 August 6, 2004:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,161,226 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. Controls and Procedures 17
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities 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
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2
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 2004 and December 31, 2003
(Dollars in Thousands)
(Unaudited)
ASSETS
2004 2003
--------- ---------
Cash, including interest-bearing accounts
June 30, 2004 $2,397; December 31, 2003 $17,655 $ 6,730 $ 25,318
Certificates of deposit 126 200
Securities available for sale, at fair value 21,663 27,410
Federal Home Loan Bank Stock, at cost 1,444 1,303
Loans held for sale 3,522 1,997
Loans receivable, net 181,482 160,049
Accrued interest receivable 1,502 1,209
Premises and equipment, net 4,016 3,585
Mortgage servicing rights, net 2,680 2,681
Other assets 188 53
--------- ---------
TOTAL ASSETS $ 223,353 $ 223,805
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 165,362 $ 169,662
Borrowed funds 26,140 23,000
Advances from borrowers for taxes and insurance 1,736 1,585
Deferred income taxes 1,327 1,456
Accrued interest payable 208 34
Accrued expenses and other liabilities 252 200
--------- ---------
TOTAL LIABILITIES 195,025 195,937
--------- ---------
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 27,453 26,922
Accumulated other comprehensive income 287 525
Unearned compensation restricted stock awards (488) (561)
Treasury stock, at cost, 1,026,274 shares at June 30, 2004,
and 1,033,673 shares at December 31, 2003 (16,289) (16,391)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 28,328 27,868
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 223,353 $ 223,805
========= =========
(See Notes to Consolidated Financial Statements)
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,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Interest and dividend income
Loans receivable:
First mortgage loans $ 1,703 $ 1,876 $ 3,433 $ 3,815
Consumer and other loans 1,121 709 2,097 1,419
Investment securities and other
interest bearing deposits 219 316 445 653
---------- ---------- ---------- ----------
Total interest income 3,043 2,901 5,975 5,887
---------- ---------- ---------- ----------
Interest Expense
Deposits 635 897 1,296 1,880
Borrowed funds 321 310 631 617
---------- ---------- ---------- ----------
Total interest expense 956 1,207 1,927 2,497
---------- ---------- ---------- ----------
Net interest income 2,087 1,694 4,048 3,390
Provision for loan losses - - - -
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 2,087 1,694 4,048 3,390
---------- ---------- ---------- ----------
Noninterest income
Gain on sale of loans originated for sale 550 1,591 829 2,998
Loan servicing fees 240 231 481 449
Insurance commissions 152 117 340 211
Fees and service charges 122 196 303 416
Other 30 41 60 69
---------- ---------- ---------- ----------
Total noninterest income 1,094 2,176 2,013 4,143
---------- ---------- ---------- ----------
Noninterest expense
Compensation and benefits 1,275 1,054 2,297 1,966
Occupancy and equipment 270 271 534 532
Data processing 127 127 267 252
Advertising 71 74 152 133
Amortization and valuation adjustments for
mortgage servicing rights 24 85 264 604
Other 493 593 880 920
---------- ---------- ---------- ----------
Total noninterest expense 2,260 2,204 4,394 4,407
---------- ---------- ---------- ----------
Income before taxes 921 1,666 1,667 3,126
Income tax expense 356 662 625 1,234
---------- ---------- ---------- ----------
Net income $ 565 $ 1,004 $ 1,042 $ 1,892
========== ========== ========== ==========
Cash dividends declared per share $ 0.22 $ 0.20 $ 0.44 $ 0.40
========== ========== ========== ==========
Earnings per share
Basic $ 0.49 $ 0.89 $ 0.90 $ 1.68
========== ========== ========== ==========
Diluted $ 0.47 $ 0.87 $ 0.88 $ 1.64
========== ========== ========== ==========
Weighted average number of common shares
outstanding:
Basic 1,162,283 1,131,085 1,160,414 1,128,490
========== ========== ========== ==========
Diluted 1,190,265 1,159,797 1,188,396 1,153,604
========== ========== ========== ==========
(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,
-------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
Net Income $ 565 $ 1,004 $ 1,042 $ 1,892
Other comprehensive income:
Unrealized depreciation on
securities available for sale (532) (42) (381) (244)
Related deferred income taxes 206 17 143 100
