-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KkrzaIbYLCy7l3vOrbn1OavHfn6ENXlyVd/eBhPJy5vgBn7uv0G805r3txJ0jcuN kQDmTc8yfCmtyMyvJIrQAA== 0000946275-03-000788.txt : 20031107 0000946275-03-000788.hdr.sgml : 20031107 20031107090415 ACCESSION NUMBER: 0000946275-03-000788 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLS FINANCIAL CORP CENTRAL INDEX KEY: 0000934739 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 411799504 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25342 FILM NUMBER: 03983669 BUSINESS ADDRESS: STREET 1: 53 FIRST ST SW STREET 2: P.O. BOX 310 CITY: WELLS STATE: MN ZIP: 56097 BUSINESS PHONE: 5075533151 MAIL ADDRESS: STREET 1: 53 1ST ST SW STREET 2: PO BOX 310 CITY: WELLS STATE: MN ZIP: 56097 10QSB 1 f10qsb_093003-0129.txt FORM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 ------------------ 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 ------- Wells Financial Corp. ------------------------------------------------------ (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 ------------------------------------------------ (Address of principal executive offices) (507) 553-3151 ------------------------------------------------ (Registrant's Telephone Number, including Area Code) N/A ------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check by |X| whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No The number of shares outstanding of each of the issuer's classes of common stock as of November 7, 2003: Class Outstanding ----- ----------- $.10 par value per share, common stock 1,135,327 Shares Transitional Small Business Disclosure Format (check one): Yes No X --- --- WELLS FINANCIAL CORP. and SUBSIDIARY [OBJECT OMITTED] FORM 10-QSB INDEX ================================================================================ PART I - FINANCIAL INFORMATION: Page - ------------------------------- ---- Item 1. Consolidated Financial Statements (Unaudited) Consolidated Statements of Financial Condition 1 Consolidated Statements of Income 2 Consolidated Statements of Comprehensive Income 3 Consolidated Statement of Stockholders' Equity 4 Consolidated Statements of Cash Flows 5-6 Notes to Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Use of Proceeds 10-16 Item 3. Controls and Procedures 17 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures ================================================================================ WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Financial Condition September 30, 2003 and December 31, 2002 (Dollars in Thousands) (Unaudited)
ASSETS 2003 2002 --------- --------- Cash, including interest-bearing accounts September 30, 2003 $39,055; December 31, 2002 $35,178 $ 40,601 $ 36,571 Certificates of deposit 200 200 Securities available for sale, at fair value 24,576 19,856 Federal Home Loan Bank Stock, at cost 1,300 1,875 Loans held for sale 4,577 9,695 Loans receivable, net 143,335 145,586 Accrued interest receivable 1,161 1,387 Foreclosed real estate 195 209 Premises and equipment 3,536 2,975 Mortgage servicing rights, net 2,747 2,179 Other assets 225 83 --------- --------- TOTAL ASSETS $ 222,453 $ 220,616 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $ 167,622 $ 169,126 Borrowed funds 23,000 23,000 Advances from borrowers for taxes and insurance 2,251 1,347 Deferred income taxes 1,389 1,376 Accrued interest payable 273 50 Accrued expenses and other liabilities 514 494 --------- --------- TOTAL LIABILITIES 195,049 195,393 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, no par value; 500,000 shares authorized; none outstanding - - Common stock, $.10 par value; authorized 7,000,000 shares; issued 2,187,500 shares 219 219 Additional paid-in capital 16,938 16,985 Retained earnings, substantially restricted 26,636 24,287 Accumulated other comprehensive income 405 746 Unearned ESOP shares - (29) Unearned compensation restricted stock awards (80) (138) Treasury stock, at cost, 1,054,060 shares at September 30, 2003, and 1,062,435 shares at December 31, 2002 (16,714) (16,847) --------- --------- TOTAL STOCKHOLDERS' EQUITY 27,404 25,223 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 222,453 $ 220,616 ========= =========
(See Notes to Consolidated Financial Statements) 1 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Income (Dollars in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Interest and dividend income Loans receivable: First mortgage loans $ 1,674 $ 2,253 $ 5,489 $ 6,951 Consumer and other loans 698 829 2,117 2,395 Investment securities and other Interest bearing deposits 275 387 928 1,198 ---------- ---------- ---------- ---------- Total interest income 2,647 3,469 8,534 10,544 ---------- ---------- ---------- ---------- Interest Expense Deposits 763 1,211 2,643 3,890 Borrowed funds 314 314 931 931 ---------- ---------- ---------- ---------- Total interest expense 1,077 1,525 3,574 4,821 ---------- ---------- ---------- ---------- Net interest income 1,570 1,944 4,960 5,723 Provision for loan losses - - - 23 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 1,570 1,944 4,960 5,700 ---------- ---------- ---------- ---------- Noninterest income Gain on sale of loans originated for sale 974 319 2,571 1,074 Loan origination and commitment fees 670 426 2,071 926 Loan servicing fees 242 171 691 490 Insurance commissions 135 120 346 300 Fees and service charges 404 177 820 579 Other 66 26 135 60 ---------- ---------- ---------- ---------- Total noninterest income 2,491 1,239 6,634 3,429 ---------- ---------- ---------- ---------- Noninterest expense Compensation and benefits 1,068 848 3,034 2,517 Occupancy and equipment 298 211 830 659 Data processing 106 101 358 338 Advertising 73 62 206 162 Amortization and valuation adjustments for mortgage servicing rights 250 194 854 443 Other 439 344 1,359 940 ---------- ---------- ---------- ---------- Total noninterest expense 2,234 1,760 6,641 5,059 ---------- ---------- ---------- ---------- Income before taxes 1,827 1,423 4,953 4,070 Income tax expense 692 577 1,926 1,687 ---------- ---------- ---------- ---------- Net income $ 1,135 $ 846 $ 3,027 $ 2,383 ========== ========== ========== ========== Cash dividends declared per share $ 0.20 $ 0.18 $ 0.60 $ 0.54 ========== ========== ========== ========== Earnings per share Basic earnings per share $ 1.00 $ 0.72 $ 2.68 $ 2.02 ========== ========== ========== ========== Diluted earnings per share $ 0.98 $ 0.70 $ 2.62 $ 1.97 ========== ========== ========== ========== Weighted average number of common shares outstanding: Basic 1,132,939 1,182,522 1,129,989 1,178,437 ========== ========== ========== ========== Diluted 1,157,877 1,213,478 1,154,927 1,212,180 ========== ========== ========== ==========
(See Notes to Consolidated Financial Statements) 2 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Comprehensive Income (Dollars in Thousands) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Net Income $ 1,135 $ 846 $ 3,027 $ 2,383 Other comprehensive income: Unrealized appreciation on securities available for sale (334) (15) (578) - Related deferred income taxes 137 6 237 - ------- ------- ------- ------- Comprehensive income $ 938 $ 837 $ 2,686 $ 2,383 ======= ======= ======= ======= (See Notes to Consolidated Financial Statements) 3 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statement of Stockholders' Equity Nine Months Ended September 30, 2003 (Dollars in Thousands) (Unaudited)
Unearned Employee Unearned Accumulated Stock Compensation Total Additional Other Ownership Restricted Stock- Common Paid-In Retained Comprehensive Plan Stock Treasury holders' Stock Capital Earnings Income shares Awards Stock Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2002 $ 219 $ 16,985 $ 24,287 $ 746 $ (29) $ (138) $ (16,847) $ 25,223 Net income for the nine months ended September 30, 2003 - - 3,027 - - - - 3,027 Net change in unrealized appreciation on securities available for sale, net of related deferred taxes - - - (341) - - - (341) Options exercised - (111) - - - - 133 22 Tax benefit related to exercised options - 14 - - - - - 14 Amortization of unearned compensation - - - - - 58 - 58 Dividends on common stock - - (678) - - - - (678) Allocated employee stock ownership plan shares - 50 - - 29 - - 79 --------------------------------------------------------------------------------------------------- Balance September 30, 2003 $ 219 $ 16,938 $ 26,636 $ 405 $ - $ (80) $ (16,714) $ 27,404 ===================================================================================================
(See Notes to Consolidated Financial Statements) 4 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Cash Flow Nine Months Ended September 30, 2003 and 2002 (Dollars in Thousands) (Unaudited)
2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 3,027 $ 2,383 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses - 23 Gain on the sale of loans originated for sale (2,571) (1,074) Compensation on allocation of ESOP shares 79 227 Amortization of restricted stock awards 58 61 Tax benefit from exercised options 14 128 Loss (gain) on the sale of foreclosed real estate 6 (7) Write-down of foreclosed real estate - 30 Deferred income taxes 250 81 Depreciation and amortization on premises and equipment 262 173 Amortization of deferred loan origination fees (79) (96) Amortization and valuation adjustments for mortgage servicing rights 854 443 Amortization of securities premiums and discounts 106 17 Loans originated for sale (191,011) (93,228) Proceeds from the sale of loans originated for sale 197,278 90,982 Changes in assets and liabilities: Accrued interest receivable 226 (250) Other assets (142) (28) Accrued expenses and other liabilities 243 345 --------- --------- Net cash provided by operating activities 8,600 210 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in loans $ 2,075 $ 5,117 Purchase of certificates of deposit (200) (100) Purchase of securities available for sale (21,403) (17,287) Purchase of Federal Home Loan Bank stock (14) - Proceeds from the maturities of certificates of deposit 200 100 Proceeds from the maturities of securities available for sale 15,999 11,229 Proceeds from the sale of Federal Home Loan Bank stock 589 - Proceeds from the sale and redemption of foreclosed real estate 269 234 Purchase of premises and equipment (823) (389) Investment in foreclosed real estate (6) (6) --------- --------- Net cash used in investment activities (3,314) (1,102) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits $ (1,504) $ (8,581) Net increase in advances from borrowers for taxes and insurance 904 470 Options exercised 22 396 Purchase of treasury stock - (172) Dividends on common stock (678) (631) --------- --------- Net cash used in financing activities (1,256) (8,518) --------- --------- Net increase (decrease) in cash and cash equivalents 4,030 (9,410) CASH: Beginning 36,571 38,070 --------- --------- Ending $ 40,601 $ 28,660 ========= =========
(See Notes to Consolidated Financial Statements) 5 WELLS FINANCIAL CORP. and SUBSIDIARY Consolidated Statements of Cash Flow (continued) Nine Months Ended September 30, 2003 and 2002 (Dollars in Thousands) (Unaudited)
2003 2002 ------- ------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for: Interest on deposits $ 2,420 $ 3,738 Interest on borrowed funds 931 931 Income taxes 1,901 1,501 ======= ======= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Transfers from loans to foreclosed real estate $ 255 $ 236 Allocation of ESOP shares to participants 29 95 Net change in unrealized appreciation on securities available for sale (341) - Building costs in accounts payable - 172 ======= =======
(See Notes to Consolidated Financial Statements) 6 WELLS FINANCIAL CORP. and SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) (Unaudited) NOTE 1. SELECTED ACCOUNTING POLICIES Basis of presentation The foregoing consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (which consist of normal recurring accruals) necessary for a fair presentation of the consolidated financial statements have been included. Results for any interim period are not necessarily indicative of results to be expected for the year. The interim consolidated financial statements include the accounts of Wells Financial Corp. (Company), its subsidiary, Wells Federal Bank (Bank), and the Bank's subsidiaries, Greater Minnesota Mortgage, Inc., Wells Insurance Agency, Inc. and Wells REIT Holding, LLC. Employee stock plans At September 30, 2003, the Company had three stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Account for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based employee compensation cost on options awarded under these plans has been recognized, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share had compensation cost for the stock option plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123, Accounting for Stock-Based Compensation):
Three months ended Nine months ended September 30, September 30, ---------------------- ---------------------- 2003 2002 2003 2002 --------- -------- --------- --------- Net income: As reported $ 1,135 $ 846 $ 3,027 $ 2,383 Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (6) (7) (17) (21) --------- -------- --------- --------- Pro forma 1,129 839 3,010 2,362 ========= ======== ========= ========= Basic earnings per share: As reported $ 1.00 $ 0.72 $ 2.68 $ 2.02 Pro forma 1.00 0.71 2.66 2.00 Diluted earnings per share: As reported $ 0.98 $ 0.70 $ 2.62 $ 1.97 Pro forma 0.98 0.69 2.61 1.95
7 WELLS FINANCIAL CORP. and SUBSIDIARY Notes to Consolidated Financial Statements (Dollars in thousands) (Unaudited) Use of estimates In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and revenues and expenses for the reporting period. Actual results could differ from those estimates. Two material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of mortgage servicing rights. Management believes that the allowance for loan loss is adequate. While management uses available information to recognize losses on loans, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan loss. Such agencies may require the Company to recognize additions to the allowance for loan loss based on their judgments about information available to them at the time of their examination. Mortgage servicing rights are subject to change based primarily on changes in the mix of loans, interest rates, prepayment speeds, or default rates from the estimates used in the valuation of the mortgage servicing rights. Such changes may have a material effect on the amortization and valuation of mortgage servicing rights. Although management believes that the assumptions used to evaluate the mortgage servicing rights for impairment are reasonable, future adjustment may be necessary if future conditions differ substantially from the economic estimates used to determine the value of the mortgage servicing rights. NOTE 2. REGULATORY CAPITAL The following table presents the Bank's regulatory capital amounts and percents at September 30, 2003 and December 31, 2002. September 30, 2003 December 31, 2002 Amount Percent Amount Percent ------------------------------------------------------------------- (Dollars in Thousands) Tier 1 (Core) Capital Required $ 8,587 4.00% $ 8,629 4.00% Actual 19,716 9.18% 19,245 8.92% Excess 11,129 5.18% 10,616 4.92% Risk-based Capital Required 11,790 8.00% 10,956 8.00% Actual 20,621 13.99% 20,153 14.72% Excess 8,831 5.99% 9,197 6.72% 8 WELLS FINANCIAL CORP. and SUBSIDIARY Notes to Consolidated Financial Statements Continued (Unaudited) NOTE 3. EARNINGS PER SHARE Earnings per share are calculated and presented in accordance with FASB Statement No. 128, Earnings per Share. The Statement requires the presentation of earnings per share by all entities that have common stock or potential common stock, such as options, warrants and convertible securities, outstanding that trade in a public market. Those entities that have only common stock outstanding are required to present basic earnings per-share amounts. All other entities are required to present basic and diluted earnings per-share amounts. Diluted per-share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless the effect is to reduce a loss or increase the income per common share from continuing operations. A reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share is presented in the following chart.
Number of Shares Three months ended Nine months ended September 30, September 30, -------------------------------------------------- 2003 2002 2003 2002 ------------------------ ----------------------- Basic EPS 1,132,939 1,182,522 1,129,989 1,178,437 Effect of dilutive securities: Stock options 24,938 30,956 24,938 33,743 ------------------------ ----------------------- Diluted EPS 1,157,877 1,213,478 1,154,927 1,212,180 ======================== =======================
9 WELLS FINANCIAL CORP. and SUBSIDIARIES Management's Discussion and Analysis of Financial Condition And Results of Operations General: Wells Financial Corp. (Company) was incorporated under the laws of the State of Minnesota in December 1994 for the purpose of owning all of the outstanding stock of Wells Federal Bank, fsb (Bank) issued in the mutual to stock conversion of the Bank. On April 11, 1995, the conversion was completed and $8.4 million of the net proceeds from the sale of the stock were provided to the Bank in exchange for all of the Bank's stock. The consolidated financial statements included herein are for the Company, the Bank and the Bank's wholly owned subsidiaries, Greater Minnesota Mortgage, Inc. and Wells Insurance Agency, Inc., and Wells REIT Holding, LLC. The income of the Company is derived primarily from the operations of the Bank and the Bank's subsidiaries, and to a lesser degree from interest income from securities and certificates of deposit with other banks. The Bank's net income is primarily dependent upon the difference (or spread) between the average yield earned on loans, investments and mortgage-backed securities and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Net income is also affected by, among other things, provision for loan losses, gains on the sale of interest earning assets, service charges, servicing fees, subsidiary activities, operating expenses, and income taxes. The Bank has eight full service offices located in Wells, Blue Earth, Mankato, Fairmont, North Mankato, Albert Lea, St. Peter and Owatonna, Minnesota and a loan origination office in Farmington, Minnesota. During the fourth quarter of 2003 the Bank leased a facility and opened a loan origination office in Mason City, Iowa. The Company may from time to time make written or oral "forward-looking statements" including statements contained in this report and in other communications by the Company which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as statements of the Company's plans, objectives, estimates and intentions, involve risks and uncertainties and are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of the products and services by users, including the features, pricing and quality compared to competitor's products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and savings habits; and the success of the Company at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. 10 Critical Accounting Estimates: The consolidated financial statements include amounts that are based on informed judgments of management. These estimates and judgments are the result of management's need to estimate the effect of matters that are inherently uncertain. Therefore, actual results could vary significantly from the estimates used. Management considers the following items to be the critical accounting estimates contained in the consolidated financial statements. Allowance for Loan Loss. The allowance for loan loss is based on management's periodic review of the loan portfolio. In evaluating the adequacy of the allowance for loan loss, management considers factors including, but not limited to, specific loan impairment, historical loss experience, the size and composition of the loan portfolio and current economic conditions. Although management believes that the allowance for loan loss is maintained at an adequate level, there can be no assurance that further additions will not be made to the allowance and that losses will not exceed the estimated amounts. Mortgage Servicing Rights. Mortgage servicing rights are capitalized and then amortized over the period of estimated servicing income. Management periodically evaluates its capitalized mortgage servicing rights for impairment. The valuation of mortgage servicing rights is based on estimated prepayment speeds, ancillary income received from servicing the loans and current interest rates. Changes in these estimates may have a material effect on the valuation of the mortgage servicing rights. Although management believes that the estimates used to determine the value of the mortgage servicing rights are reasonable, future material adjustments may be necessary if economic conditions vary from those used to estimate the value of the mortgage servicing rights. Comparison of Financial Condition at September 30, 2003 and December 31, 2002: Total assets increased by $1,837,000, from $220,616,000 at December 31, 2002 to $222,453,000 at September 30, 2003. The increase in assets was primarily due to increases of $4,030,000 and $4,720,000 in cash and securities available for sale, respectively, being partially offset by decreases of $5,118,000 and $2,251,000 in loans held for sale and loans receivable, respectively. The decrease in loans receivable resulted from the continued refinance market. Due to lower interest rates on residential mortgages, management continued to sell to the secondary market the majority of the residential mortgage loans that were originated during the first nine months of 2003. Included in the loans that were originated and sold during the first nine months of 2003 were loans from the Company's mortgage loan portfolio that were refinanced resulting in the decrease in loans receivable. Cash that was received from the decrease in loans available for sale and in loans receivable was used to increase securities available for sale. In accordance with the Bank's internal classification of assets policy, management evaluates the loan portfolio on a quarterly basis to identify and determine the adequacy of the allowance for loan losses. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. As of September 30, 2003 and December 31, 2002 the balances in the allowance for loan losses and the allowance for loan losses as a percentage of total loans were $905,000 and $908,000 and 0.61% and 0.58%, respectively. 11 Activity in the Company's allowance for loan losses for the nine months ended September 30, 2003 and 2002 is summarized as follows: 2003 2002 --------- --------- Balance on January 1, $ 908,000 $ 952,000 Provision for loan losses - 23,000 Charge-offs (17,000) (65,000) Recoveries 14,000 18,000 --------- --------- Balance on September 30, $ 905,000 $ 928,000 ========= ========= Loans on which the accrual of interest has been discontinued amounted to $912,000 and $428,000 at September 30, 2003 and December 31, 2002, respectively. The effect of nonaccrual loans was not significant to the results of operations. The Company includes all loans considered impaired under FASB Statement No. 114 in nonaccrual loans. The amount of impaired loans was not material at September 30, 2003 and December 31, 2002. Mortgage servicing rights are capitalized and then amortized over the period of estimated servicing income. Mortgage loans serviced by the Company for the secondary market increased by $103 million from $272 million at September 30, 2002 to $375 million at September 30, 2003 which resulted in an increase in mortgage servicing rights of $613,000. The amortization of mortgage servicing rights increased by $221,000 and $856,000 for the quarter and nine months ended September 30, 2003 when compared to the same periods in 2002. The amortization of mortgage servicing rights results from scheduled amortization and from the immediate amortization of any remaining mortgage servicing right that is attached to a loan that is prepaid. During 2003, the Company experienced an increase in amortization due to prepayments as relatively low market interest rates on residential mortgages resulted in refinances of loans the Company services for the secondary market. As stated above the Company's portfolio of loans it services for the secondary market increased in 2003. As a result, scheduled amortization in future periods will be higher than it was in 2003. Future amortization due to prepayments will, in large part, be determined by future market interest rates. Management periodically evaluates its capitalized mortgage servicing rights for impairment. Due to changes in the estimates used to value its mortgage servicing rights, which resulted from changes in market conditions, the Company was able to recapture $165,000 and $445,000 of previously recorded impairments during the three and nine month periods ended September 30, 2003, respectively. Further changes in market conditions may allow the Company to recapture the remaining valuation reserve of $215,000. The table below summarizes capitalization, amortization and change in valuation of the Company's mortgage servicing rights during the periods indicated.
Three months ended Nine months ended September 30, September 30, -------------------------- -------------------------- 2003 2002 2003 2002 -------------------------- -------------------------- Mortgage servicing rights Balance at beginning of period $ 2,885,000 $ 2,248,000 $ 2,839,000 $ 1,850,000 Mortgage servicing rights capitalized 492,000 295,000 1,422,000 942,000 Amortization expense (415,000) (194,000) (1,299,000) (443,000) -------------------------- -------------------------- Balance at end of period $ 2,962,000 $ 2,349,000 $ 2,962,000 $ 2,349,000 ========================== ========================== Valuation reserve Balance at beginning of period $ (380,000) $ - $ (660,000) $ - Additions - - (150,000) - Subtractions 165,000 - 595,000 - Balance at end of period $ (215,000) $ - $ (215,000) $ - -------------------------- -------------------------- Mortgage Servicing Rights, net $ 2,747,000 $ 2,349,000 $ 2,747,000 $ 2,349,000 ========================== ==========================
12 Liabilities decreased by $344,000 from $195,393,000 at December 31, 2002 to $195,049,000 at September 30, 2003. This decrease is primarily due to a $1,504,000 decrease in deposits being partially offset by a $904,000 increase in advances from borrowers for taxes and insurance. The increase in advances from borrowers for taxes and insurance resulted from the increase in loans serviced described above and from the timing of payment of real estate taxes. Equity increased by $2,181,000 from $25,223,000 at December 31, 2002 to $27,404,000 at September 30, 2003. The increase in equity was primarily the result of net income for the first nine months of 2003 of $3,027,000 being partially offset by the payment of $678,000 in cash dividends. On October 21, 2003, the Board of Directors of the Company declared a $0.20 per share cash dividend to be paid on November 17, 2003 to stockholders of record on November 3, 2003. Subject to the Company's earnings and capital requirements, it is the current intention of the Company to continue to pay regular quarterly cash dividends. Comparison of Operating Results for the Three and Nine-Month Periods Ended September 30, 2003 and September 30, 2002. Net Income. Net income increased by $289,000, or 34.2% for the three-month period ended September 30, 2003 when compared to the same period during 2002. The increase in net income was primarily due an increase of $1,252,000 in noninterest income being partially offset by a $374,000 decrease in net interest income and a $474,000 increase in noninterest expense for the three months ended September 30, 2003 when compared to the same period in 2002. Net income for the nine months ended September 30, 2003 increased by $644,000, or 27.0%, when compared to the first nine months of 2002. This increase in net income was primarily the result of increase of $3,205,000 in noninterest income being partially offset by a decrease of $763,000 in net interest income and a $1,582,000 increase in noninterest expense. Interest Income. Interest income decreased by $822,000 and $2,010,000, or 23.7% and 19.1%, for the three and nine-month periods ended September 30, 2003, respectively, when compared to the same periods in 2002. These decreases were primarily the result of a decrease in interest income from the Company's loan portfolio during the first nine months of 2003 when compared to the first nine months of 2002. This decrease was due to a decrease of $12.6 million in the average balance of the Company's loan portfolio and to a decrease of 0.9% in the yield on the Company's loan portfolio, from 7.6% for the nine months ended September 30, 2002 to 6.7% for the nine months ended September 30, 2003. Also contributing to the decrease in interest income was a $112,000 and $270,000 decrease in interest income from investment securities and interest bearing deposits for the three and nine months ended September 30, 2003, respectively. The decrease in interest income from investment securities and interest bearing deposits was the result of a general decrease in the yield on these investments. Interest Expense. Total interest expense decreased by $448,000 and $1,247,000, or 29.4% and 25.9%, for the quarter and nine months ended September 30, 2003 when compared to the same periods in 2002. The decrease in interest expense was primarily the result of a decrease in the weighted average rate paid on deposits and borrowed funds of 0.7%, from 3.2% for the nine months ended September 30, 2002 to 2.5% for the nine months ended September 30, 2003. Net Interest Income. Net interest income decreased by $374,000 and 763,000, or 19.2% and 13.3% for the quarter and the nine-months ended September 30, 2003 when compared to the same periods in 2002 due to the changes in interest income and interest expense described above. The Company's net interest margin, the ratio of net interest income to average interest earning assets, decreased by 11.0% from 3.45% for the nine months ended September 30, 2002 to 3.07% for the nine months ended September 30, 2003. 13 Provision for Loan Losses. The Company made no provision for loan losses during the third quarter of 2003 or 2002. The provision for loan losses decreased by $23,000 for the nine months ended September 30, 2003 when compared to the same period in 2002. Management evaluates the quality of the loan portfolio on a quarterly basis to identify and determine the adequacy of the allowance for loan loss. Classified loans were 1.8% and 1.1% of total loans at September 30, 2003 and December 31, 2002, respectively. Nonaccrual loans were $912,000 and $428,000 at September 30, 2003 and December 31, 2002, respectively. The provision reflects management's monitoring of the allowance for loan losses in relation to the size and quality of the loan portfolio and adjusts the provision for loan losses to adequately provide for loan losses. Management determines the amounts of the allowance for loan losses in a systematic manner that includes self-correcting policies that adjust loss estimation methods on a periodic basis. While the Company maintains its allowance for loan losses at a level that is considered to be adequate to provide for potential losses, there can be no assurance that further additions will not be made to the loss allowance and that losses will not exceed estimated amounts. Noninterest Income. Noninterest income increased by $1,252,000 and $3,205,000, or 101.0% and 93.5%, for the three and nine months ended September 30, 2003, respectively, when compared to the same periods in 2002 primarily due to increases in the gain on sale of loans originated for sale and loan origination and commitment fees. Due to low interest rates on residential mortgage loans during the first nine months of 2003, the Company originated and sold to the secondary market a larger volume of loans during that period when compared to the same period in 2002. Because the company retains servicing on a majority of these loans, a larger amount of servicing assets were capitalized in 2003. These servicing assets are reported as a component of gain on sale of loans originated for sale in the Consolidated Statements of Income. Market conditions during the first nine months of 2003 when compared to the same period in 2002 allowed the Company to obtain a more favorable price on the loans sold to the secondary market which also contributed to the increase in the gain on sale of loans originated for sale. During the third quarter of 2003, interest rates on residential mortgages began increasing slightly. If this trend of increased interest rates continues, the amount of loan originations and sales to the secondary market would decrease which would result in a reduction in the gain on sale of loans originated for sale and loan origination and commitment fees in future periods. Also contributing to the increase in noninterest income was a $71,000 and $201,000 increase in loan servicing fees for the quarter and nine months ended September 30, 2003, respectively, when compared to the same periods in 2002 which resulted from an increase in the average amount of loans serviced by the Company during 2003. Noninterest Expense. Noninterest expense increased by $474,000 and $1,582,000, or 26.9% and 31.3%, for the three and nine months ended September 30, 2003, respectively, when compared to the same periods during 2002. These increases were primarily the result of increases in compensation and benefits and in other noninterest expense. The increase in compensation and benefits resulted from annual compensation adjustments and increases in commissions paid to loan officers for the origination of loans. The increase in other noninterest expense resulted primarily from a $175,000 loss realized by the Company on one of its customer's deposit accounts. Also affecting noninterest expense was the amortization and valuation adjustments for mortgage servicing rights. The amortization and valuation adjustments of mortgage servicing rights increased by $56,000 and $411,000 for the three and nine-month periods ended September 30, 2003, respectively, when compared to the same periods in 2002. On a quarterly basis, the Company evaluates its mortgage servicing rights for impairment. Due to changes in estimates used to calculate the fair value of mortgage servicing rights during the first nine months of 2003, which resulted from changes in market conditions, the Company recorded a $445,000 recovery of previously recorded impairments. Income Tax Expense. Income tax expense increased by $115,000 and increased by $239,000 for the three and nine-month periods ended September 30, 2003, respectively, when compared to the same periods in 2002. These changes are the result of increased income before taxes for the periods ended September 30, 2003 when compared to the same periods in 2002. During 2003 the Company was able to reduce its effective income tax rate by using certain tax strategies to reduce its taxable income. The Company expects its current tax rate to remain relatively constant in future periods. 14 Non-performing Assets. The following table sets forth the amounts and categories of non-performing assets at September 30, 2003 and December 31, 2002.
