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, 2004
------------------
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.
------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
MINNESOTA 41-1799504
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
53 1ST STREET S.W., P.O. BOX 310, WELLS MN 56097
------------------------------------------------
(Address of principal executive offices)
(507) 553-3151
---------------------------------------------------
(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 5, 2004:
CLASS OUTSTANDING
----- -----------
$.10 par value per share, common stock 1,168,119 Shares
Transitional Small Business Disclosure Format (check one):
Yes___ No __X__
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WELLS FINANCIAL CORP. AND SUBSIDIARY
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. UNREGISTERED SALES OF EQUITY 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, 2004 and December 31, 2003
(Dollars in Thousands)
(Unaudited)
ASSETS
2004 2003
------------------ -------------------
Cash, including interest-bearing accounts
September 30, 2004 $5,844; December 31, 2003 $17,655 $ 11,565 $ 25,318
Certificates of deposit 200 200
Securities available for sale, at fair value 16,156 27,410
Federal Home Loan Bank Stock, at cost 1,777 1,303
Loans held for sale 1,549 1,997
Loans receivable, net 192,549 160,049
Prepaid income taxes 92 -
Accrued interest receivable 1,613 1,209
Premises and equipment, net 4,140 3,585
Mortgage servicing rights, net 2,573 2,681
Other assets 262 53
----------------- ------------------
TOTAL ASSETS $ 232,476 $ 223,805
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 165,082 $ 169,662
Borrowed funds 33,640 23,000
Advances from borrowers for taxes and insurance 2,555 1,585
Deferred income taxes 1,506 1,456
Accrued interest payable 291 34
Accrued expenses and other liabilities 481 200
----------------- ------------------
TOTAL LIABILITIES 203,555 195,937
----------------- ------------------
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 17,142 17,154
Retained earnings, substantially restricted 27,669 26,922
Accumulated other comprehensive income 554 525
Unearned compensation restricted stock awards (396) (561)
Treasury stock, at cost, shares at September 30, 2004, 1,024,849
and 1,033,673 shares at December 31, 2003 (16,267) (16,391)
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 28,921 27,868
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 232,476 $ 223,805
================= ==================
(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,
----------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -------------
INTEREST AND DIVIDEND INCOME
Loans receivable:
First mortgage loans $ 1,754 $ 1,674 $ 5,187 $ 5,489
Consumer and other loans 1,163 698 3,260 2,117
Investment securities and other interest bearing deposits 189 275 634 928
--------- --------- --------- ---------
Total interest income 3,106 2,647 9,081 8,534
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 637 763 1,933 2,643
Borrowed funds 357 314 988 931
--------- --------- --------- ---------
Total interest expense 994 1,077 2,921 3,574
--------- --------- --------- ---------
Net interest income 2,112 1,570 6,160 4,960
PROVISION FOR LOAN LOSSES - - - -
--------- --------- --------- ---------
Net interest income after provision for loan losses 2,112 1,570 6,160 4,960
--------- --------- --------- ---------
NONINTEREST INCOME
Gain on sale of loans originated for sale 273 1,644 1,102 4,642
Loan servicing fees 241 242 722 691
Insurance commissions 165 135 505 346
Fees and service charges 161 404 464 820
Other 33 66 93 135
--------- --------- --------- ---------
Total noninterest income 873 2,491 2,886 6,634
--------- --------- --------- ---------
NONINTEREST EXPENSE
Compensation and benefits 1,091 1,068 3,388 3,034
Occupancy and equipment 260 298 794 830
Data processing 102 106 369 358
Advertising 84 73 236 206
Amortization and valuation adjustments for
mortgage servicing rights 209 250 473 854
Other 509 439 1,389 1,359
--------- --------- --------- ---------
Total noninterest expense 2,255 2,234 6,649 6,641
--------- --------- --------- ---------
Income before taxes 730 1,827 2,397 4,953
INCOME TAX EXPENSE 259 692 884 1,926
--------- --------- --------- ---------
NET INCOME $ 471 $ 1,135 $ 1,513 $ 3,027
========= ========= ========= =========
CASH DIVIDENDS DECLARED PER SHARE $ 0.22 $ 0.20 $ 0.66 $ 0.60
========= ========= ========= =========
EARNINGS PER SHARE
Basic $ 0.40 $ 1.00 $ 1.30 $ 2.68
========= ========= ========= =========
Diluted $ 0.40 $ 0.98 $ 1.28 $ 2.62
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 1,161,706 1,132,939 1,160,848 1,129,989
========= ========= ========= =========
Diluted 1,186,586 1,157,877 1,185,728 1,154,927
========= ========= ========= =========
(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,