------- ------- ------- -------
Comprehensive income $ 239 $ 979 $ 804 $ 1,748
======= ======= ======= =======
(See Notes to Consolidated Financial Statements)
3
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 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 six
months ended June 30, 2004 - - 1,042 - - - 1,042
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - (238) - - (238)
Treasury stock purchases,
1,725 shares - - - - - (43) (43)
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 - - - - 180 - 180
Dividends on common stock - - (511) - - - (511)
----------------------------------------------------------------------------------------
Balance June 30, 2004 $ 219 $ 17,146 $ 27,453 $ 287 $ (488) $(16,289) $ 28,328
========================================================================================
(See Notes to Consolidated Financial Statements)
4
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Six Months Ended June 30, 2004 and 2003
(Dollars in Thousands)
(Unaudited)
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,042 $ 1,892
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on sale of loans originated for sale (829) (2,998)
Compensation on allocation of ESOP shares - 79
Amortization of restricted stock awards 180 42
Tax benefit from exercised options 17 14
Gain on the sale of foreclosed real estate - (2)
Deferred income taxes (129) 108
Depreciation on premises and equipment 220 172
Amortization of deferred loan origination fees (29) (32)
Amortization and valuation adjustments for mortgage servicing rights 264 604
Amortization of securities premiums and discounts 133 57
Loans originated for sale (37,965) (128,354)
Proceeds from the sale of loans originated for sale 37,269 126,671
Changes in assets and liabilities:
Accrued interest receivable (293) 45
Other assets (146) (22)
Accrued expenses and other liabilities 226 (114)
--------- ---------
Net cash used in operating activities (40) (1,838)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans $ (21,513) $ 7,042
Purchase of certificates of deposit (26) (100)
Purchase of securities available for sale (2,624) (13,974)
Purchase of Federal Home Loan Bank stock (141) -
Proceeds from the maturities of certificates of deposit 100 100
Proceeds from the maturities of securities available for sale 7,857 10,372
Proceeds from the sale and redemption of foreclosed real estate - 102
Purchase of premises and equipment (651) (618)
Investment in foreclosed real estate - (7)
--------- ---------
Net cash provided by (used in) investment activities (16,998) 2,917
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ (4,300) $ 2,131
Net increase in advances from borrowers for taxes and insurance 151 87
Proceeds from borrowed funds 3,140 -
Options exercised 13 22
Purchase of treasury stock (43) -
Dividends on common stock (511) (451)
--------- ---------
Net cash provided by (used in) financing activities (1,550) 1,789
--------- ---------
Net increase (decrease) in cash and cash equivalents (18,588) 2,868
CASH:
Beginning 25,318 36,571
--------- ---------
Ending $ 6,730 $ 39,439
========= =========
(See Notes to Consolidated Financial Statements)
5
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Six Months Ended June 30, 2004 and 2003
(Dollars in Thousands)
(Unaudited)
2004 2003
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 1,122 $ 1,732
Interest on borrowed funds 631 617
Income taxes 675 1,156
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 109 $ 214
Allocation of ESOP shares to participants - 29
Net change in unrealized appreciation on securities available for sale (238) (144)
======= =======
(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, 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 if the 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 Six months ended
June 30, June 30,
------------------------ ----------------------
2004 2003 2004 2003
---------- --------- --------- ---------
Net income:
As reported $ 565 $ 1,004 $ 1,042 $ 1,892
Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (3) (6) (45) (11)
---------- --------- --------- ---------
Pro forma 562 998 997 1,881
========== ========= ========= =========
Basic earnings per share:
As reported $ 0.49 $ 0.89 $ 0.90 $ 1.68
Pro forma 0.48 0.88 0.86 1.67
Diluted earnings per share:
As reported $ 0.47 $ 0.87 $ 0.88 $ 1.64
Pro forma 0.47 0.86 0.84 1.63
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 June 30, 2004 and December 31, 2003.