September 30, 2003 December 31, 2002 ----------------------------------------- (Dollars in Thousands) Non-accrual loans One to four family real estate $ 320 $ 287 Commercial real estate 294 - Commercial 196 - Consumer 102 141 ------ ------ Total $ 912 $ 428 ------ ------ Accruing loans which are contractually past due 90 days or more One to four family real estate $ 316 $ 249 ------ ------ Total $ 316 $ 249 ------ ------ Total non-accrual and accruing loans past due 90 days or more $1,228 $ 677 ====== ====== Repossessed and non-performing assets Repossessed property $ 195 $ 209 Other non-performing assets - - ------ ------ Total repossessed and non-performing assets $ 195 $ 209 ------ ------ Total non-performing assets $1,423 $ 886 ====== ====== Total non-accrual and accruing loans past due 90 days or more to total loans 0.83% 0.44% ====== ====== Total non-accrual and accruing loans past due 90 days or more to total assets 0.55% 0.31% ====== ====== Total nonperforming assets to total assets 0.64% 0.40% ====== ======
Generally accepted accounting principles require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate; or as a practical expedient, either at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. At September 30, 2003 and December 31, 2002, the value of loans that would be classified as impaired is considered to be immaterial. 15 Liquidity and Capital Resources: The Bank's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans, maturities of investment securities and funds provided from operations. While scheduled loan repayments are a relatively predictable source of funds, deposit flows and loan prepayments are significantly influenced by general interest rates, economic conditions and competition. If needed, the Bank's source of funds can be supplemented by wholesale funds obtained through additional advances from the Federal Home Loan Bank system. The Bank invests excess funds in overnight deposits, which not only serve as liquidity, but also earn interest income until funds are needed to meet required loan funding. On December 21, 2000, the Company approved a stock buy back program in which up to 125,000 shares of the common stock of the Company could be acquired. During the first three months of 2002 the Company completed this buy back program. The Company paid a cash dividend of $0.20 per share on February 24, 2003, May 15, 2003 and August 15, 2003. On October 21, 2003 the Company declared a cash dividend of $0.20 per share payable on November 17, 2003 to stockholders of record on November 3, 2003. Subject to the Company's earnings and capital, it is the current intention of the Company to continue to pay regular quarterly cash dividends. Savings institutions like the Bank are required to meet prescribed regulatory capital requirements. If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization plan. At September 30, 2003, the Bank exceeded all current capital requirements. See Note 2 in the notes to Consolidated Financial Statements. The Office of Thrift Supervision (OTS) has adopted a core capital requirement for savings institutions comparable to the requirement for national banks. The OTS core capital requirement for the Bank is 4% of adjusted assets for thrifts that receive the highest supervisory rating for safety and soundness. The Bank had core capital of 9.18% at September 30, 2003. 16 WELLS FINANCIAL CORP. and SUBSIDIARIES Controls and Procedures Item 3. Disclosure Controls and Procedures. - ------- ----------------------------------- (a) Evaluation of disclosure controls and procedures. Based on their ----------------------------------------------------- evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and the principal financial officer have concluded that as of the end of the periods covered by this Quarterly Report on Form 10-QSB such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal controls. During the quarter under report, there ---------------------------- was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 17 WELLS FINANCIAL CORP. and SUBSIDIARIES September 30, 2002 FORM 10-QSB PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings ----------------- None Item 2. Changes in Securities --------------------- None Item 3. Defaults upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other information ----------------- None Item 6. Exhibits and Reports of Form 8-K -------------------------------- a. Exhibits: (i) Exhibit 31 - Section 302 certification (ii) Exhibit 32 - Section 906 certification b. (i) The Registrant filed a Form 8-K on July 30, 2003 pursuant to items 7 and 9 to report earnings for the quarter ended June 30, 2003, respectively. No other information is required to be filed under Part II of the form - -------------------------------------------------------------------------------- 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WELLS FINANCIAL CORP.
By: /s/ Lonnie R. Trasamar Date: November 7, 2003 -------------------------------------------------------- ---------------- Lonnie R. Trasamar President and Chief Executive Officer By: /s/ James D. Moll Date: November 7, 2003 -------------------------------------------------------- ---------------- James D. Moll Treasurer and Principal Financial & Accounting Officer
EX-31 3 ex-31.txt CERTIFICATIONS - SECTION 302 SECTION 302 CERTIFICATION I, Lonnie R. Trasamar, certify that: 1. I have reviewed this Form 10-QSB of Wells Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)), to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 7, 2003 /s/ Lonnie R. Trasamar ------------------------------------- Lonnie R. Trasamar President and Chief Executive Officer SECTION 302 CERTIFICATION I, James D. Moll, certify that: 1. I have reviewed this Form 10-QSB of Wells Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)), to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 7, 2003 /s/ James D. Moll ------------------------------------- James D. Moll Treasurer and Principal Financial and Accounting Officer EX-32 4 ex-32.txt CERTIFICATION - SECTION 906 CERTIFICATION PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Wells Financial Corp.(the "Company") on Form 10-QSB for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Lonnie R. Trasamar, President and Chief Executive Officer, and James D. Moll, Treasurer (Principal Financial and Accounting Officer), certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Lonnie R. Trasamar /s/ James D. Moll - ------------------------------------- -------------------------------------------- Lonnie R. Trasamar James D. Moll President and Chief Executive Officer Treasurer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: November 7, 2003 Date: November 7, 2003
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