------------------------ -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net Income $ 471 $ 1,135 $ 1,513 $ 3,027
Other comprehensive income:
Unrealized depreciation on
securities available for sale 431 (334) 50 (578)
Related deferred income taxes (164) 137 (21) 237
------- --------- ------- -------
Comprehensive income $ 738 $ 938 $ 1,542 $ 2,686
======== ========= ======= =======
(See Notes to Consolidated Financial Statements)
3
WELLS FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 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 nine
months ended September 30,
2004 - - 1,513 - - - 1,513
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - 29 - - 29
Treasury stock purchases,
1,725 shares - - - - - (43) (43)
Options exercised - (85) - - - 116 31
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 - - - - 272 - 272
Dividends on common stock - - (766) - - - (766)
----------------------------------------------------------------------------------------------
Balance September 30, 2004 $ 219 $ 17,142 $27,669 $ 554 $ (396) $(16,267) $ 28,921
==============================================================================================
(See Notes to Consolidated Financial Statements)
4
WELLS FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 2004 and 2003
(Dollars in Thousands)
(Unaudited)
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,513 $ 3,027
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on sale of loans originated for sale (1,102) (4,642)
Compensation on allocation of ESOP shares - 79
Amortization of restricted stock awards 272 58
Tax benefit from exercised options 17 14
Gain on the sale of foreclosed real estate - 6
Deferred income taxes 28 250
Depreciation on premises and equipment 337 262
Amortization of deferred loan origination fees (49) (79)
Amortization and valuation adjustments for mortgage servicing rights 473 854
Amortization of securities premiums and discounts 160 106
Loss on sale of securities 19 -
Loans originated for sale (48,709) (188,940)
Proceeds from the sale of loans originated for sale 49,894 197,278
Changes in assets and liabilities:
Accrued interest receivable (404) 226
Other assets (131) (142)
Accrued expenses and other liabilities 537 243
------------ ------------
Net cash provided by operating activities 2,855 8,600
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans $ (32,621) $ 2,075
Purchase of certificates of deposit (125) (200)
Purchase of securities available for sale (2,625) (21,403)
Purchase of Federal Home Loan Bank stock (474) (14)
Proceeds from the maturities of certificates of deposit 125 200
Proceeds from the maturities of securities available for sale 6,696 15,999
Proceeds from sale of securities AFS 7,056 -
Proceeds from the sale of Federal Home Loan Bank stock - 589
Proceeds from the sale and redemption of foreclosed real estate - 269
Purchase of premises and equipment (892) (823)
Investment in foreclosed real estate - (6)
------------ ------------
Net cash used in investment activities (22,860) (3,314)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits $ (4,580) $ (1,504)
Net increase in advances from borrowers for taxes and insurance 970 904
Proceeds from borrowed funds 10,640 -
Options exercised 31 22
Purchase of treasury stock (43) -
Dividends on common stock (766) (678)
------------ ------------
Net cash provided by (used in) financing activities 6,252 (1,256)
------------ ------------
Net increase (decrease) in cash and cash equivalents (13,753) 4,030
CASH:
Beginning 25,318 36,571
------------ ------------
Ending $11,565 $40,601
============ ============
(See Notes to Consolidated Financial Statements)
5
WELLS FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Nine Months Ended September 30, 2004 and 2003
(Dollars in Thousands)
(Unaudited)
2004 2003
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 1,676 $ 2,420
Interest on borrowed funds 988 931
Income taxes 980 1,901
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 100 $ 255
Allocation of ESOP shares to participants - 29
Net change in unrealized appreciation on securities available for sale
29 (341)
============ ============
(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, 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 Nine months ended
September 30, September 30,
---------------------- ---------------------
2004 2003 2004 2003
---------------------- ---------------------
Net income:
As reported $ 471 $ 1,135 $ 1,513 $ 3,027
Deduct total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (3) (6) (48) (17)
-------------------- --------------------
Pro forma
468 1,129 1,465 3,010
==================== ====================
Basic earnings per share:
As reported $ 0.40 $ 1.00 $ 1.30 $ 2.68
Pro forma 0.40 1.00 1.26 2.66
Diluted earnings per share:
As reported $ 0.40 $ 0.98 $ 1.28 $ 2.62
Pro forma 0.39 0.98 1.24 2.61
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, 2004 and December 31, 2003.
SEPTEMBER 30, 2004 DECEMBER 31, 2003
AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------
(Dollars in Thousands)
TIER 1 (CORE) CAPITAL
REQUIRED $ 9,147 4.00% $ 8,666 4.00%
ACTUAL 20,280 8.87% 19,516 9.01%
EXCESS 11,133 4.87% 10,850 5.01%
RISK-BASED CAPITAL
REQUIRED $14,722 8.00% 12,700 8.00%
ACTUAL 21,120 11.48% 20,420 12.86%
EXCESS 6,398 3.48% 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 Nine months ended
September 30, September 30,
---------------------------- --------------------------
2004 2003 2004 2003
------------ -------------- --------------------------
Basic EPS 1,161,706 1,132,939 1,160,848 1,129,989
Effect of dilutive securities:
Stock options 24,880 24,938 24,880 24,938
---------------------------- --------------------------
Diluted EPS 1,186,586 1,157,877 1,185,728 1,154,927
============================ ==========================
NOTE 4. SUBSEQUENT EVENTS
On September 28, 2004, the Company commenced a tender offer for up to
150,000 shares of its common stock in a transaction known as a modified Dutch
auction tender offer. The purpose of this offer is to reduce the number of the
Company's stockholders of record to fewer than 300 which will allow the Company
to deregister from the Security and Exchange Commission and delist from the
Nasdaq National Market. If this offer does not result in the Company qualifying
to deregister with the Securities and Exchange Commission the Company intends to
pursue alternatives to achieve that result, including a reverse stock split. In
the offer, the Company offered to purchase up to 150,000 shares of its common
stock at a price not greater than $31.50 nor less than $29.50 per share in cash.
Assuming that 150,000 shares are tendered in the offer at a price between $29.50
and $31.50 per share, the aggregate purchase price paid by the Company will be
between $4,425,000 and $4,725,000. The Company has adequate cash to pay for
repurchased shares. The offer, as extended, will expire on November 19, 2004.
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, gains on the sale of loans originated for sale,
service charges, servicing fees, operating expenses, and income taxes.
The Bank has nine full service offices located in Wells, Blue Earth,
Mankato, Fairmont, North Mankato, Albert Lea, St. Peter and Owatonna, Minnesota,
Mason City, Iowa and a loan origination office in Farmington, Minnesota.
The Company may from time to time make written or oral "forward-looking
statements" including statements contained in this report and in other
communications by the Company which are made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements, such as statements of the Company's plans,
objectives, estimates and intentions, involve risks and uncertainties and are
subject to change based on various important factors (some of which are beyond
the Company's control). The following factors, among others, could cause the
Company's financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements: the strength of the United States economy in general and the
strength of the local economies in which the Company conducts operations; the
effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System, inflation, interest rate, market and monetary fluctuations; the
timely development of and acceptance of new products and services of the Company
and the perceived overall value of the products and services by users, including
the features, pricing and quality compared to competitor's products and
services; the willingness of users to substitute competitors' products and
services for the Company's products and services; the success of the Company in
gaining regulatory approval of its products and services, when required; the
impact of changes in financial services' laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; changes in consumer spending and savings habits; and the success
of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
10
CRITICAL ACCOUNTING ESTIMATES:
The consolidated financial statements include amounts that are based on
informed judgments of management. These estimates and judgments are the result
of management's need to estimate the effect of matters that are inherently
uncertain. Therefore, actual results could vary significantly from the estimates
used. Management considers the following items to be the critical accounting
estimates contained in the consolidated financial statements.
ALLOWANCE FOR LOAN LOSS. The allowance for loan loss is based on
management's periodic review of the loan portfolio. In evaluating the adequacy
of the allowance for loan loss, management considers factors including, but not
limited to, specific loan impairment, historical loss experience, the size and
composition of the loan portfolio and current economic conditions. Although
management believes that the allowance for loan loss is maintained at an
adequate level, there can be no assurance that further additions will not be
made to the allowance and that losses will not exceed 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.
RECENT DEVELOPMENTS:
STOCK TENDER OFFER. On September 28, 2004, the Company commenced a
tender offer for up to 150,000 shares of its common per stock in a transaction
known as a modified Dutch auction tender offer. In the offer, the Company
offered to purchase up to 150,000 shares of its common stock at a price not
greater than $31.50 nor less than $29.50 share in cash. The offer, as extended,
will expire on November 19, 2004. See Note 4 in Notes to Consolidated Financial
Statements.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003:
Total assets increased by $8,671,000, from $223,805,000 at December 31,
2003 to $232,476,000 at September 30, 2004 due primarily to an increase in loans
receivable. Cash, securities available for sale and loans held for sale
decreased by $13,753,000, $11,254,000 and $448,000, respectively, while loans
receivable increased by $32,500,000. 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 September 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 $840,000 and $904,000 and 0.43% and 0.56%,
respectively.
Activity in the Company's allowance for loan losses for the nine months
ended September 30, 2004 and 2003 is summarized as follows:
2004 2003
--------------------------
Balance on January 1, $ 904,000 $ 908,000
Provision for loan losses - -
Charge-offs (70,000) (17,000)
Recoveries 6,000 14,000
---------- ----------
BALANCE ON SEPTEMBER 30, $ 840,000 $ 905,000
========== ==========
11
Loans on which the accrual of interest has been discontinued amounted
to $351,000 and $829,000 at September 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 September
30, 2004 and December 31, 2003 was $43,000 and $791,000, respectively.
Mortgage servicing rights decreased by $108,000 at September 30, 2004
when compared to December 31, 2003 due to the amortization and valuation
adjustment of mortgage servicing rights being greater than the capitalization of
new 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 nine months of 2004
to the same period in 2003, the amortization of mortgage servicing rights
decreased by $639,000. During the first nine months 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 $1,057,000 during the first nine months of 2004
when compared to the same period in 2003, due to the low market interest rates
mentioned above resulting in a larger amount of mortgage loan originations
during the first nine months 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
$187,000 and a $445,000 net recovery of its mortgage servicing rights valuation
reserve during the first nine months 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 Nine months ended
September 30, September 30,
----------------------------------- -----------------------------------
2004 2003 2004 2003
----------------------------------- -----------------------------------
Mortgage servicing rights
Balance at beginning of period $ 2,691,000 $ 2,885,000 $ 2,896,000 $ 2,839,000
Mortgage servicing rights capitalized 102,000 492,000 365,000 1,422,000
Amortization expense (192,000) (415,000) (660,000) (1,299,000)
----------------------------------- -----------------------------------
Balance at end of period $ 2,601,000 $ 2,962,000 $ 2,601,000 $ 2,962,000
=================================== ===================================
Valuation reserve
Balance at beginning of period $ (11,000) $ (380,000) $ (215,000) $ (660,000)
Additions (17,000) - (44,000) (150,000)
Subtractions - 165,000 231,000 595,000
----------------------------------- -----------------------------------
Balance at end of period $ (28,000) $ (215,000) $ (28,000) $ (215,000)
=================================== ===================================
Mortgage Servicing Rights, net $ 2,573,000 $ 2,747,000 $ 2,573,000 $ 2,747,000
=================================== ===================================
Liabilities increased by $7,618,000 from $195,937,000 at December 31,
2003 to $203,555,000 at September 30, 2004. This increase is primarily due to a
$10,640,00 increase in borrowed funds being partially offset by a $4,580,000
decrease in deposits. Also contributing to the increase in liabilities was a
$970,000 increase in advances from borrowers for taxes and insurance.
Stockholders' equity increased by $1,053,000 from $27,868,000 at
December 31, 2003 to $28,921,000 at September 30, 2004. The increase in equity
was primarily the result of net income for the first nine months of 2004 of
$1,513,000 being partially offset by the payment of $766,000 in cash dividends.
On October 19, 2004, the Board of Directors of the Company declared a $0.22 per
share cash dividend to be paid on November 26, 2004 to stockholders of record on
November 16, 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 NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003.
NET INCOME. Net income decreased by $664,000, or 58.5% for the
three-month period ended September 30, 2004 when compared to the same period
during 2003. The decrease in net income was primarily due to a decrease of
$1,618,000 in noninterest income partially offset by a $542,000 increase in net
interest income and a $433,000 decrease in income tax expense for the three
months ended September 30, 2004 when compared to the same period in 2003.
Net income decreased by $1,514,000, or 50.0% for the nine month period
ended September 30, 2004 when compared to the same period during 2003. The
decrease in net income was primarily due to a decrease of $3,748,000 in
noninterest income partially offset by a $1,200,000 increase in net interest
income and a $1,042,000 decrease in income tax expense for the nine months ended
September 30, 2004 when compared to the same period in 2003.
INTEREST INCOME. Interest income increased by $459,000 and $547,000, or
17.3% and 6.4%, for the three and nine month periods ended September 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 $27.9 million increase
in the average balance of the Company's loan portfolio for the nine months ended
September 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 0.42%, from
6.73% for the first nine months of 2003 to 6.31% for the first nine 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 $64.5 million during the first nine months of 2003 to $32.4 million during
the first nine months of 2004. This decrease was primarily the result of the
Company using its interest bearing cash deposits and cash received from the sale
of $7.1 million of securities available for sale to fund loan growth.
INTEREST EXPENSE. Interest expense on deposits decreased by $126,000
and $710,000, or 16.5% and 26.9%, for the three and nine month periods ended
September 30, 2004, respectively, when compared to the same periods in 2003. The
decrease in interest expense on deposits was primarily the result of a decrease
in the weighted average rate paid on deposits of 0.53%, from 2.07% for the nine
months ended September 30, 2003, to 1.54% for the nine months ended September
30, 2004. Interest expense on borrowed funds increased by $43,000 and $57,000,
or 13.7% and 6.1%, for the three and nine months ended September 30, 2004,
respectively, when compared to the same periods in 2003 primarily due to an
increase in the average balance of borrowed funds during 2004 when compared to
2003.
NET INTEREST INCOME. Net interest income increased by $542,000 and
$1,200,000, or 34.5% and 24.2%, for the three and nine months ended September
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 3.07% for the nine months ended September 30,
2003 to 3.89% for the nine months ended September 30, 2004.
13
The table below summarizes average balances and yields or costs for the
Company's interest earning assets and interest bearing liabilities.
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
-------------------------- -----------------------
Average Average Average Average
Balance Yield/Cost Balance Yield/Cost
INTEREST EARNING ASSETS
Loans Receivable $178,579 6.31% $150,670 6.73%
Investments and Interest Earning Deposits 32,367 2.61% 64,476 1.92%
-------- --------
Total Interest Earning Assets $210,946 5.74% $215,146 5.29%
INTEREST BEARING LIABILITIES
Deposits $167,324 1.54% $169,979 2.07%
Borrowed Funds 25,920 5.08% 23,000 5.40%
-------- --------
Total Interest Bearing Liabilities $193,244 2.02% $192,979 2.47%
INTEREST RATE SPREAD 3.72% 2.82%
NET INTEREST MARGIN 3.89% 3.07%
PROVISION FOR LOAN LOSSES. The Company made no provision for loan
losses during the first nine 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 0.8% and 1.6% of
total loans at September 30, 2004 and December 31, 2003, respectively.
Nonaccrual loans were $351,000 and $829,000 at September 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 may 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 $1,618,000 and
$3,748,000, or 65.0% and 56.5%, for the three and nine month periods ended
September 30, 2004, respectively, 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 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 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 nine months of
2004, interest rates on residential mortgages have, generally, 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 remained relatively constant
for the three and nine-month periods ended September 30, 2004 when compared to
the same periods during 2003. During the quarter ended September 30, 2004
increases of $23,000 and $70,000 in compensation and benefits and other
noninterest expense, respectively, were partially offset by decreases of $38,000
and $41,000 in occupancy and equipment and the amortization and valuation
adjustments for mortgage servicing rights, respectively. For the nine months
ended September 30, 2004 when compared to the same period in 2003 increases of
$354,000, $30,000 and $30,000 in compensation and benefits, advertising and
other noninterest expense, respectively, were partially offset by a $381,000
decrease in the amortization and valuation adjustments for mortgage servicing
rights described above.
14
INCOME TAX EXPENSE. Income tax expense decreased by $433,000 and
$1,042,000 for the three and nine month periods ended September 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 September 30, 2004 when compared to
the same periods in 2003.
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of non-performing assets at September 30, 2004 and December 31, 2003:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
----------------------------------------
(Dollars in Thousands)
Non-accrual loans
One to four family real estate $ 211 $ 281
Commercial real estate - 295
Commercial 60 182
Consumer 80 71
----------------------------------------
Total $ 351 $ 829
----------------------------------------
Accruing loans which are contractually past due 90
days or more
One to four family real estate $ 199 $ 171
Commercial real estate 29 -
Consumer 1 1
----------------------------------------
Total $ 229 $ 172
----------------------------------------
Total non-accrual and accruing loans past due 90
days or more $ 580 $ 1,001
========================================
Repossessed and non-performing assets
Repossessed property $ 100 $ -
Other non-performing assets - -
----------------------------------------
Total repossessed and non-performing assets $ 100 $ -
----------------------------------------
Total non-performing assets $ 680 $ 1,001
========================================
Total non-accrual and accruing loans past due 90
days or more to total loans 0.30% 0.63%
========================================
Total non-accrual and accruing loans past due 90
days or more to total assets 0.25% 0.45%
========================================
Total nonperforming assets to total assets 0.29% 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 September 30, 2004 and December 31, 2003, the value
of loans classified as impaired was $43,000 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
September 30, 2004 and December 31, 2003, the Bank's noninterest bearing cash
was $5.7 million and $7.7 million, respectively.
The Bank notified the Office of Thrift Supervision (OTS) that it
intends to declare a special cash dividend of $2,030,000 to the Company, payable
on November 12, 2004. The OTS has notified the Bank indicating that it takes no
objection to the payment of this dividend.
The Company paid a cash dividend of $0.22 per share on February 16,
2004, May 21, 2004 and August 16, 2004. On October 19, 2004 the Company declared
a cash dividend of $0.22 per share payable on November 26, 2004 to stockholders
of record on November 16, 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 September 30, 2004, the Bank exceeded all current
capital requirements. See Note 2 in the notes to Consolidated Financial
Statements.
The OTS has adopted a core capital requirement for savings institutions
comparable to the requirement for national banks. The OTS core capital
requirement for the Bank is 4% of adjusted assets for thrifts that receive the
highest supervisory rating for safety and soundness. The Bank had core capital
of 8.87% at September 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
SEPTEMBER 30, 2004
FORM 10-QSB
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. Legal Proceedings
-----------------
None
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
None
ITEM 3. Defaults upon Senior Securities
-------------------------------
None
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
ITEM 5. Other information
-----------------
None
ITEM 6. Exhibits and Reports of Form 8-K
--------------------------------
a. Exhibits:
(i) Exhibit 31 - Section 302 certifications
(ii) Exhibit 32 - Section 906 certification
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 5, 2004
-------------------------------------------------- ----------------
LONNIE R. TRASAMAR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BY: /S/ JAMES D. MOLL DATE: NOVEMBER 5, 2004
-------------------------------------------------- ----------------
JAMES D. MOLL
TREASURER AND PRINCIPAL FINANCIAL & ACCOUNTING OFFICER