June 30, 2004 December 31, 2003
Amount Percent Amount Percent
-------------------------------------------------
(Dollars in Thousands)
Tier 1 (Core) Capital
Required $ 8,801 4.00% $ 8,666 4.00%
Actual 20,013 9.10% 19,516 9.01%
Excess 11,212 5.10% 10,850 5.01%
Risk-based Capital
Required $14,064 8.00% $12,700 8.00%
Actual 20,873 11.87% 20,420 12.86%
Excess 6,809 3.87% 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 Six months ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Basic EPS 1,162,283 1,131,085 1,160,414 1,128,490
Effect of dilutive securities:
Stock options 27,982 28,712 27,982 25,114
--------- --------- --------- ---------
Diluted EPS 1,190,265 1,159,797 1,188,396 1,153,604
========= ========= ========= =========
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., 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, gain on sale of loans originated for sale, 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 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, 2004 and December 31, 2003:
Total assets decreased by $452,000, from $223,805,000 at December 31,
2003 to $223,353,000 at June 30, 2004 due primarily to a reduction in customer
deposits. Cash and securities available for sale decreased by $18,588,000 and
$5,747,000, respectively, while loans held for sale and loans receivable
increased by $1,525,000 and $21,433,000, respectively. On June 30, 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.
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 mentioned above and changes in the composition of the
Company's loan portfolio could require an increase in the allowance for loan
losses in future periods. As of June 30, 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 $860,000 and $904,000 and 0.46% and 0.56%,
respectively.
Activity in the Company's allowance for loan losses for the six months
ended June 30, 2004 and 2003 is summarized as follows:
2004 2003
--------- ---------
Balance on January 1, $ 904,000 $ 908,000
Provision for loan losses - -
Charge-offs (49,000) (17,000)
Recoveries 5,000 12,000
--------- ---------
Balance on June 30, $ 860,000 $ 903,000
========= =========
Loans on which the accrual of interest has been discontinued amounted
to $109,000 and $829,000 at June 30, 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. The amount of impaired loans at June 30, 2004 and December
31, 2003 was $70,000 and $791,000, respectively.
11
Mortgage servicing rights remained relatively constant from December
31, 2003 to June 30, 2004 due to the capitalization of new servicing rights and
the valuation adjustment offsetting the amortization of mortgage 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 half of 2004 to the first half of 2003, the
amortization of mortgage servicing rights decreased by $416,000. During the
first half 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 $667,000 during the
first half of 2004 when compared to the first half of 2003, due to the low
market interest rates mentioned above resulting in a larger amount of mortgage
loan originations during the first half 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
$204,000 and a $280,000 net recovery of its mortgage servicing rights valuation
reserves during the first half of 2004 and 2003, respectively. Changes in market
conditions could result in the recovery of the remaining impairment or additions
to the impairment in future periods. 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,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Mortgage servicing rights
Balance at beginning of period $ 2,760,000 $ 3,052,000 $ 2,896,000 $ 2,839,000
Mortgage servicing rights capitalized 186,000 348,000 263,000 930,000
Amortization expense (255,000) (515,000) (468,000) (884,000)
----------- ----------- ----------- -----------
Balance at end of period $ 2,691,000 $ 2,885,000 $ 2,691,000 $ 2,885,000
=========== =========== =========== ===========
Valuation reserve
Balance at beginning of period $ (242,000) $ (810,000) $ (215,000) $ (660,000)
Additions - - (27,000) (150,000)
Subtractions 231,000 430,000 231,000 430,000
----------- ----------- ----------- -----------
Balance at end of period $ (11,000) $ (380,000) $ (11,000) $ (380,000)
=========== =========== =========== ===========
Mortgage Servicing Rights, net $ 2,680,000 $ 2,505,000 $ 2,680,000 $ 2,505,000
=========== =========== =========== ===========
Liabilities decreased by $912,000 from $195,937,000 at December 31,
2003 to $195,025,000 at June 30, 2004. This decrease is primarily due to a
$4,300,000 decrease in deposits being partially offset by a $3,140,000 increase
in borrowed funds.
Equity increased by $460,000 from $27,868,000 at December 31, 2003 to
$28,328,000 at June 30, 2004. The increase in equity was primarily the result of
net income for the first six months of 2004 of $1,042,000 being partially offset
by the payment of $511,000 in cash dividends. On July 20, 2004, the Board of
Directors of the Company declared a $0.22 per share cash dividend to be paid on
August 16, 2004 to stockholders of record on August 2, 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.
12
Comparison of Operating Results for the Three and Six-Month Periods Ended June
30, 2004 and June 30, 2003.
Net Income. Net income decreased by $439,000, or 43.7% for the
three-month period ended June 30, 2004 when compared to the same period during
2003. The decrease in net income was primarily due a decrease of $1,083,000 in
noninterest income partially offset by a $393,000 increase in net interest
income and a $306,000 decrease in income tax expense for the three months ended
June 30, 2004 when compared to the same period in 2003.
Net income decreased by $850,000, or 44.9% for the six-month period
ended June 30, 2004 when compared to the same period during 2003. The decrease
in net income was primarily due a decrease of $2,131,000 in noninterest income
partially offset by a $658,000 increase in net interest income and a $609,000
decrease in income tax expense for the six months ended June 30, 2004 when
compared to the same period in 2003.
Interest Income. Interest income increased by $142,000 and $88,000, or
4.9% and 1.5%, for the three and six-month periods ended June 30, 2004,
respectively, when compared to the same periods in 2003. These increases were
primarily the result of an increase in interest income from the Company's loan
portfolio being partially offset by a decrease in interest income from
investment securities and other interest bearing deposits. The increase in
interest income from the loan portfolio resulted from a $22.1 million increase
in the average balance of the Company's loan portfolio for the six months ended
June 30, 2004 when compared to the same period in 2003. Partially offsetting the
increase in interest income that resulted from the increase in the average
balance was a decrease in yield on the loan portfolio of 0.54%, from 6.93% for
the first six months of 2003 to 6.39% for the first six months of 2004. The
decrease in interest income from the Company's investment securities and
interest bearing deposits resulted from a decrease in the average balance from
$64.6 million during the first half of 2003 to $36.1 million during the first
half of 2004. This decrease was primarily the result of the Company using its
interest bearing cash deposits to fund loan growth.
Interest Expense. Total interest expense decreased by $251,000 and
$570,000, or 20.8% and 22.8%, for the three and six-month periods ended June 30,
2004, respectively, when compared to the same periods in 2003. The decrease in
interest expense was primarily the result of a decrease in the weighted average
rate paid on deposits of 0.66%, from 2.20% for the six months ended June 30,
2003, to 1.54% for the six months ended June 30, 2004.
Net Interest Income. Net interest income increased by $393,000 and
$658,000, or 23.2% and 19.4%, for the three and six months ended June 30, 2004,
respectively, when compared to the same periods 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 3.14% for the six months ended June 30, 2003 to 3.87% for the six
months ended June 30, 2004.
13
The table below summarizes average balances and yields or costs for the
Company's interest earning assets and interest bearing liabilities.
June 30, 2004 June 30, 2003
--------------------------- -----------------------------
Average Average Average Average
Balance Yield/Cost Balance Yield/Cost
------- ---------- ------- ----------
Interest Earning Assets
Loans Receivable $173,178,000 6.39% $151,042,000 6.93%
Investments 36,087,000 2.47% 64,614,000 2.02%
------------ ------------
Total Interest Earning Assets $209,265,000 5.71% $215,656,000 5.46%
============ ============
Interest Bearing Liabilities
Deposits $168,170,000 1.54% $170,644,000 2.20%
Borrowed Funds 23,897,000 5.28% 23,000,000 5.37%
------------ ------------
Total Interest Bearing Liabilities $192,067,000 2.01% $193,644,000 2.58%
============ ============
Interest Rate Spread 3.70% 2.88%
Net Interest Margin 3.87% 3.14%
Provision for Loan Losses. The Company made no provision for loan
losses during the first six months 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 0.7% and 1.6% of
total loans at June 30, 2004 and December 31, 2003, respectively. Nonaccrual
loans were $109,000 and $829,000 at June 30, 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
possible 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 probable loss, further additions to the
allowance may be required if actual losses exceed estimated amounts.
Noninterest Income. Noninterest income decreased by $1,083,000 and
$2,131,000, or 49.7% and 51.4%, for the three and six month periods ended June
30, 2004 when compared to the same periods in 2003 primarily due to decreases in
the gain on sale of loans originated for sale. Due to low interest rates on
residential mortgage loans during the first six 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 half 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.
14
Noninterest Expense. Noninterest expense increased by $56,000, or 2.5%,
for the three months ended June 30, 2004 when compared to the same period during
2003. This increase was primarily the result of an increase of $221,000 in
compensation and benefits being partially offset by a $100,000 decrease in other
noninterest expense and a decrease of $61,000 in the amortization and valuation
adjustments for mortgage servicing rights. Noninterest expense decreased by
$13,000 for the six months ended June 30, 2004 when compared to the same period
in 2003 due primarily to $340,000 decrease in the amortization and valuation
adjustments for mortgage servicing rights being partially offset by a $331,000
increase 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 half 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 six months of 2004,
which resulted from changes in market conditions, the Company recorded a
$204,000 net recovery.
Income Tax Expense. Income tax expense decreased by $306,000 and
$609,000 for the three and six-month periods ended June 30, 2004 when compared
to the same periods in 2003. This change was the result of a decrease in income
before taxes for the periods ended June 30, 2004 when compared to the same
periods in 2003. The Company estimates the effective tax rate for the first six
months of 2004 will be consistent in future periods.
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at June 30, 2004 and December 31, 2003:
June 30, 2004 December 31, 2003
------------------------------------
(Dollars in Thousands)
Non-accrual loans
One to four family real estate $ - $ 281
Commercial real estate - 295
Commercial - 182
Consumer 109 71
------ ------
Total $ 109 $ 829
------ ------
Accruing loans which are contractually past due
90 days or more
One to four family real estate $ 62 $ 171
Consumer 3 1
------ ------
Total $ 65 $ 172
------ ------
Total non-accrual and accruing loans past due
90 days or more $ 174 $1,001
====== ======
Repossessed and non-performing assets
Repossessed property $ 42 $ -
Other non-performing assets - -
------ ------
Total repossessed and non-performing assets $ 42 $ -
------ ------
Total non-performing assets $ 216 $1,001
====== ======
Total non-accrual and accruing loans past due
90 days or more to total loans 0.09% 0.63%
====== ======
Total non-accrual and accruing loans past due
90 days or more to total assets 0.08% 0.45%
====== ======
Total nonperforming assets to total assets 0.10% 0.45%
====== ======
15
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 June 30, 2004 and December 31, 2003, the value of
loans classified as impaired was $70,000 and $791,000, respectively.
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 June
30, 2004 and December 31, 2003, the Bank's noninterest bearing cash was $4.3
million and $7.7 million, respectively.
The Company paid a cash dividend of $0.22 per share on February 16,
2004 and May 21, 2004. On July 20, 2004 the Company declared a cash dividend of
$0.22 per share payable on August 16, 2004 to stockholders of record on August
2, 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 June 30, 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 9.10% at June 30, 2004.
16
WELLS FINANCIAL CORP. and SUBSIDIARIES
Item 3. 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
June 30, 2004
FORM 10-QSB
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
------------------------------------------------------------------------
Securities
----------
The following table provides information on repurchases by the Company
of its common stock in each month of the quarter ended June 30, 2004:
Issuer Purchases of Equity Securities
- --------------------------------------------------------------------------------------------------
(c) Total Number of
(a)Total Shares Purchased as (d) Maximum Number of
Number of (b) Average Part of Publicly Shares that May Yet Be
Shares Price Paid Announced Plans or Purchased Under the Plan
Period Purchased per Share Programs or Programs
- --------------------------------------------------------------------------------------------------
April 1-30, 2004 - - - 38,875
- --------------------------------------------------------------------------------------------------
May 1-31, 2004 1,025 24.59 1,025 37,850
- --------------------------------------------------------------------------------------------------
June 1-30, 2004 700 25.30 700 37,150
- --------------------------------------------------------------------------------------------------
Total 1,725 24.88 1,725 37,150
- --------------------------------------------------------------------------------------------------
The total number of shares repurchased during the quarter was directly
related to the Company's stock repurchase plan that was publicly
announced on December 17, 2002, authorizing the repurchase of up to
60,000 shares of the Company's stock in open market transactions.
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 April 30, 2004 pursuant to
Items 7 and 9 to report earnings for the quarter ended March
31, 2004.
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: August 6, 2004
------------------------------------------------- --------------
Lonnie R. Trasamar
President and Chief Executive Officer
By: /s/ James D. Moll Date: August 6, 2004
------------------------------------------------- --------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer