-----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, OAzHFEd72LRTqHn6+x+IUCNMIi6mXI7T7SdQ1C+An4zlKwpA+BBeIZfaIRsyBkDx wgUo0/XHsUgSQf2lm1jNkQ== 0000946275-04-000316.txt : 20040319 0000946275-04-000316.hdr.sgml : 20040319 20040319135043 ACCESSION NUMBER: 0000946275-04-000316 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040319 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25342 FILM NUMBER: 04679602 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 10KSB 1 f10ksb_123103-0129.txt FORM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 small business issuer in its charter) Minnesota 41-1799504 - -------------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. employer of incorporation or organization) identification no.) 53 First Street, S.W., Wells, Minnesota 56097 - --------------------------------------------- ------------------------ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (507) 553-3151 --------------------- Securities registered pursuant to Section 12(b) of the Act: None --------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per share --------------------------------------- (Title of class) Indicate by check mark whether 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X]. Registrant's revenues for the year ended December 31, 2003 were $19.3 million. Registrant's voting stock trades on the Nasdaq National Market under the symbol "WEFC." The aggregate market value of the voting stock held by non-affiliates of registrant, based upon the closing price of such stock as of March 1, 2004 ($34.00 per share), was $33.1 million. As of March 1, 2004, registrant had 1,159,751 shares of Common Stock outstanding. Transitional small Business Disclosure Format (Check one): Yes No X . --- --- DOCUMENTS INCORPORATED BY REFERENCE 1. Part II -- Portions of Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 2003. 2. Part III -- Portions of Registrant's Proxy Statement for the 2004 Annual Meeting of Stockholders. PART I WELLS FINANCIAL CORP. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-KSB AND THE EXHIBITS THERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT 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 THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS' 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 SAVING 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. Item 1. Business - ---------------- General Wells Financial Corp. ("Registrant" or the "Company") is a unitary savings and loan holding company that was incorporated in December 1994 under the laws of the State of Minnesota for the purpose of acquiring all of the issued and outstanding common stock of Wells Federal Bank, fsb (the "Bank"). This acquisition occurred in April 1995 at the time the Bank simultaneously converted from a mutual to a stock institution, and sold all of its outstanding capital stock to the Company and the Company made its initial public offering of common stock (the "Conversion"). As of December 31, 2003, the Company had total assets of $223.8 million, total deposits of $169.7 million, and stockholders' equity of $27.9 million or 12.5% of total assets under generally accepted accounting principles ("GAAP") in the United States of America. The only subsidiary of the Company is the Bank. The primary activity of the Company is directing and planning the activities of the Bank, the Company's primary asset. At December 31, 2003, the remainder of the assets of the Company were maintained in deposits in interest bearing accounts with other financial institutions. The Company engages in no other significant activities. As a result, references to the Company or Registrant generally refer to the Bank, unless the context otherwise indicates. In the discussion of regulation, except for the discussion of the regulation of the Company, all regulations apply to the Bank rather than the Company. The Bank is a federally chartered stock savings bank headquartered in Wells, Minnesota. The Bank has eight full service offices located in Faribault, Martin, Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota and a loan origination office in Dakota County, Minnesota. During 2003, the Bank leased a facility and opened a loan origination office in Cerro Gordo County, Iowa. The Bank was founded in 1934 and obtained its current name in 1991. The Bank's deposits have been federally insured by the Savings Association Insurance Fund ("SAIF") and its predecessor, the Federal Savings and Loan Insurance Corporation ("FSLIC") since 1934, and the Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a community oriented, full service retail savings institution offering traditional mortgage, commercial and consumer loan products. It is the Bank's intent to remain an independent community savings bank serving the local banking needs of southern Minnesota and northern Iowa. The Bank attracts deposits from the general public and uses such deposits to invest in owner occupied residential loans, commercial and agricultural related loans, consumer loans and purchases mortgage-backed and investment securities. The principal sources of funds for the Registrant's lending activities are deposits, advances from the Federal Home Loan Bank and the amortization, repayment, and maturity of loans, and investment securities. Principal sources of income are interest and fees on loans, investment securities, and deposits held in other financial institutions. The Registrant's principal expense is interest paid on deposits and borrowed funds. Market Area The Company's primary market area consists of Faribault, Martin, Blue Earth, Nicollet, Steele and Freeborn Counties, Minnesota. Located southwest of Minneapolis, this area is primarily rural and contains approximately 50 communities ranging in population size from 200 to 40,000. The primary lending concentration is in the Mankato, North Mankato and Owatonna areas. These areas have a relatively large population base. The Company has an office in each of the Mankato, North Mankato and Owatonna areas. Historically, the economy in the Company's market area has been dependent on agriculture and agriculture related industries. Economic growth in the Company's market area remains dependent upon the local economy. In addition, the deposit and loan activity of the Company is significantly affected by economic conditions in its market area including the agriculture industry. Lending Activities. Historically the Bank's lending strategy was focused on the origination of traditional one-to-four family mortgage loans primarily secured by single family residences and, to a lesser 2 extent, consumer, agricultural real estate and agricultural operating loans in the Bank's primary market area. As a method to reduce interest rate risk the Bank has modified the composition of its loan portfolio to have less of an emphasis on mortgage loans on single family residences and a greater emphasis on consumer, agricultural real estate, agricultural operating loans and, over the past few years, commercial real estate and commercial operating loans. Subject to market conditions, the Bank plans to continue to expand its commercial real estate and operating lending. 3 Loan Portfolio Composition. The following table sets forth information concerning the composition of the Company's loan portfolio in dollar amounts and in percentages of the total loan portfolio (before deductions for loans in process, deferred loan origination fees and costs and allowances for losses) as of the dates indicated.
At December 31, ------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------ ----------------- ---------------- ------------------ ---------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in Thousands) Real Estate Loans: One- to four-family....... $ 42,432 26.08% $53,967 36.00% $80,613 49.01% $112,579 58.29% $106,292 60.82% Multi-family.............. 389 0.25 439 0.29 484 0.29 523 0.27 654 0.37 Commercial................ 65,120 40.03 51,958 34.66 41,510 25.24 38,514 19.94 31,928 18.27 Construction.............. 9,697 5.96 4,830 3.22 2,185 1.33 2,043 1.06 2,957 1.69 -------- ------ ------- ------ ------- ------ -------- ------ -------- ------ Total real estate loans........ 117,638 72.32 111,194 74.17 124,792 75.87 153,659 79.56 141,831 81.15 Other Loans: Consumer Loans: Savings account........... 457 0.28 387 0.26 635 0.39 558 0.30 578 0.33 Vehicles.................. 6,146 3.78 5,687 3.79 4,914 2.99 5,333 2.76 4,914 2.81 Home equity, home improvement and second mortgages.......... 21,755 13.37 22,826 15.23 26,228 15.95 26,155 13.54 21,315 12.20 Other..................... 7,254 4.46 3,905 2.60 4,314 2.62 4,449 2.30 3,144 1.80 -------- ------ ------- ------ ------- ------ -------- ------ -------- ------ Total consumer loans.. 35,612 21.89 32,805 21.88 36,091 21.95 36,495 18.90 29,951 17.14 Commercial business loans... 9,421 5.79 5,917 3.95 3,591 2.18 2,967 1.54 2,988 1.71 -------- ------ ------- ------ ------- ------ -------- ------ -------- ------ Total other loans..... 45,033 27.68 38,722 25.83 39,682 24.13 39,462 20.44 32,939 18.85 -------- ------ ------- ------ ------- ------ -------- ------ -------- ------ Total loans........... 162,671 100.00% 149,916 100.00% 164,474 100.00% 193,121 100.00% 174,770 100.00% ====== ====== ====== ====== ====== Less: Loans in process.......... 1,562 3,202 2,694 657 722 Deferred loan origination fees and costs................ 156 220 315 494 478 Allowance for loan losses. 904 908 952 833 857 -------- --------- -------- -------- -------- Total loans receivable, net..... $160,049 $ 145,586 $160,513 $191,137 $172,713 ======== ========= ======== ======== ========
4 Loan Maturity Tables. The following table sets forth the maturity of the Company's loan portfolio at December 31, 2003. The table does not include prepayments, scheduled principal repayments or loans held for sale. All mortgage loans are shown as maturing based on contractual maturities. Commercial Business and Construction Consumer Total ------------ -------- ----- (In Thousands) Amounts Due: Within 1 year or less.............. $6,190 $ 7,681 $13,871 After 1 year through 5 years....... 3,507 26,307 29,814 After 5 years...................... - 11,045 11,045 ------ ------- ------- Total amount due..................... $9,697 $45,033 $54,730 ====== ======= ======= The following table sets forth the dollar amount of all loans due after December 31, 2004 that have pre-determined interest rates or which have floating or adjustable interest rates. This table does not include loans held for sale.
Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In Thousands) One- to four-family ........................ $ 21,956 $ 20,314 $ 42,270 Commercial and multi-family real estate .... 57,141 6,710 63,851 Construction ............................... - 3,507 3,507 Commercial business and consumer ........... 29,189 8,163 37,352 -------- -------- -------- Total .................................... $108,286 $ 38,694 $146,980 ======== ======== ========
One- to Four-Family Residential Loans. The Company originates single family residential mortgage loans secured by property in the Company's primary market area. Due to low interest rates on fixed rate residential mortgage loans during the past two years, the Company has sold the majority of these loans to the secondary market. As a source of noninterest income and to maintain its customer base the Bank retains the servicing on the majority of the loans sold to the secondary market. The Company originates adjustable rate mortgage loans for retention in its portfolio with loan-to-value ratios of up to 95% and requires private mortgage insurance when the loan-to-value ratio exceeds 80%. The Company's adjustable rate loans provide for annual 1%-2% interest rate adjustments with a maximum adjustment over the term of the loan of, generally, 5%. Loan originations are generally obtained from existing customers, members of the local community, correspondent banks, and referrals from realtors within the Company's lending area. Mortgage loans originated and held by the Company in its portfolio include due-on sale clauses which provide the Company with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Company's consent. 5 The Company primarily originates fixed and adjustable rate mortgage loans with 15-30 year terms. The Company offers various loan programs, including low documentation loans for loans with lower loan- to-value ratios and other loan programs using cost of funds or one-year U.S. treasury indices for adjustable rate loan repricing. Interest rates charged on mortgage loans are competitively priced based on market conditions and the Company's cost of funds. Throughout the year, origination fees for loans were generally 1% of the loan amount. The Company's standard underwriting guideline for fixed-rate mortgage loans conform to FreddieMac guidelines and the loans may be sold in the secondary market to private investors. The Company customarily sells all Federal Housing Administration and Veterans' Administration ("FHA/VA") loans as well as certain conforming fixed rate mortgage loans in the secondary market. The Company also originates adjustable rate mortgages ("ARMs") which adjust every year based upon various indices. At December 31, 2003, the Company was servicing approximately $380.4 million of loans for others, primarily long term fixed rate loans sold to FreddieMac. Generally, the Company retains all servicing on loans sold to FreddieMac and does not retain servicing on FHA/VA loans sold. Except for document deficiencies that may occur during origination that may require a repurchase by the Company, loans are sold without recourse. Consumer Loans. The Company offers second mortgage loans on one- to four-family residences. Such loans are only made on owner-occupied one- to four-family residences and are subject to a 90% combined loan-to-value ratio. The Company holds the majority of the underlying first mortgages on these loans. The underwriting standards for second mortgage loans are similar to the Company's standards applicable to one- to four-family residential loans. To a lesser extent, the Company makes loans secured by vehicles and by savings accounts held with the Company. Loans secured by vehicles totaled $6.1 million, or 3.78% of the loan portfolio at December 31, 2003. Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to 35% of an institution's assets. In addition, a federal thrift has lending authority above the 35% category for certain consumer loans, property improvement loans, and loans secured by savings accounts. The Company originates consumer loans in order to provide a wide range of financial services to its customers and because the shorter terms and normally higher interest rates on such loans help maintain a profitable spread between its average loan yield and its cost of funds. Consumer loans, however, tend to have a higher risk of default than residential mortgage loans. Based on the Company's experience, a borrower faced with either paying a mortgage loan to avoid foreclosure on the borrower's home or defaulting on a consumer loan will continue paying the mortgage loan. At December 31, 2003, the Company had approximately $72,000 in consumer loans that were more than 90 days delinquent. Commercial Real Estate Loans. In order to enhance yields on its assets, the Company originates loans secured by commercial real estate. Approximately 74% of this portfolio is secured by farm real estate. In addition to originating farm real estate loans, the Company also purchases participations in farm real estate loans that are originated by commercial banks in southern Minnesota. Most of the remainder of the portfolio is secured by commercial real estate. At December 31, 2003, loans secured by farm real estate were originated in amounts up to the lesser of 65% of the appraised value of the property or $1,300 per tillable acre. These loans are evaluated on a cash flow basis in addition to an asset value basis. Loans secured by commercial real estate are generally originated in amounts up to 80% of the appraised value of the property. At December 31, 2003, the Company's largest commercial real estate loan consisted of a $2,606,000 performing commercial construction loan. As part of its underwriting, the Company requires that borrowers qualify for a commercial loan at the fully indexed interest rate rather than at the origination interest rate. 6 Loans secured by commercial real estate generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrowers ability to repay the loan may be impaired. The Company's commercial real estate loan portfolio primarily consists of loans secured by agricultural real estate. For loans secured by agricultural real estate, repayment is dependent, primarily, on the successful operation or management of the farm property securing the loan. The success of the farming operation may be affected by any number of factors outside the control of the farm borrower, including weather conditions, recent changes in government support programs, grain and livestock prices, and the uncertainty of government programs and other regulations. While the scheduled repayments of farm real estate loans depends on the successful operation of the farm, the Company underwrites these loans to be collateral dependent with a maximum loan-to-value ratio of 65%. At December 31, 2003, the outstanding balance on the Company's largest agricultural real estate loan was $804,000. At December 31, 2003, the outstanding balance of the Company's largest commercial real estate loans not secured by agricultural real estate ranged from $1.5 million to $2.6 million. Commercial Business Loans. The Company's commercial business loans consist of commercial and agricultural operating and term loans. The commercial operating and term loans are generally secured by equipment, inventory, commercial real estate and receivables. The agricultural operating and term loans are primarily secured by farm equipment, livestock, crops and farm real estate. Commercial and agricultural loans generally involve a greater degree of risk than residential mortgage loans. This increased credit risk is a result of several factors, including the effects of general economic conditions and the increased difficulty of evaluating and monitoring these types of loans. Construction Loans. Construction loans, with a maximum loan-to-value ratio of 80%, are made on commercial real estate projects. These loans generally have a term of approximately one year and a fixed interest rate. Construction loans are also made on single family residential property to the individuals who are the owners and occupants upon completion of construction. These loans are generally made for a term of six months with a maximum loan-to-value ratio of 80%, after which the loan is rewritten to a permanent loan and, generally, sold to the secondary market. The Company does not originate many speculative loans to builders and limits the loan-to-value ratio to 70% with a maximum loan term of 18 months. In underwriting such loans, the Company takes into consideration the number of units that the builder has on a speculative basis that remain unsold. Construction lending is generally considered to involve a higher degree of credit risk than long-term financing of residential properties. The Company's risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost of construction. If the estimate of construction cost and the marketability of the property upon completion of the project prove to be inaccurate, the Company may be compelled to advance additional funds to complete the development. Furthermore, if the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a property with a value that is insufficient to assure full repayment. For the small number of speculative loans originated to builders, the ability of the builder to sell completed dwelling units will depend, among other things, on demand, pricing, and availability of comparable properties and economic conditions. 7 Loans to One Borrower. Loans-to-one borrower are limited in an amount equal to 15% of unimpaired capital and unimpaired surplus and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate) or $500,000, whichever is higher. The Company's maximum loan-to-one borrower limit was approximately $2.9 million as of December 31, 2003. Loan Delinquencies. The Company's collection procedures provide that when a mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is still delinquent after 30 days past due the customer will receive a letter and/or telephone call and may receive a visit from a representative of the Company. If the delinquency continues, similar subsequent efforts are made to eliminate the delinquency. If the loan continues in a delinquent status for 60 days past due and no repayment plan is in effect, a notice of right to cure default is mailed to the customer giving 30 additional days to bring the account current before foreclosure is commenced. The loan committee meets regularly to determine when foreclosure proceedings should be initiated and the customer is notified when foreclosure has been commenced. Loans are reviewed on a monthly basis and are generally placed on a non-accrual status when a mortgage loan or a non-mortgage loan becomes 120 or 90 days delinquent, respectively, and, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments, if any, are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. Non-accrual loans fluctuate over time due to a variety of factors. The Company's experience has been that these fluctuations are normal and are not dependant on any one factor over time. 8 The following table sets forth information regarding non-accrual loans, real estate owned, and certain other repossessed assets and loans.
At December 31, ---------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (Dollars in Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: Permanent loans secured by 1-to-4 family residences ............................ $ 281 $ 287 $ 194 $ 108 $ -- All other mortgage loans ................ 295 -- -- 195 32 Non-mortgage loans: Commercial .............................. 182 -- -- -- -- Consumer ................................ 71 141 214 60 79 ------ ------ ------ ------ ------ Total ..................................... $ 829 $ 428 $ 408 $ 363 $ 111 ====== ====== ====== ====== ====== Accruing loans which are contractually past due 90 days or more: Mortgage loans: Construction loans ...................... $ -- $ -- $ -- $ -- $ -- Permanent loans secured by 1-to-4 family residences ............................ 171 249 211 258 11 All other mortgage loans ................ -- -- 11 -- -- Non-mortgage loans: Commercial .............................. -- -- -- -- -- Consumer ................................ 1 1 2 4 -- ------ ------ ------ ------ ------ Total ..................................... $ 172 $ 250 $ 224 $ 262 $ 11 ====== ====== ====== ====== ====== Total non-accrual and accruing loans past due 90 days or more ................ $1,001 $ 678 $ 632 $ 625 $ 122 ====== ====== ====== ====== ====== Foreclosed real estate .................... $ -- $ 209 $ 252 $ 54 $ 55 ====== ====== ====== ====== ====== Other nonperforming assets ................ $ -- $ -- $ -- $ -- $ -- ====== ====== ====== ====== ====== Total nonperforming assets ................ $1,001 $ 887 $ 884 $ 679 $ 177 ====== ====== ====== ====== ====== Total non-accrual and accruing loans past due 90 days or more to net loans ........ 0.63% 0.47% 0.39% 0.33% 0.07% ====== ====== ====== ====== ====== Total non-accrual and accruing loans past due 90 days or more to total assets ..... 0.45% 0.31% 0.27% 0.28% 0.06% ====== ====== ====== ====== ====== Total nonperforming assets to total assets 0.45% 0.40% 0.38% 0.31% 0.09% ====== ====== ====== ====== ======
At December 31, 2003, non-accrual loans on 1-4 family residences consisted of five loans. Management estimates that the market value of the collateral on these loans exceeds the remaining principal balance on each of these loans. Non-accrual loans on all other mortgage loans and on non-mortgage commercial loans consist of four loans, three of which are made to the same borrower. Management is in negotiations with the borrower to obtain additional collateral and guarantees from the borrower and does not believe there will be a charge-off on these loans. Consumer loans that are in non-accrual status consist of 14 loans, 12 of which are secured. The principal balance of the largest unsecured consumer loan that is in nonaccrual status is $5,000. Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was immaterial for the year ended December 31, 2003. Amounts included in the Company's interest income on non-accrual loans for the year ended December 31, 2003 were likewise immaterial. 9 Classified Assets. Office of Thrift Supervision ("OTS") regulations provide for a classification system for problem assets of insured institutions which covers all problem assets. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets may be designated "special mention" because of potential weakness that do not currently warrant classification in one of the aforementioned categories. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. The following table provides further information about the Company's problem assets as of December 31, 2003. (In Thousands) Special Mention............................. $ 748 Substandard................................. 1,820 Doubtful assets............................. -- Loss assets................................. -- ------- Total.................................. $ 2,568 ------- Allowance for loan loss..................... $ 904 ======= Allowance for Loan Losses. It is management's policy to provide for losses on unidentified loans in its loan portfolio. A provision for loan losses is charged to operations based on management's evaluation of the potential losses that may be incurred in the Company's loan portfolio. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers 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. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loss provisions may be deemed necessary. There can be no assurance that the allowance for losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required. 10 Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the Company's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable, at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio. The allocation of the allowance for loan losses is based on management's evaluation of the loans in the respective portfolios; the Company does not attempt to manage the percentage of the allocation between loan categories. As part of management's evaluation, for each loan category, the allowance is determined after examination of prior period experience but is adjusted for various factors such as delinquencies, expected charge-offs, recoveries, amount of classified assets, amount of non-accrual loans and any known local economic trends. As a result, the allocation of the allowance does not reflect relative levels of historic charge-offs between loan categories.
At December 31, ---------------------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------------------- --------------------- ---------------------- -------------------- -------------------- Percent of Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category to Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in Thousands) At end of year allocated to: Mortgage.......... $ 566 72.32% $ 566 74.17% $ 574 75.87% $ 749 79.56% $ 749 81.15% Consumer and non-mortgage.... 338 27.68 342 25.83 378 24.13 84 20.44 108 18.85 ------ ------ ------- ------ ----- ------ ----- ------ ----- ------ Total allowance... $ 904 100.00% $ 908 100.00% $ 952 100.00% $ 833 100.00% $ 857 100.00% ====== ====== ======= ====== ===== ====== ===== ====== ===== ======
11 Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Company's allowance for loan losses for the years indicated:
At December 31, ----------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- -------- -------- -------- (Dollars in Thousands) Total loans outstanding..................... $ 162,671 $ 149,916 $164,474 $193,121 $174,770 ========= ========= ======= ======= ======= Average loans outstanding................... $ 152,279 $ 162,622 $186,772 $184,773 $161,444 ========= ========= ======= ======= ======= Beginning allowance balances................ $ 908 $ 952 $ 833 $ 857 $ 853 Provision: One-to-four family........................ -- 23 (175) -- 27 Commercial and multi-family real estate............................. -- -- -- -- -- Consumer.................................. -- -- 355 -- -- Charge-offs: One-to-four family........................ -- 31 -- -- -- Commercial and multi-family real estate............................. -- -- -- -- -- Consumer.................................. 23 55 89 49 43 Recoveries: One-to-four family........................ -- -- -- -- -- Commercial and multi-family real estate............................. -- -- -- -- -- Consumer.................................. 19 19 28 25 20 Other....................................... -- -- -- -- -- --------- --------- -------- -------- --------- Ending allowance balance.................... $ 904 $ 908 $ 952 $ 833 $ 857 ========= ========= ======== ======== ======= Allowance for loan losses as a percent of total loans outstanding................ 0.56% 0.61% 0.58% 0.43% 0.49% Net loans charged off as a percent of average loans outstanding................. 0.003% 0.04% 0.03% 0.01% 0.01%
12 Investment Activities The Company is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and certain other investments. The Company has maintained a liquidity portfolio in excess of regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of future yield levels, as well as management's projections as to the short-term demand for funds to be used in the Company's loan origination and other activities. At December 31, 2003, the Company had an investment portfolio of approximately $28.9 million, consisting primarily of U.S. government, corporate and agency obligations. To a lesser extent, the portfolio also includes FreddieMac stock, certificates of deposit and FHLB stock, as permitted by the OTS regulations. The Company classifies its investments, including debt and equity securities, as either held to maturity or available for sale, in accordance with SFAS 115. The Company will continue to seek high quality investments. The primary and secondary goals of the investment portfolio are safety of principal and rate of return, respectively. Investment Portfolio. The following table sets forth the carrying value of the Company's investments, including short-term investments, FHLB stock, and mortgage-backed securities, at the dates indicated. At December 31, 2003, the Company's securities that were classified as available for sale had an unrealized net gain of $863,000. At December 31, 2003, the market value for the interest bearing deposits shown below approximated their cost. At December 31, --------------------------- 2003 2002 2001 ------- ------- ------- (In Thousands) Securities available for sale: Equity securities ................... $ 933 $ 945 $ 1,047 U.S. Agency Securities .............. 5,576 14,700 12,449 Mortgage-backed securities .......... 19,035 3,773 54 Obligations of state and political subdivisions ...................... 1,866 438 438 ------- ------- ------- Total securities available for sale 27,410 19,856 13,988 FHLB stock ............................ 1,303 1,875 1,875 Certificates of deposit ............... 200 200 200 ------- ------- ------- Total investments ................. $28,913 $21,931 $16,063 ======= ======= ======= 13 Investment Portfolio Maturities. The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Company's investment securities portfolio.
At December 31, 2003 ------------------------------------------------------------------------------------------------- More Total One Year or Less One to Five Years Five to Ten Years than Ten Years Investment Securities ------------------ ----------------- ------------------ ---------------- ------------------------ Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------ (Dollars in Thousands) U.S. Agency Obligations (1).... $365 1.34% $ 5,724 3.43% $ 515 2.88% $838 4.39% $ 7,442 3.40% $ 7,442 Mortgage-backed securities(2).. -- -- 6,140 3.46 12,895 3.57 -- -- 19,035 3.54 19,035 FHLB Stock..................... -- -- -- -- -- -- -- -- 1,303 -- 1,303 Equity Securities.............. -- -- -- -- -- -- -- -- 933 -- 933 Certificates of Deposit........ 200 1.13% -- -- -- -- -- -- 200 1.13% 200 ---- ------- ------- ---- ------- ------- Total........................ $565 $11,864 $13,410 $838 $28,913 $28,913 ==== ======= ======= ==== ======= =======
(1) Includes obligations of state and political subdivisions. (2) Not including amortization or prepayments. Mortgage-backed securities are shown at scheduled maturity. 14 Sources of Funds General. Deposits are the major external source of the Company's funds for lending and other investment purposes. The Company derives funds from amortization and prepayment of loans and, to a much lesser extent, maturities of investment securities, borrowings and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. The Company may also borrow from the FHLB of Des Moines as a source of funds. Deposits. Consumer and commercial deposits are attracted principally from within the Company's primary market area through the offering of a broad selection of deposit instruments including regular savings accounts, NOW accounts, and term certificate accounts. The Company also offers IRA and KEOGH accounts. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit and the interest rate, among other factors. The interest rates paid by the Bank on deposits can be set daily at the direction of senior management. Senior management determines the interest rate to offer the public on new and maturing accounts. Senior management obtains the interest rates being offered by other financial institutions within its market area. This data along with a report showing the dollar value of certificates of deposit maturing is reviewed and interest rates are determined. Non-interest bearing demand accounts constituted $6.0 million, or 3.52% of the Bank's deposit portfolio at December 31, 2003. Money market accounts and NOW accounts constituted $40.6 million, or 23.94% of the Bank's deposit portfolio at December 31, 2003. Regular savings accounts constituted $30.0 million, or 17.69% of the Bank's deposit portfolio at December 31, 2003. Certificates of deposit constituted $93.1 million or 54.85% of the deposit portfolio, including $7.9 million of which had balances of $100,000 and over. As of December 31, 2003, the Bank had no brokered deposits. Jumbo Certificate Accounts. The following table indicates, at December 31, 2003, the amount of the Company's certificates of deposit of $100,000 or more by time remaining until maturity. Certificates of Weighted Deposit Interest Rate ------- ------------- Maturity Period (In Thousands) - --------------- Within three months............. $3,260 2.00% Three through six months........ 825 1.69 Six through twelve months....... 1,111 1.53 Over twelve months.............. 2,696 3.27 ------ ---- $7,892 2.34% ====== ==== Borrowings. Deposits are the primary source of funds of the Company's lending and investment activities and for its general business purposes. Through the Bank, the Company may obtain advances from the FHLB of Des Moines to supplement its supply of lendable funds. Advances from the FHLB of Des Moines are typically secured by a pledge of the Bank's stock in the FHLB of Des Moines and a portion of the Company's first mortgage loans and certain other assets. The Bank, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At December 31, 2003, the Company had $23 million in advances outstanding from the FHLB of Des Moines (see Note 9 of the Notes to the Company's Consolidated 15 Financial Statements). Future use of advances depends on the rates on advances as compared to the rates on deposits. The following table sets forth certain information as to FHLB advances at the dates indicated. As of and for the Years Ended December 31, ------------------------------------------ 2003 2002 2001 ------- ------- ------- (Dollars in Thousands) FHLB advances ................. $23,000 $23,000 $23,000 Weighted average interest rate of FHLB advances ............ 5.34% 5.34% 5.34% Maximum amount of advances .... $23,000 $23,000 $33,500 Average amount of advances .... $23,000 $23,000 $25,192 Weighted average interest rate of average amount of advances 5.41% 5.41% 5.36% Subsidiary Activity The Company has one wholly-owned subsidiary, the Bank. The Bank has three wholly-owned subsidiaries, known as Wells Insurance Agency, Inc. ("WIA"), Greater Minnesota Mortgage, Inc. ("GMM") and Wells REIT Holding, LLC. (REIT). The Bank is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. Under the 2% limitation, as of December 31, 2003, the Bank was authorized to invest up to approximately $4.5 million in the stock of, or loans to, service corporations. WIA was incorporated under the laws of the State of Minnesota in 1976. WIA offers life, health, casualty, and business insurance on behalf of others and also offers fixed-rate annuities. The Bank's investment in WIA totaled $1.1 million at December 31, 2003. GMM was incorporated under the laws of Minnesota in 1997. GMM originates loans through referrals from community commercial banks and, primarily, sells these loans to the secondary market. During 2003, GMM originated $66.3 million in single family dwelling loans, which were sold to the secondary market. At December 31, 2003, the Bank's investment in GMM totaled $3.1 million. REIT was incorporated under the laws of Delaware in 2002. Wells REIT Holding, LLC is the holding company of Wells Real Estate Investment Trust, LLC, which invests in real estate loans acquired from the Bank. Personnel As of December 31, 2003, the Bank had 94 full-time and three part-time employees. None of the Bank's employees are represented by a collective bargaining group. The Company, with no employees of its own, utilizes those of the Bank. 16 Competition The competition for deposit products includes banks ranging in size from larger, Minneapolis-based regional banks with branches in the Company's market area to local independent community banks. Deposit competition also includes a number of insurance products sold by local agents and investment products sold by local and regional sales people. Loan competition varies depending upon market conditions. Loan competition includes branches of large Minneapolis-based commercial banks and thrifts, credit unions, mortgage bankers with local sales staff and local banks. The Company believes that it is one of the few area lenders that has consistently offered a variety of loans throughout all types of economic conditions. The Company has traditionally maintained a leadership position in mortgage loan volume and market share throughout its service area by virtue of its local presence. The Company believes that it has been able to effectively market its larger variety of loan and other financial products and services when compared to other local-based institutions and its superior customer service when compared to branches of larger institutions based outside of the Company's market area. Regulation of the Company Set forth below is a brief description of certain laws that relate to the regulation of the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. As a unitary savings and loan holding company, the Company generally is not subject to any restrictions on its business activities. While the Gramm-Leach-Bliley Act (the "GLB Act") terminated the "unitary thrift holding company" exemption from activity restrictions on a prospective basis, the Company enjoys grandfathered status under this provision of the GLB Act because it acquired the Bank prior to May 4, 1999. As a result, the Company's freedom from activity restrictions as a unitary savings and loan holding company was not affected by the GLB Act. However, if the Company were to acquire control of an additional savings institution, its business activities would be subject to restriction under the Home Owners' Loan Act. Furthermore, if the Company were in the future to sell control of the Bank to any other company, such company would not succeed to the Company's grandfathered status under the GLB Act and would be subject to the Home Owner's Loan Act's activity restrictions. The continuation of the Company's exemption from restrictions on business activities as a unitary savings and loan holding company is also subject to the Company's continued compliance with the QTL Test. See "- Regulation of the Bank - Qualified Thrift Lender Test." Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes- Oxley Act of 2002 (the "Act"). The Securities and Exchange Commission (the "SEC") has promulgated new regulations pursuant to the Act and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act by Congress and the 17 implementation of new regulations by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations may increase the Company's expenses. Regulation of the Bank General. As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that are found in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC, or the Congress could have a material adverse impact on the Company, the Bank, and their operations. Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The FDIC administers two separate deposit insurance funds. Generally, the Bank Insurance Fund (the "BIF") insures the deposits of commercial banks and the SAIF insures the deposits of savings institutions. The FDIC is authorized to increase deposit insurance premiums if it determines such increases are appropriate to maintain the reserves of either the SAIF or BIF or to fund the administration of the FDIC. In addition, the FDIC is authorized to levy emergency special assessments of BIF and SAIF members. The FDIC has set the deposit insurance assessment rates for SAIF member institutions for the first six months of 2004 at 0% to 0.27% of insured deposits on an annualized basis, with the assessment rate for most savings institutions set at 0%. In addition, all institutions insured by the FDIC are required to pay quarterly assessments, totaling approximately 0.0154% of insured deposits for the 2003 calendar year, to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the Financing Corporation bonds mature in 2017. 18 Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 4.0% of total adjusted assets for most savings institutions, and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. The Bank exceeded these minimum standards at December 31, 2003. The Bank's capital ratios are set forth in Note 11 to the Company's Consolidated Financial Statements. Regulations that enable the OTS to take prompt corrective action against savings institutions effectively impose higher capital requirements on the Bank. Dividend and Other Capital Distribution Limitations. The Bank must give the OTS 30 days advance notice of any proposed distribution of capital, such as a declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit any payment of dividends to the Company that it deems to constitute an unsafe or unsound practice. In addition, the Bank may not declare or pay a dividend on its capital stock if the dividend would (1) reduce the regulatory capital of the Bank below the amount required for the liquidation account established in connection with the conversion from mutual to stock form or (2) reduce the amount of capital of the Bank below the amounts required in accordance with other OTS regulations. In contrast, the Company has fewer restrictions on its payment of dividends to its stockholders. During 2003, the Company declared four $0.20 per share quarterly dividends to its shareholders. During 2002, the Company declared four $0.18 per share quarterly dividends to its shareholders. The Company's dividend payout ratio for 2003 was 25.6% and for 2002 was 25.3%. Qualified Thrift Lender Test. Savings institutions must meet a QTL test. If the Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Des Moines. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 20% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FannieMae and FreddieMac as qualifying QTIs. As of December 31, 2003, the Bank was in compliance with its QTL requirement. Loans-to-One Borrower. See "Business -- Loans-to-One Borrower." Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. The balances 19 maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. Item 2. Description of Property - ------------------------------- The Company does not own any real property but utilizes the offices of the Bank. The Bank operates from its main full service office located at 53 First Street, S.W., Wells, Minnesota, seven additional full service offices, and two loan origination offices. The Bank owns the offices in Wells and two branch facilities, and leases the remaining locations. In the opinion of the Bank's management, the physical condition of each of the offices is good and is adequate for the conduct of the Bank's business. Item 3. Legal Proceedings - ------------------------- There are various claims and lawsuits in which Registrant is periodically involved, such as claims to enforce liens, condemnation proceedings on properties in which Registrant holds security interests, claims involving the making and servicing of real property loans, and other issues incident to Registrant's business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ On November 18, 2003, Wells Financial Corp. held a Special Meeting of Stockholders to approve (1) the Wells Financial Corp. 2003 Stock Option Plan and (2) the Wells Financial Corp. 2003 Stock Bonus Plan. The proposals were approved by the following votes: PROPOSAL FOR AGAINST ABSTAIN - -------- --- ------- ------- (1) Approval of the Wells Financial Corp. 2003 Stock Option Plan 515,075 199,318 5,175 (2) Approval of the Wells Financial Corp. 2003 Stock Bonus Plan 519,975 194,118 5,475 PART II Item 5. Market for Common Equity and Related Stockholder Matters - ----------------------------------------------------------------- The information contained under the section captioned "Stock Market Information" on pages 1 and 2 of the Company's 2003 Annual Report to Stockholders (the "Annual Report"), is incorporated herein by reference. Item 6. Management's Discussion and Analysis or Plan of Operation - ------------------------------------------------------------------ The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. 20 Item 7. Financial Statements - ----------------------------- The following financial statements and the report of independent accountants of Registrant included in Registrant's Annual Report to Stockholders are incorporated herein by reference. Independent Auditor's Report. Consolidated Statements of Financial Condition as of December 31, 2003 and 2002. Consolidated Statements of Income for the Years Ended December 31, 2003, 2002, and 2001. Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002, and 2001. Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001. Notes to Consolidated Financial Statements. Item 8. Changes in and Disagreements With Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure -------------------- None. Item 8A. 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 Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-KSB 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 control over financial reporting. During the last quarter of the year 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. PART III Item 9. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The information required under this item is incorporated herein by reference to the proxy statement for the Registrant's 2004 Annual Meeting of Stockholders (the "Proxy Statement") under the Sections captioned "Proposal I - Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance". 21 Item 10. Executive Compensation - -------------------------------- The information contained under the section captioned "Director and Executive Officer Compensation" in the Proxy Statement is incorporated herein by reference. The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. A copy of the Company's Code of Ethics will be furnished, without charge, to any person who requests such copy by writing to the Secretary, Wells Financial Corp., 53 First Street, S.W., Wells, Minnesota 56097. Item 11. Security Ownership of Certain Beneficial Owners and Management and - -------------------------------------------------------------------------------- Related Stockholders Matters ---------------------------- (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the first table under "Proposal I - Election of Directors" in the Proxy Statement. (c) Changes in Control Management of Registrant knows of no arrangements, including any pledge by any person of securities of Registrant, the operation of which may at a subsequent date result in a change in control of Registrant. (d) Securities Authorized for Issuance Under Equity Compensation Plans 22 Set forth below is information as of December 31, 2003 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION (a) (b) (c) Number of securities Number of Weighted- remaining available securities to be average exercise for future issuance issued upon price of under equity exercise of outstanding compensation plans outstanding options, (excluding securities options, warrants warrants and reflected in column and rights rights (a)) --------------------- ------------------ ------------------------ Equity compensation plans approved by shareholders 2003 Stock Option Plan 36,000 $30.15 84,000 2003 Stock Bonus Plan 17,500 N/A 32,500 1995 Stock Option Plan 61,547 13.71 -- 1995 Stock Bonus Plan 12,835 N/A -- Equity compensation plans not approved by shareholders N/A N/A N/A ------- ------- ------- TOTAL 127,882 $ 15.09 116,500 ======= ======= =======
Item 12. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Certain Relationships and Related Transactions" in the Proxy Statement. Item 13. Exhibits, List, and Reports on Form 8-K - ------------------------------------------------ (a) The following exhibits are included in this Report or incorporated herein by reference:
3(i) Articles of Incorporation of Wells Financial Corp.* 3(ii) Bylaws of Wells Financial Corp.** 10.1 1995 Stock Option Plan of Wells Financial Corp.*** 10.2 Management Stock Bonus Plan and Trust Agreements*** 10.3 Change in Control Severance Agreement with James D. Moll**** 10.4 Change in Control Severance Agreement with Gerald D. Bastian**** 10.5 Wells Financial Corp. 2003 Stock Option Plan***** 10.6 Wells Financial Corp. 2003 Stock Bonus Plan***** 23 13 Annual Report to Stockholders for the fiscal year ended December 31, 2003 (only those portions incorporated by reference in this document are deemed filed) 21 Subsidiaries of Registrant**** 23 Consent of McGladrey & Pullen, LLP 31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K. A Report on Form 8-K, dated November 5, 2003, was filed with the SEC on November 6, 2003 to report earning for the quarter ended September 30, 2003. Item 14. Principal Accountant Fees and Services - ------------------------------------------------ The information called for by this item is incorporated herein by reference to the section entitled "Proposal I - Election of Directors" in the Proxy Statement. - --------------- * Incorporated by reference to the registration statement on Form S-1 (File No. 33-87922) declared effective by the SEC on February 13, 1995. ** Incorporated by reference to the identically numbered exhibit to the Registrant's Form 10-KSB for the year ended December 31,1998 (File No. 0-25342). *** Incorporated by reference to the exhibits to the Registrant's proxy statement for a special meeting of stockholders held on November 15, 1995 and filed with the SEC on October 2, 1995 (File No. 0-25342). **** Incorporated by reference to the identically numbered exhibit to the Registrant's Form 10-K for the year ended December 31, 1995. ***** Incorporated by reference to the exhibits to the Registrant's proxy statement for a special meeting of stockholders held on November 18, 2003 and filed with the SEC on October 20, 2003 (File No. 0-25342). 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 as of March 19, 2004. WELLS FINANCIAL CORP. By: /s/ Lonnie R. Trasamar ------------------------------------- Lonnie R. Trasamar President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 19, 2004.
/s/ Lonnie R. Trasamar /s/ James D. Moll - ----------------------------------------------- --------------------------------------------- Lonnie R. Trasamar James D. Moll President, Chief Executive Officer and Director Treasurer and Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) /s/ Dale E. Stallkamp /s/ Gerald D. Bastian - ----------------------------------------------- --------------------------------------------- Dale E. Stallkamp Gerald D. Bastian Director Vice President and Director /s/ Randel I. Bichler /s/ Richard A. Mueller - ----------------------------------------------- --------------------------------------------- Randel I. Bichler Richard A. Mueller Chairman of the Board Director /s/ David Buesing - ----------------------------------------------- David Buesing Director
EX-13 3 ex-13_0129.txt ANNUAL REPORT WELLS FINANCIAL CORP. 2003 ANNUAL REPORT Table of Contents ============================================================================== Profile and Stock Market Information............................ 1-2 Selected Consolidated Financial and Other Data.....................3 Letter to Stockholders.............................................4 Management's Discussion and Analysis of Financial Condition and Results of Operations...........................5-18 Independent Auditor's Report......................................19 Consolidated Statements of Financial Condition....................20 Consolidated Statements of Income.................................21 Consolidated Statements of Stockholders' Equity................22-23 Consolidated Statements of Cash Flows..........................24-26 Notes to Consolidated Financial Statements.....................27-51 Office Locations................................................. 52 Other Corporate Information...................................... 53 ============================================================================== Wells Financial Corp. Profile Wells Financial Corp. (the "Company") is a Minnesota corporation organized in December 1994 at the direction of the Board of Directors of Wells Federal Bank, fsb (the "Bank") to acquire all of the capital stock that the Bank issued upon its conversion from mutual to stock form of ownership. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage provided that the Bank retains a specified amount of its assets in housing-related investments. At the present time, because the Company does not conduct any active business, the Company does not intend to employ any persons other than officers of the Bank but utilizes the support staff of the Bank from time to time. The Bank is a federally chartered stock savings bank headquartered in Wells, Minnesota. The Bank has eight full service offices located in Faribault, Martin, Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota, one loan origination office in Dakota County, Minnesota and one loan origination office located in Cerro Gordo County, Iowa. The Bank was founded in 1934 and its deposits have been federally insured by the Savings Association Insurance Fund ("SAIF") and its predecessor, the Federal Savings and Loan Insurance Corporation ("FSLIC"), since 1934. The Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a community oriented, full-service retail savings institution. The Bank attracts deposits from the general public and uses such deposits primarily to invest in residential lending on owner occupied properties, home equity loans and other consumer loans. Other lending activities include agricultural real estate, agricultural operating, multi-family residential and commercial real estate loans. Cash in excess of what is needed for lending operations is used to purchase investment securities and to maintain required liquidity. The Bank has three subsidiaries, Greater Minnesota Mortgage (GMM), Wells Insurance Agency (WIA) and Wells REIT Holding, LLC. GMM originates loans through referrals from community commercial banks and, primarily, sells these loans to the secondary market. WIA is a full service insurance agency that sells property, casualty, life, health and investment products, including mutual funds. Wells REIT Holding, LLC is the holding company of Wells Real Estate Investment Trust, LLC, which invests in real estate loans acquired from the Bank. Stock Market Information Since its issuance on April 11, 1995, the Company's common stock has been traded on the Nasdaq National Market under the symbol "WEFC." The following table reflects high and low bid information during the periods shown. The quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions. Dividends Paid High Low per Share ---------- ---------- ----------------- January 1, 2002 - March 31, 2002 $21.38 $17.55 $0.18 April 1, 2002 - June 30, 2002 $23.04 $19.65 $0.18 July 1, 2002 - September 30, 2002 $22.75 $17.68 $0.18 October 1, 2002 - December 31, 2002 $20.64 $17.19 $0.18 January 1, 2003 - March 31, 2003 $23.33 $20.63 $0.20 April 1, 2003 - June 30, 2003 $26.78 $22.35 $0.20 July 1, 2003 - September 30, 2003 $27.75 $24.38 $0.20 October 1, 2003 - December 31, 2003 $31.72 $26.80 $0.20 1 The number of stockholders of record of common stock as of the record date of March 1, 2004, was approximately 490. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. At March 1, 2004, there were 1,159,751 shares outstanding. The Company's ability to pay dividends to stockholders is subject to the requirements of Minnesota law. No dividend may be paid by the Company unless its board of directors determines that the Company will be able to pay its debts in the ordinary course of business after payment of the dividend. In addition, the Company's ability to pay dividends is dependent, in part, upon the dividends it receives from the Bank. The Bank may not declare or pay a cash dividend on any of its stock if the effect thereof would cause the Bank's regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with the Bank's conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by the Office of Thrift Supervision ("OTS"). During 2003, 2002 and 2001 the Bank paid $3,009,000, $2,020,000 and $2,186,000 in cash dividends, respectively, to the Company. 2 WELLS FINANCIAL CORP. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (dollars in thousands, except per share amounts)
Financial Condition - ---------------------------------------------- ------------ ------------ ------------ ----------- ---------- December 31, 2003 2002 2001 2000 1999 - ---------------------------------------------- ------------ ------------ ------------ ----------- ---------- Total assets $223,805 $220,616 $230,408 $221,848 $199,836 Loans held for sale 1,997 9,695 10,155 1,955 521 Loans receivable, net 160,049 145,586 160,513 191,137 172,713 Securities available for sale 27,410 19,856 15,863 16,225 2,551 Securities held to maturity - - - - 15,559 Certificates of deposit 200 200 200 200 400 Cash and cash equivalents 25,318 36,571 38,070 7,606 4,200 Deposits 169,662 169,126 180,999 163,582 156,984 Borrowed funds 23,000 23,000 23,000 33,500 17,000 Stockholders' equity 27,868 25,223 23,572 22,341 23,457 Summary of Operations - ---------------------------------------------- ------------ ------------ ------------ ----------- ---------- Years Ended December 31, 2003 2002 2001 2000 1999 - ---------------------------------------------- ------------ ------------ ------------ ----------- ---------- Interest income $11,514 $13,865 $16,376 $15,941 $14,214 Interest expense 4,595 6,247 8,609 9,652 7,698 Net interest income 6,919 7,618 7,767 6,289 6,516 Provision for loan losses - 23 180 - 27 Noninterest income 7,750 5,957 4,290 1,781 1,709 Noninterest expense 8,899 7,849 6,175 5,055 5,054 Net income 3,540 3,340 3,345 1,765 1,874 Other Selected Data - ---------------------------------------------- ------------ ------------ ------------ ----------- ---------- Years Ended December 31, 2003 2002 2001 2000 1999 - ---------------------------------------------- ------------ ------------ ------------ ----------- ---------- Return on average assets 1.58% 1.47% 1.51% 0.84% 0.97% Return on average equity 13.30% 13.31% 15.06% 7.92% 7.57% Average equity to average assets 11.89% 11.06% 10.03% 10.57% 12.77% Equity to assets 12.45% 11.43% 10.23% 10.07% 11.74% Net interest rate spread (1) 3.16% 3.16% 3.22% 2.57% 2.89% Nonperforming assets to total loans (2) 0.63% 0.61% 0.55% 0.35% 0.10% Allowance for loan losses to total loans 0.56% 0.62% 0.59% 0.43% 0.49% Allowance for loan losses to nonperforming 90.31% 102.37% 107.90% 134.1% 702.46% loans (2) Basic earnings per share $ 3.12 $ 2.84 $ 2.91 $ 1.41 $ 1.26 Diluted earnings per share $ 3.05 $ 2.75 $ 2.79 $ 1.39 $ 1.23 Cash dividends declared per share $ 0.80 $ 0.72 $ 0.64 $ 0.61 $ 0.60
(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (2) Nonperforming loans are loans over 90 days past due. Nonperforming assets include nonperforming loans and foreclosed real estate. 3 [LOGO] WELLS ============================================================ FINANCIAL 53 FIRST ST. S.W., PO BOX 310 o WELLS, MN 56097-0310 CORP. o 507/553-3151 To Our Stockholders: On behalf of the Board of Directors of Wells Financial Corp, I am pleased to present our annual report for 2003. For 2003, the Company's basic earnings per share and diluted earnings per share were $3.12 and $3.05, respectively, both record earnings for the Company. The Company's return on average assets was 1.58% and return on average equity was 13.30% for 2003. During 2003, the primary source of income for the Company was from the origination and sale of mortgage loans to the secondary market by the Company's subsidiary, Wells Federal Bank. Due to lower interest rates on residential mortgage loans, the Bank and its subsidiary Greater Minnesota Mortgage, originated and sold to the secondary market a record amount of residential mortgages which resulted in increased fee income. The secondary source of income during 2003 was net interest income. In order to maintain interest rate spread and reduce interest rate risk, the Bank began to diversify its loan portfolio with a lesser emphasis on residential mortgages and a greater emphasis on consumer, commercial and agricultural real estate loans and commercial and agricultural operating loans. The Company's loan portfolio increased by $14,463,000 from $145,586,000 at December 31, 2002 to $160,049,000 at December 31, 2003 which resulted, primarily, from an increase in commercial real estate loans. The asset quality of the Company's loan portfolio remained high with only $4,000 in net charge-offs during 2003. We continually search for new markets and products to enhance our Company. During 2003, the Bank opened a loan origination office in Mason City, Iowa, its first office outside the State of Minnesota. In order to obtain greater efficiencies and customer convenience the Bank will be updating three of its offices during 2004. It was a pleasure to lead the Company in 2003, a time of record volume and profitability and I look forward to meeting the challenges of 2004. Thank you for your confidence and investment in Wells Financial Corp. We hope that you use our many products and services. Your referrals and testimonies as satisfied customers are our best sales tools. Sincerely, /s/Lonnie R. Trasamar Lonnie R. Trasamar President and CEO 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands) General The Company's business activities to date have been limited to its investment in and loan to the Bank and a loan made to the Bank's Employee Stock Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the Company's common stock and, to a lesser degree, investing in securities and deposits in other financial institutions. As a result of the limited operations of the Company, this discussion primarily relates to the Bank. The principal business of the Bank consists of attracting deposits from the general public and using such deposits, together with borrowings to invest in loans and investment securities. During 2003, the primary source of income for the Company was from the origination and sale of mortgage loans to the secondary market. Due to lower interest rates on residential mortgages during 2003, the Bank originated and sold to the secondary market a record amount of residential mortgages. Included in the loans that were originated and sold to the secondary market during 2003 were loans from the Bank's mortgage loan portfolio that were refinanced. In order to maintain interest rate spread and reduce interest rate risk, management has elected to diversify the Bank's loan portfolio by decreasing its investment in residential mortgages and increasing its investment in agriculture and commercial mortgages, commercial operating and term loans and consumer loans. Using this strategy, the Bank was able to increase its loan portfolio during 2003, primarily during the fourth quarter. The increased volume of originations and sales to the secondary market, along with improved market pricing during 2003, resulted in increases in the gain on sale of loans and loan origination and commitment fees. Increases in interest rates on residential mortgages and changes in market pricing could negatively impact the gain on sale of loans and loan origination and commitment fees in future periods. The Company's secondary source of income for 2003 was the Bank's net interest income. The Bank's net interest income, which is the difference between interest income earned on its investment and loan portfolios and interest paid on interest-bearing liabilities, decreased during 2003 when compared to 2002. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (interest rate spread) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Bank's interest rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. As stated above, management believes that the diversification of the loan portfolio will help to maintain the interest rate spread. The operations of the Bank and the entire thrift industry are significantly affected by prevailing economic conditions, competition, and the monetary and fiscal policies of the federal government and governmental agencies. The demand for and supply of housing, competition among lenders, the level of interest rates, and the availability of funds influence lending activities. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the levels of personal income and savings in the Bank's market area. 5 (dollars in thousands) 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. 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. 6 (dollars in thousands) Asset/Liability Management Net interest income, a primary component of the Bank's net earnings, is derived from the difference or "spread" between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Bank has sought to reduce its exposure to changes in interest rates by matching more closely the effective maturities or repricing characteristics of its interest-earning assets and interest-bearing liabilities. The matching of the Bank's assets and liabilities may be analyzed by examining the extent to which its assets and liabilities are interest rate sensitive and by monitoring the expected effects of interest rate changes on its net portfolio value. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If the Bank's assets mature or reprice more quickly or to a greater extent than its liabilities, the Bank's net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. If the Bank's assets mature or reprice more slowly or to a lesser extent than its liabilities, the Bank's net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. The Bank's policy has been to mitigate the interest rate risk inherent in the historical savings institution business of originating long-term loans funded by short-term deposits by pursuing certain strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. These strategies include obtaining longer term fixed rate borrowings at favorable rates and, in periods of lower interest rates, the sale of all qualifying newly originated fixed rate mortgage loans to the secondary market. Historically the Bank's lending strategy was focused on the origination of traditional one-to-four family mortgage loans primarily secured by single family residences and consumer, agricultural real estate and agricultural operating loans in the Bank's primary market area. As a method to reduce interest rate risk the Bank has modified the composition of its loan portfolio to have less of an emphasis on mortgage loans on single family residences and a greater emphasis on consumer, agricultural real estate, agricultural operating loans and, over the past few years, commercial real estate and commercial operating loans. Mortgage loans on one-to-four family residences decreased from 36.00% of the Bank's loan portfolio at December 31, 2002 to 26.08% at December 31, 2003 while commercial real estate loans, including mortgages on agricultural real estate, increased from 34.66% of the loan portfolio to 40.03%. Due to the lower than normal interest rate environment during 2001, 2002 and 2003, the Bank elected to sell the majority of the one-to-four family fixed rate loans it originated during those time periods. In addition, the Bank retains servicing on most of the loans that it sells, enabling it to generate additional income and maintain certain economies of scale in loan servicing. In order to improve the Bank's interest rate sensitivity, improve asset quality, and provide diversification in the asset mix, the Bank maintains a percentage of its assets in investment securities, which generally have shorter terms to maturity. The Bank's purchase of investment securities is designed primarily for safety of principal and secondarily for rate of return. On a weekly basis, the Bank monitors the interest rates of its competitors and sets its interest rates such that its rates are neither the highest or lowest in its market area. The Bank intends for its rates to be competitive and perhaps slightly above the average rates being paid in its market area. The Bank has sought to remain competitive in its market by offering a variety of products. The Bank attempts to manage the interest rates it pays on deposits while maintaining a stable deposit base and providing quality services to its customers. 7 (dollars in thousands) Net Portfolio Value The Company measures its sensitivity to interest rate risk (IRR) by using the net portfolio value (NPV) provided by the Office of Thrift Supervision (OTS). NPV is the difference between incoming and outgoing discounted cash flows from assets, liabilities, and off-balance sheet contracts. An institution's IRR is measured as the change to its NPV as a result of a hypothetical 200 basis point change in market interest rates. The Bank's interest rate risk policy requires a minimum NPV ratio of 6%. The Bank's NPV ratio at December 31, 2003, as calculated by the OTS using information provided by the Bank, exceeds the Bank's interest rate risk policy as outlined in the following table.
Percent of Change in Change Interest Estimated Amount of Estimated NPV NPV Ratio(4) Rates (basis points) NPV Change(1) NPV(2) Ratio(3) (basis points) -------------------- --- --------- ------ -------- -------------- (Dollars in thousands) +300 $26,794 $(8,241) (24)% 12.05% -287 bp +200 30,148 (4,887) (14)% 13.29% -164 bp +100 33,041 (1,994) (6)% 14.29% -63 bp -- 35,035 -- -- 14.93% -- -100 36,218 1,183 3 % 15.24% 32 bp
(1) Represents the excess (deficiency) of the estimated NPV assuming the indicated change in interest rates minus the estimated NPV assuming no change in interest rates. (2) Calculated as the amount of change in the estimated NPV divided by the estimated NPV assuming no change in interest rates. (3) Calculated as the estimated NPV divided by average total assets. (4) Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates. 8 (dollars in thousands) At December 31, 2003 ------------------- *** Risk Measures: 200 bp rate shock *** Pre-Shock NPV Ratio: NPV as % of PV of Assets 14.93% Exposure Measure: Post-Shock NPV Ratio 13.29% Sensitivity Measure: Change in NPV Ratio 164bp The Bank is subject to interest rate risk and, as can be seen above, rising interest rates will reduce the Bank's NPV. During periods of increasing interest rates, the Bank's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets (repricing periods on adjustable-rate loans affect the repricing of interest rate sensitive assets, with longer repricing periods delaying the repricing of such assets more than shorter repricing periods would delay the repricing of such assets), causing a decline in the Bank's interest rate spread and margin. In times of decreasing interest rates, the value of fixed rate assets could increase in value and the lag in repricing of interest rate sensitive assets could be expected to have a positive effect on the Bank. 9 Average Balance Sheet (dollars in thousands) The following table sets forth certain information relating to the Bank's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. The yields for the periods presented include deferred loan origination fees that are considered adjustments to yield. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material difference in the information presented.
Years Ended December 31, -------------------------------------------------------------------------------------- 2003 2002 2001 -------------------------------------------------------------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield\ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- Interest-earning assets: Loans receivable (1) $ 152,279 $ 10,295 6.76% $ 162,622 $ 12,339 7.59% $ 186,772 $15,239 8.16% Investments (2) 55,704 1,219 2.19% 56,843 1,526 2.68% 28,524 1,137 3.99% ---------- --------- -------- ---------- --------- ----------------- -------- ------- Total interest-earning assets 207,983 11,514 5.54% 219,465 13,865 6.32% 215,296 16,376 7.61% Noninterest earning assets 15,808 7,324 6,217 ---------- ---------- ---------- Total assets $ 223,791 $ 226,789 $ 221,513 ========== ========== ========== Interest bearing liabilities: Savings, NOW and money Market accounts 69,256 604 0.87% 57,183 783 1.37% 46,932 1,024 2.18% Certificates of deposit 100,699 2,746 2.73% 117,748 4,219 3.58% 123,809 6,234 5.04% Borrowed funds 23,000 1,245 5.41% 23,000 1,245 5.41% 25,192 1,351 5.36% ---------- --------- -------- ---------- --------- ----------------- -------- ------- Total interest bearing liabilities 192,955 4,595 2.38% 197,931 6,247 3.16% 195,933 8,609 4.39% Noninterest bearing liabilities 4,217 3,760 3,373 ---------- ---------- ---------- Total liabilities 197,172 201,691 199,306 Equity 26,619 25,098 22,207 ---------- ---------- ---------- Total liabilities and equity $ 223,791 $ 226,789 $ 221,513 ========== ========== ========== Net interest income $ 6,919 $ 7,618 $ 7,767 ========= ========= ======== Interest rate spread (3) 3.16% 3.16% 3.22% Net yield on interest earning assets (4) 3.33% 3.47% 3.61% Ratio of average interest earning assets to average interest bearing liabilities 1.08X 1.11X 1.10X ========= ========== ==========
(1) Average balances include non-accrual loans and loans held for sale. (2) Includes interest-bearing deposits in other financial institutions. (3) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 10 (dollars in thousands) Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume); (iii) changes in rate-volume (changes in rate multiplied by the change in average volume). The combined effects of changes in both rate and volume that cannot be separately identified have been allocated proportionately to the change due to rate and the change due to volume.
Years Ended December 31, -------------------------------------------------------------- 2003 vs. 2002 2002 vs. 2001 ------------------------------ ----------------------------- Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------ ----------------------------- Volume Rate Net Volume Rate Net ------- ------- ------- ------- ------- ------- Interest Income: Loans receivable $ (753) $(1,291) $(2,044) $(1,881) $(1,019) $(2,900) Investments (30) (277) (307) 580 (191) 389 ------- ------- ------- ------- ------- ------- Total interest-earning assets (783) (1,568) (2,351) (1,301) (1,210) (2,511) ------- ------- ------- ------- ------- ------- Interest expense: Deposit accounts (424) (1,228) (1,652) (81) (2,175) (2,256) Borrowed funds - - - (119) 13 (106) ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities (424) (1,228) (1,652) (200) (2,162) (2,362) ------- ------- ------- ------- ------- ------- Change in net interest income $ (359) $ (340) $ (699) $(1,101) $ 952 $ (149) ======= ======= ======= ======= ======= =======
11 (dollars in thousands) Financial Condition Total assets increased by $3,189 from $220,616 at December 31, 2002 to $223,805 at December 31, 2003. This increase was primarily the result of increases in total loans and securities available for sale, partially offset by a decrease in cash and loans held for sale. Securities available for sale increased by $7,554 as the Company used cash to purchase securities, primarily mortgage-backed securities that have balloon payments. Loans held for sale decreased from $9,695 at December 31, 2002 to $1,997 at December 31, 2003 due to a decrease in the amount of residential loans originated for sale to the secondary market during the last quarter of 2003 when compared to the last quarter of 2002. On December 31, 2002 and December 31, 2003, the Company had firm commitments to sell the loans that were classified as held for sale. Loans receivable increased by $14,463 from $145,586 at December 31, 2002 to $160,049 at December 31, 2003. The increase in loans receivable resulted from increases in commercial and agricultural mortgage and operating loans, partially offset by a decrease in one-to-four family real estate loans. In order to improve interest rate spreads, the Company has changed the composition of the loan portfolio. Since December 31, 1999, one- to-four family real estate loans decreased from 60.82% of the Company's loan portfolio to 26.08% of the loan portfolio while commercial real estate loans increased from 18.27% to 40.03% of the loan portfolio and commercial business loans increased from 1.71% to 5.79% of the loan portfolio. In accordance with the Bank's internal classification of assets policy, management evaluates the loan portfolio on a quarterly basis to identify and determine the adequacy of the allowance for loan losses. The increase in the percentage and volume of commercial loans in the Bank's loan portfolio mentioned above could require an increase in the allowance for loan losses in future periods. As of December 31, 2003 and December 31, 2002, the balance in the allowance for loan losses and the allowance for loan losses as a percentage of total loans were $904 and $908 and 0.56% and 0.62%, respectively. Loans on which the accrual of interest had been discontinued amounted to $829 and $428 at December 31, 2003 and 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 at December 31, 2003 and 2002 was $791 and $149, respectively. Liabilities increased by $544, from $195,393 at December 31, 2002 to $195,937 at December 31, 2003. This increase is primarily due to an increase of $536 in deposits. Stockholders' equity increased by $2,645 from $25,223 at December 31, 2002 to $27,868 at December 31, 2003. The increase in stockholders' equity was primarily the result of net income for 2003 of $3,540 being partially offset by the payment of $905 in cash dividends. Accumulated other comprehensive income decreased by $221 due to a decrease in the net unrealized gain on securities available for sale which resulted from changes in interest rates. Unearned compensation-restricted stock awards increased by $423 due to the awarding of shares under the Wells Federal Bank 2003 Stock Bonus Plan that was approved by stockholders on November 18, 2003. 12 (dollars in thousands) Comparison of Operating Results for the Years Ended December 31, 2003 and 2002 General. Net income increased by $200, or 5.99% for 2003 when compared to 2002. The increase in net income was due primarily to an increase in noninterest income of $1,793 being partially offset by a $699 decrease in net interest income and a $1,050 increase in noninterest expense. Interest Income. Total interest income decreased by $2,351 from $13,865 for the year ended December 31, 2002 to $11,514 for the year ended December 31, 2003. Interest income on loans decreased by $2,044 for 2003 when compared to 2002 due primarily to a decrease in the yield on the loan portfolio due to market conditions. Also contributing to the decrease in interest income from the loan portfolio was a decrease in the average balance of the loan portfolio during 2003 when compared to 2002. The Bank's loan portfolio increased during the fourth quarter of 2003 which may result in an improvement in interest income from the loan portfolio in future periods. The average yield on the loan portfolio decreased by 0.83% from 7.59% for 2002 to 6.76% for 2003. Interest income and the average yield on investments decreased by $307 and 0.49%, respectively, for 2003 when compared to 2002. Interest Expense. Total interest expense decreased by $1,652, or 26.4%, for the year ended December 31, 2003 when compared to the year ended December 31, 2002. Interest expense on deposits decreased by $1,652, or 33.0%, during 2003 when compared to 2002 due, primarily, to a decrease in the average rate paid on deposits from 2.86% for 2002 to 1.97% for 2003. Also affecting interest expense on deposits was a decrease in the average balance of deposits. Interest expense on borrowed funds remained constant for 2003 when compared to 2002. Net Interest Income. Net interest income decreased by $699, or 9.2%, for the year ended December 31, 2003 when compared to the year ended December 31, 2002 due to the changes in interest income and interest expense described above. Provision for Loan Losses. The provision for loan loss decreased by $23 for the year ended December 31, 2003 when compared to the year ended December 31, 2002. The provision reflects management's monitoring of the allowance for loan losses in relation to the size and quality of the loan portfolio and adjusts the provision for loan losses to adequately provide for loan losses. Management determines the amounts of the allowance for loan losses in a systematic manner that includes self-correcting policies that adjust loss estimation methods on a periodic basis. Due to the increase in the loan portfolio and the changes in the composition of the loan portfolio, it is likely that the provision for loan losses will increase in future periods. Noninterest Income. Noninterest income increased by $1,793, or 30.1%, for 2003 when compared to 2002 primarily due to an increase of $611 in the gain on sale of loans originated for sale and an increase of $554 in loan origination and commitment fees. Due to low interest rates on residential mortgage loans during 2003, the Company originated and sold to the secondary market a larger volume of loans during 2003 when compared to 2002. Market conditions during 2003 when compared to 2002 allowed the Company to obtain a more favorable price on the loans sold to the secondary market. These increased prices and an increase in the volume of loans sold to the secondary market are the primary reasons for the increases in the gain on sale of loans originated for sale and loan origination and commitment fees. Changes in interest rates and the amount of loan originations and sales to the secondary market will impact the gain on sale of loans originated for sale and loan origination and commitment fees in future periods. 13 (dollars in thousands) Noninterest Expense. Noninterest expense increased by $1,050, or 13.4%, for the year ended December 31, 2003 when compared to the year ended December 31, 2002 primarily due to a $619 increase in compensation and benefits which resulted from annual compensation adjustments and increases in commissions paid to loan officers for the origination of loans. If loan originations decrease in future periods, it is expected that commissions paid to loan officers will also decrease. Also affecting noninterest expense was a $463 increase in other noninterest expense which resulted primarily from increased costs associated with the increase in loan originations during 2003. Income Tax Expense. Income tax expense decreased by $133 for 2003 when compared to 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. Comparison of Operating Results for the Years Ended December 31, 2002 and 2001 General. Net income decreased by $5, or 0.15% for 2002 when compared to 2001. The decrease in net income was due primarily to an in noninterest expense of $1,674 for 2002 when compared to 2001 which was not fully offset by the $1,667 increase in noninterest income. Interest Income. Interest income decreased by $2,511, or 15.3%, for 2002 when compared to 2001. The decrease in interest income resulted from a $2,900 decrease in interest income from the Company's loan portfolio which was the result of a decrease in the average balance of the Company's loan portfolio during 2002 when compared to 2001 and, to a lesser extent, due to a general decrease in the yield on the Company's loan portfolio. Partially offsetting the decrease in interest income on the Company's loan portfolio was a $389 increase in interest income on securities and interest bearing accounts. The increase in interest income from investment securities and interest-bearing accounts was the result of an increase in the average balance of the Company's securities and interest-bearing accounts during 2002 when compared to 2001. Interest Expense. Total interest expense decreased by $2,362, or 27.4%, for the year ended December 31, 2002 when compared to the year ended December 31, 2001. Interest expense on deposits decreased by $2,256, or 31.1%, during 2002 when compared to 2001 due, primarily, to a decrease in the average rate paid on deposits and, to a lesser extent, to a decrease in the average balance of deposits. Interest expense on borrowed funds decreased by $106, or 7.8%, due to a decrease in the average balance of borrowed funds during 2002 when compared to 2001. Net Interest Income. Net interest income decreased by $149, or 1.9%, for the year ended December 31, 2002 when compared to the year ended December 31, 2001 due to the changes in interest income and interest expense described above. Provision for Loan Losses. The provision for loan loss decreased by $157 for the year ended December 31, 2002 when compared to the year ended December 31, 2001 due, primarily, to the decrease in the Company's loan portfolio. 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. 14 (dollars in thousands) Noninterest Income. Noninterest income increased by $1,667, or 38.9%, for 2002 when compared to 2001 primarily due to an increase in the gain on sale of loans originated for sale and, to a lesser extent, loan origination and commitment fees. Market conditions during 2002 when compared to 2001 allowed the Company to obtain a more favorable price on the loans sold to the secondary market. These increased prices and an increase in the volume of loans sold to the secondary market are the primary reasons for the increase in the gain on sale of loans originated for sale. Noninterest Expense. Noninterest expense increased by $1,674, or 27.1%, for the year ended December 31, 2002 when compared to the year ended December 31, 2001 primarily due to increases in the amortization and valuation adjustments for mortgage servicing rights and compensation and benefits. The amortization and valuation adjustments for mortgage servicing rights increased by $1,070 primarily due to a $660 valuation adjustment that the Company realized during 2002. The increase in compensation and benefits resulted from annual compensation adjustments and increases in commissions paid to loan officers for the origination of loans. Income Tax Expense. Income tax expense remained relatively constant for 2002 when compared to 2001. Liquidity and Capital Resources The Bank's primary sources of funds are deposits, 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. Due to the amount of the Bank's mortgage loans that were refinanced during the past two years, it is expected that cash flows from the prepayments of mortgage loans will be less than during 2003 and 2002. If needed, the Bank's primary 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 December 31, 2003 and 2002, the Bank's noninterest bearing cash was $7,663 and $1,393, respectively. At December 31, 2003, the Bank had $23,000 in outstanding advances from the FHLB of Des Moines, which have been used to fund loan originations. At December 31, 2003, the Bank had the ability to borrow an additional $6 million based upon the pledged collateral. The Bank has the option of pledging additional collateral which will increase the amount available to borrow. During 2002 the Company approved stock buy back programs in which up to 120,000 shares of the common stock of the Company could be acquired. During 2002 the Company bought 80,000 shares of its common stock under this buy back program. No shares were purchased under this program during 2003. 15 (dollars in thousands) The Bank is required to maintain specified amounts of capital. The capital standards generally require the maintenance of regulatory capital sufficient to meet a tangible capital requirement, a core capital requirement and a risk-based capital requirement. At December 31, 2003, the Bank's tangible capital totaled $19,516, or 9.01% of adjusted total assets, and core capital totaled $19,516, or 9.01% of adjusted total assets, which substantially exceeded the respective 1.5% tangible capital and 4.0% core capital requirements at that date by $16,266 and $10,850, respectively, or 7.51% and 5.01% of adjusted total assets, respectively. The Bank's risk-based capital totaled $20,420 at December 31, 2003 or 12.86% of risk-weighted assets, which exceeded the current requirements of 8.0% of risk-weighted assets by $7,720 or 4.86% of risk-weighted assets. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Off Balance Sheet Arrangements The Company is a party to financial instruments with off-statement of financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments include primarily commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of those instruments reflect the extent of the Company's involvement in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-statement of financial condition instruments. Commitments to extend credit on loans totaled approximately $39,440 and $53,717 at December 31, 2003 and 2002, respectively. The portion of commitments to extend credit that related to fixed rate loans is $32,432 and $48,539 as of December 31, 2003 and 2002, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but normally includes real estate and personal property. 16 Impact of New Accounting Standards In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. It establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003. In December 2003, the FASB issued a revision to FIN 46 (FIN46R) which clarified certain implementation issues and revised implementation dates for VIE's created before January 31, 2003. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised Interpretation. Otherwise, application of FIN 46R (or FIN 46) is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. The Company adopted FIN 46 in connection with its consolidated financial statements for the year ending December 31, 2003. The adoption had no significant impact on its financial condition. In April 2003, the Financial Accounting Standards Board issued Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments and hedging activities under Statement 133. In addition, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This statement is effective for contracts entered into or modified after June 30, 2003. The Company adopted the provisions of SFAS No. 149 effective July 1, 2003, with no significant effect to the consolidated financial statements. The Company's derivative instruments outstanding during the year ended December 31, 2003 include commitments to fund loans originated for sale and forward loan sale agreements. In accordance with SFAS No. 133 and SFAS No. 149, derivative instruments are recognized in the balance sheet at fair value and changes in the fair value thereof are recognized in the statement of income. The Company originates single-family residential loans for sale pursuant to programs with FHLMC. Under the structure of the programs, at the time the Company initially issues a loan commitment in connection with such programs, it does not lock in a specific interest rate. At the time the interest rate is locked in by the borrower, the Company concurrently enters into a forward loan sale agreement with respect to the sale of such loan at a set price in an effort to manage the interest rate risk inherent in the locked loan commitment. The forward loan sale agreement also meets the definition of a derivative instrument under SFAS No. 133. Any change in the fair value of the loan commitment after the borrower locks in the interest rate is substantially offset by the corresponding change in the fair value of the forward loan sale agreement related to such loan. The period from the time the borrower locks in the interest rate to the time the Company funds the loan and sells it to FHLMC is generally 60 days. The fair value of each instrument will rise or fall in response to changes in market interest rates subsequent to the dates the interest rate locks and forward loan sale agreements are entered into. In the event that interest rates rise after the Company enters into an interest rate lock, the fair value of the loan commitment will decline. However, the fair value of the forward loan sale agreement related to such loan commitment should increase by substantially the same amount, effectively eliminating the Company's interest rate and price risk. At December 31, 2003, the Company had $2.9 million of loan commitments outstanding related to loans being originated for sale all of which were subject to interest rate locks forward loan sale agreements as described above. 17 In May 2003, the Financial Accounting Standards Board issued Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that certain freestanding financial instruments be reported as liabilities in the balance sheet. For the Company, the Statement is effective for the fiscal year beginning January 1, 2005 and implementation is not expected to have a significant impact on the consolidated financial statements. 18 McGladrey & Pullen Certified Public Accountants Independent Auditor's Report To the Board of Directors and Stockholders Wells Financial Corp. and Subsidiary Wells, Minnesota We have audited the accompanying consolidated statements of financial condition of Wells Financial Corp. and Subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wells Financial Corp. and Subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP Rochester, Minnesota January 29, 2004 19 Wells Financial Corp. and Subsidiary Consolidated Statements of Financial Condition December 31, 2003 and 2002 (dollars in thousands)
Assets 2003 2002 - ------------------------------------------------------------------------------------------- Cash, including interest-bearing accounts 2003 $17,655; 2002 $35,178 (Note 16) $ 25,318 $ 36,571 Certificates of deposit (Note 2) 200 200 Securities available for sale (Note 3) 27,410 19,856 Federal Home Loan Bank Stock, at cost (Note 9) 1,303 1,875 Loans held for sale (Note 4) 1,997 9,695 Loans receivable, net of allowance for loan losses of $904 in 2003 and $908 in 2002 (Notes 4, 9, 15 and 16) 160,049 145,586 Accrued interest receivable 1,209 1,387 Premises and equipment (Note 7) 3,585 2,975 Mortgage servicing rights, net (Note 5) 2,681 2,179 Other assets (Note 6) 53 292 ---------------------- Total assets $ 223,805 $ 220,616 ====================== Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------- Liabilities Deposits (Note 8) $ 169,662 $ 169,126 Borrowed funds (Note 9) 23,000 23,000 Advances from borrowers for taxes and insurance (Note 5) 1,585 1,347 Deferred income taxes (Note 10) 1,456 1,376 Accrued interest payable 34 50 Accrued expenses and other liabilities 200 494 ---------------------- Total liabilities 195,937 195,393 ====================== Commitments, contingencies and credit risk (Notes 14, 15, and 16) Stockholders' Equity (Notes 11 and 13) Preferred stock, no par value; 500,000 shares authorized; none outstanding -- -- Common stock, $.10 par value; 7,000,000 shares authorized; 2,187,500 shares issued 219 219 Additional paid-in capital 17,154 16,985 Retained earnings, substantially restricted 26,922 24,287 Accumulated other comprehensive income 525 746 Unearned Employee Stock Ownership Plan shares -- (29) Unearned compensation-restricted stock awards (561) (138) Less cost of treasury stock, 2003 1,033,673 shares; 2002 1,062,435 shares (16,391) (16,847) ------------------------ Total stockholders' equity 27,868 25,223 ------------------------ Total liabilities and stockholders' equity $ 223,805 $ 220,616 ========================
See Notes to Consolidated Financial Statements. 20 Wells Financial Corp. and Subsidiary Consolidated Statements of Income Years Ended December 31, 2003, 2002 and 2001 (dollars in thousands, except per share data)
2003 2002 2001 - --------------------------------------------------------------------------- Interest and Dividend Income Loans receivable: First mortgage loans $ 7,447 $ 9,153 $11,658 Consumer and other loans 2,848 3,186 3,581 Investment securities and interest- bearing deposits 1,219 1,526 1,137 ---------------------------- Total interest income 11,514 13,865 16,376 ---------------------------- Interest Expense Deposits 3,350 5,002 7,258 Borrowed funds 1,245 1,245 1,351 ---------------------------- Total interest expense 4,595 6,247 8,609 ---------------------------- Net interest income 6,919 7,618 7,767 Provision for loan losses (Note 4) -- 23 180 ---------------------------- Net interest income after provision for loan losses 6,919 7,595 7,587 ---------------------------- Noninterest Income Gain on sale of loans 2,840 2,229 1,150 Loan origination and commitment fees 2,250 1,696 1,457 Loan servicing fees 947 661 464 Insurance commissions 459 405 410 Fees and service charges 1,058 892 774 Other 196 74 35 ---------------------------- Total noninterest income 7,750 5,957 4,290 ---------------------------- Noninterest Expenses Compensation and benefits (Note 13) 4,159 3,540 3,025 Occupancy (Note 14) 1,153 885 856 Data processing (Note 14) 471 446 403 Advertising 293 236 213 Amortization and valuation adjustments for mortgage servicing rights (Note 5) 1,071 1,453 383 Other 1,752 1,289 1,295 ---------------------------- Total noninterest expenses 8,899 7,849 6,175 ---------------------------- Income before income taxes 5,770 5,703 5,702 Income tax expense (Note 10) 2,230 2,363 2,357 ---------------------------- Net income $ 3,540 $ 3,340 $ 3,345 ============================ Cash dividends declared per share $ 0.80 $ 0.72 $ 0.64 ============================ Earnings per share (Note 12): Basic $ 3.12 $ 2.84 $ 2.91 ============================ Diluted $ 3.05 $ 2.75 $ 2.79 ============================
See Notes to Consolidated Financial Statements. 21 Wells Financial Corp. and Subsidiary Consolidated Statements of Stockholders' Equity Years Ended December 31, 2003, 2002 and 2001 (dollars in thousands)
Additional Comprehensive Common Paid-In Income Stock Capital - ---------------------------------------------------------------------------------------------------------- Balances, December 31, 2000 $ 219 $ 17,011 Comprehensive Income: Net income $ 3,345 -- -- Other comprehensive income, net of tax: Unrealized gains on securities, net of related taxes 47 -- -- ------------ Comprehensive income $ 3,392 ============ Treasury stock purchases, 116,140 shares (Note 11) -- -- Cash dividends declared ($0.64 per share) -- -- Amortization of unearned compensation -- -- Options exercised, 41,192 options (Note 13) -- (211) Allocated ESOP shares -- 132 ---------------------- Balances, December 31, 2001 219 16,932 Comprehensive Income: Net income $ 3,340 -- -- Other comprehensive income, net of tax: Unrealized gains on securities, net of related taxes 1 -- -- ------------ Comprehensive income $ 3,341 ============ Treasury stock purchases, 88,860 shares (Note 11) -- -- Cash dividends declared ($0.72 per share) -- -- Amortization of unearned compensation -- - Options exercised, 54,364 options (Note 13) -- (293) Award of management stock bonus plan shares, 4,375 shares (Note 13) -- 23 Tax benefit related to exercised options -- 152 Allocated ESOP shares -- 171 ---------------------- Balances, December 31, 2002 219 16,985 Comprehensive Income: Net income $ 3,540 -- -- Other comprehensive income, net of tax: Unrealized gains on securities, net of related taxes (221) -- -- ------------ Comprehensive income $ 3,319 ============ Cash dividends declared ($0.80 per share) -- -- Amortization of unearned compensation -- - Options exercised, 19,569 options (Note 13) -- (146) Award of management stock bonus plan shares, 17,500 shares (Note 13) -- 251 Tax benefit related to exercised options -- 14 Allocated ESOP shares -- 50 ---------------------- Balances, December 31, 2003 $ 219 $ 17,154 ======================
(Continued) 22 Wells Financial Corp. and Subsidiary Consolidated Statements of Stockholders' Equity Years Ended December 31, 2003, 2002 and 2001 (Continued) (dollars in thousands)
Unearned Employee Unearned Accumulated Stock Compensation- Other Ownership Restricted Total Retained Comprehensive Plan Stock Treasury Stockholders' Earnings Income Shares Awards Stock Equity ---------------------------------------------------------------------- Balances, December 31, 2000 $ 19,182 $ 698 $ (290) $ (237) $(14,242) $ 22,341 Comprehensive Income: Net income 3,345 -- -- -- -- 3,345 Other comprehensive income, net of tax: Unrealized gains on securities, net of related taxes -- 47 -- -- -- 47 Comprehensive income Treasury stock purchases, 116,140 shares (Note 11) -- -- -- -- (2,006) (2,006) Cash dividends declared ($0.64 per share) (735) -- -- -- -- (735) Amortization of unearned compensation -- -- -- 109 -- 109 Options exercised, 41,192 options (Note 13) -- -- -- -- 415 204 Allocated ESOP shares -- -- 135 -- -- 267 ---------------------------------------------------------------------- Balances, December 31, 2001 21,792 745 (155) (128) (15,833) 23,572 Comprehensive Income: Net income 3,340 -- -- -- -- 3,340 Other comprehensive income, net of tax: Unrealized gains on securities, net of related taxes -- 1 -- -- -- 1 Comprehensive income Treasury stock purchases, 88,860 shares (Note 11) -- -- -- -- (1,771) (1,771) Cash dividends declared ($0.72 per share) (845) -- -- -- -- (845) Amortization of unearned compensation -- -- -- 81 -- 81 Options exercised, 54,364 options (Note 13) -- -- -- -- 689 396 Award of management stock bonus plan shares, 4,375 shares (Note 13) -- -- -- (91) 68 -- Tax benefit related to exercised options -- -- -- -- -- 152 Allocated ESOP shares -- -- 126 -- -- 297 ---------------------------------------------------------------------- Balances, December 31, 2002 24,287 746 (29) (138) (16,847) 25,223 Comprehensive Income: Net income 3,540 -- -- -- -- 3,540 Other comprehensive income, net of tax: Unrealized gains on securities, net of related taxes -- (221) -- -- -- (221) Comprehensive income Cash dividends declared ($0.80 per share) (905) -- -- -- -- (905) Amortization of unearned compensation -- -- -- 105 -- 105 Options exercised, 19,569 options (Note 13) -- -- -- -- 179 33 Award of management stock bonus plan shares, 17,500 shares (Note 13) -- -- -- (528) 277 -- Tax benefit related to exercised options -- -- -- -- -- 14 Allocated ESOP shares -- -- 29 -- -- 79 ---------------------------------------------------------------------- Balances, December 31, 2003 $ 26,922 $ 525 $ -- $ (561) $(16,391) $ 27,868 ======================================================================
See Notes to Consolidated Financial Statements. 23 Wells Financial Corp. and Subsidiary Consolidated Statements of Cash Flows Years Ended December 31, 2003, 2002 and 2001 (dollars in thousands)
2003 2002 2001 - --------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 3,540 $ 3,340 $ 3,345 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses -- 23 180 Gain on sale of loans (2,840) (2,229) (1,150) Amortization and valuation adjustments for mortgage servicing rights 1,071 1,453 383 Compensation on allocation of ESOP shares 79 297 267 Amortization of unearned compensation 105 81 109 Tax benefit from exercised options 14 152 -- (Gain) loss on sale of foreclosed real estate (23) 6 -- Write-down of foreclosed real estate 3 30 -- Deferred income taxes 234 151 338 Depreciation and amortization on premises and equipment 357 244 237 Amortization of net deferred loan origination fees (117) (165) (240) Amortization of excess servicing fees -- 16 7 Amortization of securities premiums and discounts 158 27 1 Loans originated for sale (211,650) (151,422) (123,439) Proceeds from the sale of loans held for sale 220,615 152,329 114,978 Changes in assets and liabilities: Accrued interest receivable 178 142 381 Other assets 30 76 (76) Accrued expenses and other liabilities (310) 302 (100) ------------------------------------ Net cash provided by (used in) operating activities 11,444 4,853 (4,779) ------------------------------------
(Continued) 24 Wells Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2003, 2002 and 2001 (dollars in thousands)
2003 2002 2001 - ------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Net (increase) decrease in loans $(14,437) $ 14,792 $ 30,492 Certificates of deposit: Maturities 200 200 1,500 Purchases (200) (200) (1,500) Purchase of Federal Home Loan Bank Stock (16) -- -- Proceeds from sale of Federal Home Loan Bank Stock 588 -- -- Purchase of securities available for sale (27,465) (18,286) (8,944) Proceeds from maturities and calls of securities available for sale 19,378 12,393 9,383 Purchase of premises and equipment (967) (1,418) (205) Proceeds from the sale and redemption of foreclosed real estate 325 292 -- Investment in foreclosed real estate (5) (8) (6) -------------------------------- Net cash provided by (used in) investing activities (22,599) 7,765 30,720 -------------------------------- Cash Flows From Financing Activities Net increase (decrease) in deposits 536 (11,873) 17,417 Net increase (decrease) in advances from borrowers for taxes and insurance 238 (24) 143 Stock options exercised 33 396 204 Dividends paid (905) (845) (735) Repayments on borrowed funds -- -- (10,500) Purchase of treasury stock -- (1,771) (2,006) -------------------------------- Net cash provided by (used in) financing activities (98) (14,117) 4,523 -------------------------------- Net increase (decrease) in cash (11,253) (1,499) 30,464 Cash Beginning 36,571 38,070 7,606 -------------------------------- Ending $ 25,318 $ 36,571 $ 38,070 ================================
(Continued) 25 Wells Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2003, 2002 and 2001 (dollars in thousands)
2003 2002 2001 - ----------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash payments for: Interest on deposits $ 3,366 $ 5,027 $ 7,281 Interest on borrowed funds 1,245 1,245 1,382 Income taxes 1,980 1,942 2,100 ============================ Supplemental Schedule of Noncash Investing and Financing Activities: Other real estate acquired in settlement of loans $ 91 $ 277 $ 192 Allocation of ESOP shares to participants 29 126 135 Net change in unrealized gain (loss) on securities available for sale (221) 1 47 ============================
See Notes to Consolidated Financial Statements. 26 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies Principles of consolidation: The accompanying consolidated financial statements include the accounts of Wells Financial Corp., its wholly owned subsidiary, Wells Federal Bank, fsb., and the Bank's wholly owned subsidiaries, Wells Insurance Agency, Inc., Greater Minnesota Mortgage, Inc. and Wells REIT Holding, LLC. All significant intercompany transactions and balances are eliminated in consolidation. Nature of operations: Operations of Wells Financial Corp. (Company) primarily consist of banking services through Wells Federal Bank, fsb (Bank). Wells Insurance Agency, Inc., is a property and casualty insurance agency. Greater Minnesota Mortgage, Inc., is a mortgage banking company that originates loans through referrals from commercial banks. Wells REIT Holding, LLC is the holding company for the Wells Real Estate Investment Trust which invests in real estate loans acquired from the Bank. The Company serves its customers through the Bank's nine locations in South Central Minnesota and one location in Northern Iowa. 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 allowances for losses on loans are 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 allowances for losses on loans. Such agencies may require the Company to recognize additions to the allowances 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 economic conditions differ substantially from the economic assumptions used to determine the value of the mortgage servicing rights. Comprehensive income: Comprehensive income is the total of reported net income and all other revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America bypass reported net income. The Company includes unrealized gains or losses, net of tax, on securities available for sale in other comprehensive income. Segment disclosures: Operating segments are components of a business about which separate financial information is available and that are evaluated regularly by the Company in deciding how to allocate resources and assessing performance. Public companies are required to report certain financial information about operating segments in interim and annual financial statements. Management evaluates the operations of the Company as one operating segment, community banking, due to the materiality of the community banking operation to the Company's financial condition and results of operations, taken as a whole, and as a result separate segment disclosures are not required. The Company offers the following products and services to customers: deposits, loans and mortgage banking. Revenues for each of these products and services are disclosed separately in the Consolidated Statements of Income. 27 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies (Continued) Cash and cash flows: For the purpose of reporting cash flows, cash includes cash on hand and amounts due from banks (including cash items in process of clearing). Cash flows from loans and deposits are reported net. Federal Home Loan Bank stock: The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of the FHLB. The FHLB stock requirement is related to the asset size of the Bank and the amount of advances the Bank has with the FHLB. No ready market exists for the FHLB stock and it has no quoted market value. Securities available for sale: Securities classified as available for sale includes all equity securities and those debt securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses, net of the related deferred tax effect, are reported as a net amount in accumulated other comprehensive income. Amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Declines in the fair value of individual securities below their amortized cost that are determined to be other than temporary result in write-downs of the individual securities to their fair value with the resulting write-downs included in current earnings as realized losses. Loans held for sale: Loans held for sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or market value. Gains and losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating cost to servicing rights retained. All sales are made without recourse. Loans receivable: The Company generally originates single-family residential loans within its primary lending area of South Central Minnesota and Northern Iowa. These loans are secured by the underlying properties. The Company is also active in originating agricultural real estate, commercial real estate, commercial operating and secured consumer loans, primarily automobile and home equity loans. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the amount of unpaid principal, reduced by an allowance for loan losses and net deferred origination fees. Interest is accrued daily on the outstanding balances. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan's yield. The Company is generally amortizing these amounts over the contractual life of the related loans, adjusted for estimated prepayments based on the Company's historical prepayment experience. 28 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies (Continued) The Company determines a loan to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. Accrual of interest is discontinued for all loans at the time the loan is 120 days delinquent for first mortgage loans or 90 days delinquent for consumer/other loans. All interest accrued but not collected for loans that are placed on nonaccrual status is reversed against interest income. Accrual of interest is generally resumed when the borrower has demonstrated the ability to make all periodic interest and principal payments. Allowance for loan losses: The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is impaired when it is probable, based on current information and events, the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured on an individual basis for commercial and construction loans based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. Loan origination fees and related costs: Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Company's historical prepayment experience. 29 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies (Continued) Loan servicing: The Company generally retains the right to service mortgage loans sold to others. The cost allocated to the mortgage servicing rights retained has been recognized as a separate asset and is being amortized in proportion to and over the period of estimated net servicing income. Mortgage servicing rights are periodically evaluated for impairment based on the fair value of those rights. Fair values are estimated based upon estimated prepayment speeds, ancillary income received from servicing the loans and current interest rates. For purposes of measuring impairment, the rights must be stratified by one or more predominant risk characteristics of the underlying loans. The Company stratifies its capitalized mortgage servicing rights based on interest rates and the term of the underlying loans. The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights for each stratum exceeds their fair value. Foreclosed real estate: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of cost or fair value less estimated costs to sell at the date of foreclosure. Costs relating to improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are periodically performed by management and charge-offs to operations are made if the carrying value of a property exceeds its estimated fair value less estimated costs to sell. Premises and equipment: Land is carried at cost. Bank premises, leasehold improvements, and furniture, fixtures, and equipment are carried at cost, less accumulated depreciation and amortization. Bank premises and furniture, fixtures, and equipment are depreciated using the straight-line method over the estimated useful lives of the assets ranging from 10 to 40 years for bank premises and 3 to 7 years for furniture, fixtures and equipment. The cost of leasehold improvements is being amortized using the straight-line method over the terms of the related leases, generally 7 to 10 years. Income taxes: Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss or tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Earnings per share: Earnings per basic common share are computed based upon the weighted average number of common shares outstanding during each year. Dilutive per share amounts assume conversion, exercise or issuance of all potential common stock instruments unless the effect is to reduce a loss or increase income per common share. Employee Stock Plans: The Company has three types of stock-based compensation plans, which are described in more detail in Note 13. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based employee compensation cost has been recognized, as all options granted under those 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 all of the stock-based compensation plans been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123, Accounting for Stock-Based Compensation): 30 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies (Continued)
Years Ended December 31, ------------------------------------ 2003 2002 2001 - ---------------------------------------------------------------------------------------- Net income: As reported $ 3,540 $ 3,340 $ 3,345 Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (153) (28) (42) ------------------------------------ Pro forma $ 3,387 $ 3,312 $ 3,303 ==================================== Basic earnings per share: As reported $ 3.12 $ 2.84 $ 2.91 Pro forma 2.99 2.81 2.87 Diluted earnings per share: As reported $ 3.05 $ 2.75 $ 2.79 Pro forma 2.92 2.74 2.78
Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash: The carrying amounts reported for cash and interest-bearing accounts approximate their fair values. Certificates of deposit: The carrying amounts reported for certificate of deposits approximate their fair values. Securities available for sale: Fair values for securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Federal Home Loan Bank stock: The carrying amount approximates fair value. Loans held for sale: Fair values are based on quoted market prices of similar loans sold on the secondary market. Loans and accrued interest receivable: For variable-rate loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The carrying amount of accrued interest receivable approximates its fair value. Mortgage servicing rights: Fair values are estimated using discounted cash flows based on current market rates and conditions. 31 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies (Continued) Deposits and other liabilities: The fair values disclosed for demand deposits and savings accounts are, by definition, equal to their carrying amounts, which represent the amounts payable on demand. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on those certificates. The carrying amounts of advances by borrowers for taxes and insurance and accrued interest payable approximate their fair values. Borrowed funds: The fair value of long term fixed rate borrowed funds is estimated by using a discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements. Off-statement of financial condition instruments: Since the majority of the Company's off-statement of financial condition instruments consist of non fee-producing commitments to originate and sell loans, the Company has determined they do not have a significant fair value. Recent accounting pronouncements: In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. It establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003. In December 2003, the FASB issued a revision to FIN 46 (FIN46R) which clarified certain implementation issues and revised implementation dates for VIE's created before January 31, 2003. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised Interpretation. Otherwise, application of FIN 46R (or FIN 46) is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. The Company adopted FIN 46 in connection with its consolidated financial statements for the year ending December 31, 2003. The adoption had no significant impact on its financial condition. In April 2003, the Financial Accounting Standards Board issued Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments and hedging activities under Statement 133. In addition, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This statement is effective for contracts entered into or modified after June 30, 2003. The Company adopted the provisions of SFAS No. 149 effective July 1, 2003, with no significant effect to the consolidated financial statements. The Company's derivative instruments outstanding during the year ended December 31, 2003 include commitments to fund loans originated for sale and forward loan sale agreements. 32 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies (Continued) In accordance with SFAS No. 133 and SFAS No. 149, derivative instruments are recognized in the balance sheet at fair value and changes in the fair value thereof are recognized in the statement of income. The Company originates single-family residential loans for sale pursuant to programs with FHLMC. Under the structure of the programs, at the time the Company initially issues a loan commitment in connection with such programs, it does not lock in a specific interest rate. At the time the interest rate is locked in by the borrower, the Company concurrently enters into a forward loan sale agreement with respect to the sale of such loan at a set price in an effort to manage the interest rate risk inherent in the locked loan commitment. The forward loan sale agreement also meets the definition of a derivative instrument under SFAS No. 133. Any change in the fair value of the loan commitment after the borrower locks in the interest rate is substantially offset by the corresponding change in the fair value of the forward loan sale agreement related to such loan. The period from the time the borrower locks in the interest rate to the time the Company funds the loan and sells it to FHLMC is generally 60 days. The fair value of each instrument will rise or fall in response to changes in market interest rates subsequent to the dates the interest rate locks and forward loan sale agreements are entered into. In the event that interest rates rise after the Company enters into an interest rate lock, the fair value of the loan commitment will decline. However, the fair value of the forward loan sale agreement related to such loan commitment should increase by substantially the same amount, effectively eliminating the Company's interest rate and price risk. At December 31, 2003, the Company had $2.9 million of loan commitments outstanding related to loans being originated for sale all of which were subject to interest rate locks forward loan sale agreements as described above. In May 2003, the Financial Accounting Standards Board issued Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that certain freestanding financial instruments be reported as liabilities in the balance sheet. For the Company, the Statement is effective for the fiscal year beginning January 1, 2005 and implementation is not expected to have a significant impact on the consolidated financial statements. Note 2. Certificates of Deposit Certificates of deposit with a carrying value of $200 at December 31, 2003 and 2002, had weighted average yields of 1.1% and 1.6%, respectively, and contractual maturities of less than one year. 33 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 3. Securities Available for Sale
December 31, 2003 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value - --------------------------------------------------------------------------------------------- Mortgage backed securities $ 19,121 $ 43 $ (129) $ 19,035 U.S. Government corporations and agencies 5,549 37 (10) 5,576 Obligations of states and political subdivisions 1,861 5 -- 1,866 FHLMC stock 16 917 -- 933 ------------------------------------------------------ $ 26,547 $ 1,002 $ (139) $ 27,410 ======================================================
December 31, 2002 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value - --------------------------------------------------------------------------------------------- Mortgage backed securities $ 3,691 $ 86 $ (4) $ 3,773 U.S. Government corporations and agencies 14,497 203 -- 14,700 Obligations of states and political subdivisions 393 45 -- 438 FHLMC stock 16 929 -- 945 ------------------------------------------------------ $ 18,597 $ 1,263 $ (4) $ 19,856 ======================================================
Contractual maturities: The amortized cost and fair value of securities available for sale as of December 31, 2003 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. In addition, FHLMC stock has no maturity. Therefore, these securities are not included in the maturity categories in the following maturity summary. Amortized Cost Fair Value - ---------------------------------------------------------------------------- Due in one year or less $ 365 $ 365 Due in one to five years 5,686 5,724 Due in over five years 1,359 1,353 ----------------------------------- 7,410 7,442 Equity securities 16 933 Mortgage backed securities 19,121 19,035 ----------------------------------- $ 26,547 $ 27,410 =================================== 34 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 3. Securities Available for Sale (Continued) Changes in other comprehensive income - unrealized gains on securities available for sale: Years Ended December 31, ---------------------------- 2003 2002 2001 - ----------------------------------------------------------------------------- Balance, beginning $ 746 $ 745 $ 698 Unrealized gains (losses) during the year (375) 2 78 Deferred tax effect relating to unrealized appreciation 154 (1) (31) ---------------------------- Balance, ending $ 525 $ 746 $ 745 =========================== Unrealized losses are deemed to be temporary and have been in a loss position for less than twelve months. Most of these underlying securities consist of mortgage-backed securities. Market fluctuations are caused primarily by changes in interest rates and prepayments of underlying mortgages. Because management has the ability to hold these securities to maturity, unrealized losses are deemed to be a temporary impairment. Securities with a carrying value of $1,524 and $2,016 at December 31, 2003 and 2002, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. Note 4. Loans Receivable and Loans Held for Sale Composition of loans receivable:
December 31, ------------------------- 2003 2002 - --------------------------------------------------------------------------------------------- First mortgage loans (principally conventional): Secured primarily by one-to-four family residences $ 40,870 $ 50,765 Secured by other properties, primarily agricultural real estate 65,509 52,397 Construction 9,697 4,830 ------------------------- Total first mortgage loans 116,076 107,992 ------------------------- Consumer and other loans: Home equity, home improvement and second mortgages 21,755 22,826 Agricultural and commercial operating and term loans 9,421 5,917 Vehicle loans 6,146 5,687 Other 7,711 4,292 ------------------------- Total consumer and other loans 45,033 38,722 ------------------------- Total loans 161,109 146,714 Less: Net deferred loan origination fees (156) (220) Allowance for loan losses (904) (908) ------------------------- Loan receivable, net $ 160,049 $ 145,586 =========================
35 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 4. Loans Receivable and Loans Held for Sale (Continued) Allowance for loan losses: Years Ended December 31, ---------------------------- 2003 2002 2001 - ------------------------------------------------------------------ Balance, beginning $ 908 $ 952 $ 833 Provision for loan losses -- 23 180 Loans charged off (23) (86) (89) Recoveries 19 19 28 ---------------------------- Balance, ending $ 904 $ 908 $ 952 ============================ Nonaccrual and impaired loans: Loans on which the accrual of interest has been discontinued totaled $829, $428, and $408 at December 31, 2003, 2002 and 2001, respectively. The effect of nonaccrual loans was not significant to the results of operations. Information about impaired and delinquent loans as of and for the years ended December 31, 2003 and 2002 is as follows: 2003 2002 - -------------------------------------------------------------------------------- Total impaired loans $791 $149 ============ Related allowance for loan losses $179 $ 75 ============ Loans past due ninety days or more still accruing interest $172 $250 ============ Related party loans: The Company has entered into transactions with its executive officers, directors, significant shareholders, and their affiliates (related parties). The aggregate amounts of loans to such related parties at December 31, 2003 and 2002 were $448 and $367, respectively. During 2003, new loans to such related parties were $268 and repayments were $187. Loans held for sale: As of December 31, 2003 and 2002, the Company's loans held for sale were $1,997 and $9,695, respectively, and consisted of one-to-four family residential real estate loans. Note 5. Loan Servicing Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans as of December 31, 2003 and 2002 were $380,445 and $307,324, respectively, and consist of one-to-four family residential real estate loans. These loans are serviced primarily for the Federal Home Loan Mortgage Corporation. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in advances from borrowers for taxes and insurance, were $1,409 and $1,054 at December 31, 2003 and 2002, respectively. 36 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 5. Loan Servicing (Continued) Mortgage servicing rights, net of valuation allowance, are summarized as follows: 2003 2002 - ---------------------------------------------------------------------------- Balance at beginning of year, net $ 2,179 $ 1,850 Mortgage servicing rights capitalized 1,573 1,782 Amortization expense and valuation adjustments (1,071) (1,453) -------------------------- Balance at end of year, net $ 2,681 $ 2,179 ========================== The estimated fair value of mortgage servicing rights was $2,921 and $2,179 at December 31, 2003 and 2002, respectively. For 2003, the fair value of mortgage servicing rights was determined using a prepayment speed assigned at the loan level. The weighted average prepayment speed on the loan portfolio was 279, which converts to a constant prepayment rate (CPR) of approximately 16.7%. The average life of the portfolio was 4.6 years and the discount rate used was 9% on 15 and 30-year mortgages and 9.75% on mortgages with a balloon payment upon maturity. For 2002, the fair value of mortgage servicing rights was determined using a CPR of 19.6%, an average life of 4.6 years and a discount rate of 8.0% on the entire portfolio. Changes in the Company's valuation allowance for servicing assets for the years ended December 31 are as follows: 2003 2002 - ---------------------------------------------------------------------------- Balance at beginning of year $ 660 $ -- Provisions for impairment -- 660 Less: Recoveries (445) -- -------------------------- Balance at end of year $ 215 $ 660 ========================== The amortized cost of mortgage servicing rights was $2,896 at December 31, 2003. The following table indicates the estimated future amortization expense for mortgage servicing rights. The estimated amortization expense is based on existing asset balances. Actual amortization expense recognized in future periods may differ significantly depending upon economic conditions, mortgage interest rates, and other matters. Years ending December 31, - ---------------------------------------------------------------------------- 2004 $ 922 2005 695 2006 518 2007 380 2008 275 Thereafter 106 ------- $ 2,896 ======= 37 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 6. Foreclosed Real Estate The Company had investments in real estate acquired through foreclosure or deeded to the Company in lieu of foreclosure of $-0- and $209 as of December 31, 2003 and 2002, respectively. No allowances for losses on foreclosed real estate were required at these dates. The amount of foreclosed real estate is included in other assets in the consolidated statements of financial condition. Note 7. Premises and Equipment Premises and equipment are summarized as follows: December 31, ----------------------- 2003 2002 - ----------------------------------------------------------------------------- Land $ 244 $ 244 Buildings and improvements 3,279 2,868 Leasehold improvements 111 111 Furniture, fixtures and equipment 2,228 1,671 ----------------------- 5,862 4,894 Less accumulated depreciation and amortization 2,277 1,919 ----------------------- $ 3,585 $ 2,975 ======================= Note 8. Deposits Composition of deposits: December 31, ----------------------- 2003 2002 - ----------------------------------------------------------------------------- Demand deposits, noninterest bearing $ 5,969 $ 4,319 NOW and money market accounts 40,619 34,744 Savings accounts 30,014 22,355 Certificates of deposit 93,060 107,708 ----------------------- $ 169,662 $ 169,126 ======================= The aggregate amount of certificates of deposit over $100 was $7,892 and $9,564 at December 31, 2003 and 2002, respectively. A summary of scheduled maturities of certificates of deposit is as follows: Years Ending December 31, - ----------------------------------------------------------------------------- 2004 64,108 2005 15,167 2006 9,557 2007 4,228 --------- $ 93,060 ========= 38 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 9. Borrowed Funds Maturities of advances from the Federal Home Loan Bank (FHLB) at December 31 are as follows: 2003 2002 - -------------------------------------------------------------------------- Fixed-rate advances (with rates ranging from 4.77% to 5.71%) Due from one to five years $ 5,000 $ -- Due from five to ten years 18,000 23,000 --------------------------- $ 23,000 $ 23,000 =========================== All advances are subject to various prepayment, call, and conversion provisions. The advances are collateralized by FHLB stock and first mortgage loans with balances exceeding 120% of the amount of the advances. Note 10. Income Tax Matters The Company and its subsidiary file consolidated federal income tax returns. The Company is allowed bad debt deductions based on actual charge-offs. The components of income tax expense are as follows: Years Ended December 31, ----------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------- Federal: Current $ 1,641 $ 1,659 $ 1,530 Deferred 167 115 256 ----------------------------------- 1,808 1,774 1,786 ----------------------------------- State: Current 355 553 489 Deferred 67 36 82 ----------------------------------- 422 589 571 ----------------------------------- Total $ 2,230 $ 2,363 $ 2,357 =================================== Total income tax expense differed from the amounts computed by applying the statutory U.S. Federal income tax rates to income before income taxes as a result of the following: Years Ended December 31, ----------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------- Computed "expected" tax expense $ 2,020 $ 1,996 $ 1,996 State income taxes, net of federal benefit 373 369 368 Effect of graduated rates (58) (57) (57) Other (105) 55 50 ----------------------------------- Income tax expense $ 2,230 $ 2,363 $ 2,357 =================================== 39 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 10. Income Tax Matters (Continued) The net deferred tax liability included in liabilities in the accompanying consolidated statements of financial condition includes the following amounts of deferred tax assets and liabilities: December 31, ----------------------- 2003 2002 - -------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 366 $ 367 Management stock bonus plan 65 46 Accrued compensation 14 16 Other 22 23 ----------------------- 467 452 Less valuation allowance -- -- ----------------------- Total deferred tax assets 467 452 ----------------------- Deferred tax liabilities: Premises and equipment 210 149 Securities available for sale 359 513 FHLB stock dividends 189 189 Mortgage servicing rights 1,085 882 Deferred loan origination fees 39 49 Other 41 46 ----------------------- Total deferred tax liabilities 1,923 1,828 ----------------------- Net deferred tax liability $(1,456) $(1,376) ======================= Retained earnings at December 31, 2003 and 2002 include approximately $1,839 related to the pre-1987 allowance for loan losses for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. If the Bank no longer qualifies as a bank or in the event of a liquidation of the Bank, income would be created for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for financial statement purposes was approximately $736 at December 31, 2003 and 2002. Note 11. Stockholders' Equity, Regulatory Capital and Dividend Restrictions The Company has initiated several stock buy back programs. Shares totaling -0-, 88,860, and 116,140 were purchased during the years ended December 31, 2003, 2002 and 2001, respectively. On January 20, 2004, the Company declared a dividend of $0.22 per common share payable on February 16, 2004 to stockholders of record as of February 2, 2004. The scheduled dividend is approximately $254. 40 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 11. Stockholders' Equity, Regulatory Capital and Dividend Restrictions (Continued) The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2003, the most recent notification from the Office of Thrift Supervision categorized the Bank as "well capitalized" under the regulatory framework for Prompt Corrective Action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank's category. The following table summarizes the Bank's compliance with its regulatory capital requirements:
Minimum Minimum To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent ----------------------------------------------------------------------------- As of December 31, 2003: Tier 1 (core) capital (to adjusted total assets) $ 19,516 9.01% $ 8,666 4.00% $ 10,833 5.00% Risk-based capital (to risk- weighted assets) 20,420 12.86 12,700 8.00 15,875 10.00 Tangible (capital to tangible assets) 19,516 9.01 3,250 1.50 N/A N/A Tier 1 (core) capital (to risk-weighted assets) 19,516 12.29 N/A N/A 9,525 6.00 As of December 31, 2002: Tier 1 (core) capital (to adjusted total assets) $ 19,245 8.92% $ 8,629 4.00% $ 10,786 5.00% Risk-based capital (to risk- weighted assets) 20,153 14.72 10,956 8.00 13,696 10.00 Tangible capital (to tangible assets) 19,245 8.92 3,236 1.50 N/A N/A Tier 1 (core) capital (to risk-weighted assets) 19,245 14.05 N/A N/A 8,217 6.00
41 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 11. Stockholders' Equity, Regulatory Capital and Dividend Restrictions (Continued) Under current regulations, the Bank is not permitted to pay dividends on its stock if its regulatory capital would reduce below (i) the amount required for the liquidation account established to provide a limited priority claim to the assets of the bank to certain qualifying depositors who had deposits at the Bank and who continue to maintain those deposits after its conversion from a Federal mutual savings and loan association to a Federal stock savings bank pursuant to its Plan of Conversion (Plan) adopted October 19, 1994, or (ii) the Bank's regulatory capital requirements. As a "Tier 1" institution (an institution with capital in excess of its capital requirements, both immediately before the proposed capital distribution and after giving effect to such distribution), after a 30 day notice the Bank may make capital distributions without the prior consent of the Office of Thrift Supervision in any calendar year. However, without consent, capital distributions during a calendar year must not exceed the net income of the Bank during the calendar year plus retained net income for the preceding two years. The Bank declared dividends of $3,009 and $2,020 to the Company during the years ended December 31, 2003 and 2002, respectively. Note 12. Earnings Per Share (dollars in thousands, except per share data) A reconciliation of the income and common stock share amounts used in the calculation of basic and diluted earnings per share follows: For the Year Ended December 31, 2003 ------------------------------------ Per Share Income Shares Amount - ------------------------------------------------------------------------------ Basic EPS Net income $ 3,540 1,133,320 $ 3.12 ========== Effect of Dilutive Securities Stock options -- 27,623 --------------------- Diluted EPS Net income plus assumed conversions $ 3,540 1,160,943 $ 3.05 ==================================== For the Year Ended December 31, 2002 ------------------------------------ Per Share Income Shares Amount - ------------------------------------------------------------------------------ Basic EPS Net income $ 3,340 1,177,027 $ 2.84 ========== Effect of Dilutive Securities Stock options -- 36,099 --------------------- Diluted EPS Net income plus assumed conversions $ 3,340 1,213,126 $ 2.75 ==================================== For the Year Ended December 31, 2001 ------------------------------------ Per Share Income Shares Amount - ------------------------------------------------------------------------------ Basic EPS Net income $ 3,345 1,150,640 $ 2.91 ========== Effect of Dilutive Securities Stock options -- 47,766 --------------------- Diluted EPS Net income plus assumed conversions $ 3,345 1,198,406 $ 2.79 ==================================== 42 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 13. Employee Benefit Plans Defined Contribution 401(k) Plan: The Bank provides a 401(k) plan which covers substantially all of the Bank's employees who are eligible as to age and length of service. A participant may elect to make contributions of up to 15 percent of the participant's annual compensation. At the discretion of the Board of Directors, the Bank may make matching and other contributions to the plan. Discretionary matching contributions of $45 (up to 3% of participant annual compensation) were made for the year-ended 2003. No contributions were made by the Bank for the years ended December 31, 2002 and 2001. Employee Stock Ownership Plan: An Employee Stock Ownership Plan (ESOP) was adopted on April 11, 1995 covering all full-time employees of the Company who have attained age 21 and completed one year of service during which they work at least 1,500 hours. The Company makes annual contributions to the ESOP equal to the ESOP's debt service. The ESOP's debt was incurred when the Company loaned the ESOP $1,120 which was used by the ESOP to purchase common stock of the Company. All dividends received by the ESOP on unallocated shares are used to pay additional principal on the debt. The ESOP shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral based on the proportion of debt service paid in the year and allocated to employees. The shares pledged as collateral are deducted from stockholders' equity as unearned ESOP shares in the accompanying statement of financial condition. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as compensation expense. In 2003, the remaining ESOP's debt was retired and an additional 1,600 shares were purchased and allocated to ESOP participants at a cost of approximately $48, which was charged to compensation expense. Compensation expense for the ESOP was $127, $297 and $267 for the years ended December 31, 2003, 2002 and 2001, respectively. Shares of Company stock held by the ESOP at December 31, 2003 and 2002 are as follows: 2003 2002 - -------------------------------------------------------------------------------- Shares released for allocation 110,948 118,610 Unreleased (unearned) shares -- 3,575 --------------------------------- 110,948 122,185 ================================= Fair value of unreleased (unearned) shares $ -- $ 75 ================================= 43 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 13. Employee Benefit Plans (Continued) Stock Option Plans: The Company, effective November 15, 1995, adopted a stock option plan (1995 Plan). Pursuant to the 1995 Plan, stock options for 218,750 common shares may be granted to directors, officers and key employees of the Bank. The options have a maximum term of 10 years, at the market price on the grant date. Awarded options vest at the rate of 20% per year. Effective November 18, 2003, the Company approved the Wells Financial Corp. 2003 Stock Option Plan (2003 Plan). Pursuant to the 2003 Plan, stock options for 120,000 common shares may be granted to officers, directors, employees and other persons providing services to the Company. Upon approval of the Plan, the Company reduced the share reserve under the 1995 Plan by 41,375 shares, thereby eliminating any future awards under the 1995 plan. The 2003 Plan options have a maximum term of 10 years, at the market price on the grant date. Awards to non-employee directors are exercisable on the grant date. Awards to employees are generally exercisable on the grant date subject to employment conditions. On November 18, 2003, 36,000 shares were awarded to non-employee directors. Options granted under either Plan may be options that qualify as Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or options that do not so qualify. The following is a summary of grants made under the plans:
Black-Scholes Assumptions ------------------------------------------------- Estimated Risk-Free Exercise Fair Value on Dividend Price Interest Estimated Grant Date Award Price Grant Date Rate Volatility rate Life (years) - ------------------------------------------------------------------------------------------------------------ 1995 Plan November 15, 1995 125,405 11.00 $ 408 0.00% 10.0% 5.65% 6 September 7, 2000 32,805 12.88 $ 134 4.97% 43.6% 5.58% 10 September 19, 2000 12,780 13.38 $ 40 4.79% 18.3% 5.97% 10 July 23, 2002 10,935 20.90 $ 35 3.45% 17.4% 3.56% 10 2003 Plan November 18, 2003 36,000 30.15 $ 221 2.70% 15.3% 4.50% 10
The status of the Company's fixed stock option plans as of December 31, 2003 and 2002, and changes during the years ended on those dates, are presented below:
Years Ended December 31, ------------------------------------------------------------------- 2003 2002 ------------------------------------------------------------------- Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price - ----------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 81,116 $ 13.18 128,258 $ 11.70 Granted 36,000 30.15 10,935 20.90 Exercised (19,569) 12.19 (54,367) 11.31 Forfeited -- -- (3,710) 11.00 ------------------------------------------------------------------- Outstanding at end of year 97,547 $ 19.78 81,116 $ 13.18 ===================================================================
44 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 13. Employee Benefit Plans (Continued) The status of the 97,547 options outstanding at December 31, 2003 is presented below: Contractual Number Date of award Shares Price Life Exercisable - ------------------------------------------------------------------------------- November 15, 1995 16,119 $ 11.00 1.9 16,119 September 7, 2000 28,431 12.88 6.7 17,059 September 19, 2000 7,305 13.38 6.7 5,635 July 23, 2002 9,692 20.90 8.5 944 November 18, 2003 36,000 30.15 10 -- Management Stock Bonus Plan: The Bank adopted a Management Stock Bonus Plan (1995 Plan) which was approved by the Company's stockholders on November 15, 1995. Restricted stock awards covering shares representing an aggregate of up to 4% (87,500 shares) of the common stock issued by the Company in the mutual to stock conversion may be granted to directors and employees of the Bank. These awards vest at the rate of 20% per year of continuous service with the Bank. The Bank adopted the Wells Federal Bank 2003 Stock Bonus Plan (2003 Plan), which was approved by the Company's stockholders on November 18, 2003. The Company authorized restricted stock awards of up to 50,000 shares to directors, officers and employees of the Bank. Approval of the 2003 Plan reduced the 1995 Plan reserve by 11,473 shares, thereby eliminating any future awards under the 1995 plan. These awards vest at the rate of 25% per year of continuous service with the Bank. The status of shares awarded as of December 31, 2003 and 2002 and the changes during the years ended on those dates is presented below: Years Ended December 31, --------------------------- 2003 2002 - ---------------------------------------------------------------------- Outstanding at beginning of year 18,450 18,815 Granted 17,500 4,375 Vested (5,615) (4,740) --------------------------- Outstanding at end of year 30,335 18,450 =========================== Unearned compensation cost, recognized in an amount equal to the fair value of the awarded shares at the award date, is recorded in stockholders' equity and amortized to operations as the shares vest. The Bank recorded expense of $105, $81 and $109 relating to this Plan for the years ended December 31, 2003, 2002 and 2001, respectively. 45 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 14. Commitments The Company leases certain branch facilities under operating leases. Some leases require the Company to pay related insurance, maintenance and repairs, and real estate taxes. The Company also has an agreement with its data processor whereby the processor agrees to provide certain data processing services. This agreement expires in 2006. The agreement automatically renews in five-year intervals unless terminated by either party. Future minimum rental and data processing commitments under these agreements as of December 31, 2003 are as follows: Years Ending Rental Data Processing - ---------------------------------------------------------------- 2004 $ 210 $ 408 2005 165 408 2006 160 136 2007 160 - 2008 146 - ----------------------------------- $ 841 $ 952 =================================== Total rental expense related to operating leases was approximately $222, $229 and $221 for the years ended December 31, 2003, 2002 and 2001, respectively. Total data processing expense related to operating leases was approximately $471, $446 and $403 for the years ended December 31, 2003, 2002 and 2001, respectively. Note 15. Financial Instruments with Off-Statement of Financial Condition Risk The Company is a party to financial instruments with off-statement of financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments include primarily commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of those instruments reflect the extent of the Company's involvement in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-statement of financial condition instruments. Commitments to extend credit on loans totaled approximately $39,440 and $53,717 at December 31, 2003 and 2002, respectively. The portion of commitments to extend credit that related to fixed rate loans is $32,432 and $48,539 as of December 31, 2003 and 2002, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but normally includes real estate and personal property. 46 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 16. Concentrations Concentration by geographic location: The Company makes agricultural, commercial, residential and consumer loans to customers primarily in south central Minnesota. Although the Company's loan portfolio is diversified, there is a relationship in this region between the agricultural economy and the economic performance of loans made to nonagricultural customers. The Company's lending policies for agricultural and nonagricultural customers require loans to be well-collateralized and supported by cash flows. Collateral for agricultural loans includes equipment, crops, livestock and land. Credit losses from loans related to the agricultural economy are consistent with credit losses experienced in the portfolio as a whole. The concentration of credit in the regional agricultural economy is taken into consideration by management in determining the allowance for loan losses. Concentration by institution: The nature of the Company's business requires that it maintain amounts due from banks which, at times, may exceed federally insured limits. The Company has not experienced any losses in such amounts. As of December 31, 2003 and 2002, the Company had $7,409 and $33,304, respectively, on deposit with the FHLB of Des Moines. At December 31, 2003, the Company had $17,977 on deposit with United Bankers Bank. 47 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 17. Fair Values of Financial Instruments and Interest Rate Risk The estimated fair values of the Company's financial instruments are as follows: December 31, ----------------------------------------- 2003 2002 - --------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------------------- Financial assets Cash $ 25,318 $ 25,318 $ 36,571 $ 36,571 Certificates of deposit 200 200 200 200 Securities available for sale 27,410 27,410 19,856 19,856 Federal Home Loan Bank stock 1,303 1,303 1,875 1,875 Loans held for sale 1,997 1,997 9,695 9,695 Loans receivable, net 160,049 162,896 145,586 147,685 Accrued interest receivable 1,209 1,209 1,387 1,387 Mortgage servicing rights 2,681 2,921 2,179 2,179 Financial liabilities Deposits 169,662 170,425 169,126 169,824 Borrowed funds 23,000 25,496 23,000 26,081 Advances from borrowers for taxes and insurance 1,585 1,585 1,347 1,347 Accrued interest payable 34 34 50 50 ========================================= Interest rate risk: The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company's financial instruments will change when interest rate levels change, and that change may be either favorable of unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to manage interest rate risk. However, borrowers with fixed-rate obligations are more likely to prepay in a falling-rate environment and less likely to prepay in a rising-rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising-rate environment and less likely to do so in a falling-rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk. 48 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 18. Financial Information of Wells Financial Corp. (Parent Only) The Company's condensed statements of financial condition as of December 31, 2003 and 2002 and related condensed statements of income and cash flows for each of the years in the three year period ended December 31, 2003 are as follows: Condensed Statements of Financial Condition 2003 2002 - ------------------------------------------------------------------------ Assets Cash, including deposits with Wells Federal Bank, fsb 2003 $867; 2002 $6 $ 5,112 $ 1,980 Dividend receivable -- 630 Investment in Wells Federal Bank, fsb 22,722 22,202 Accrued interest receivable and other assets 34 411 --------------------- Total assets $27,868 $25,223 ===================== Liabilities and Stockholders' Equity Liabilities $ -- $ -- Stockholders' equity 27,868 25,223 --------------------- Total liabilities and stockholders' equity $27,868 $25,223 ===================== Condensed Statements of Income 2003 2002 2001 - -------------------------------------------------------------------------------- Interest income $ 22 $ 47 $ 85 Other expenses (131) (104) (348) -------------------------------- (Loss) before income taxes (109) (57) (263) Income tax expense (benefit) (52) (23) (107) -------------------------------- Net (loss) before dividends and equity in undistributed income (57) (34) (156) of subsidiary Dividends received from subsidiary 3,009 2,020 2,186 Equity in undistributed income of subsidiary 588 1,354 1,315 -------------------------------- Net income $ 3,540 $ 3,340 $ 3,345 ================================ 49 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 18. Financial Information of Wells Corp. (Parent Only) (Continued)
Condensed Statements of Cash Flows 2003 2002 2001 - --------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 3,540 $ 3,340 $ 3,345 Adjustment to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (588) (1,354) (1,315) Tax benefit from exercised options 14 152 -- (Increase) decrease in receivables and other assets 1,009 (132) (218) ---------------------------------- Net cash provided by operating activities 3,975 2,006 1,812 ---------------------------------- Cash Flows From Investing Activities Proceeds from sales, maturities and calls of securities available for sale -- -- 1,887 ---------------------------------- Net cash provided by investing activities -- -- 1,887 ---------------------------------- Cash Flows From Financing Activities Payments relating to ESOP stock 29 126 135 Exercise of stock options 33 396 204 Purchase of treasury stock -- (1,771) (2,006) Dividends paid (905) (845) (735) ---------------------------------- Net cash (used in) financing activities (843) (2,094) (2,402) ---------------------------------- Net increase (decrease) increase in cash 3,132 (88) 1,297 Cash: Beginning of year 1,980 2,068 771 ---------------------------------- End of year $ 5,112 $ 1,980 $ 2,068 ==================================
50 Wells Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (dollars in thousands) - -------------------------------------------------------------------------------- Note 19. Selected Quarterly Financial Data (Unaudited) (dollars in thousands, except per share data) Year Ended December 31, 2003 --------------------------------------------- First Second Third Fourth --------------------------------------------- Interest income $ 3,000 $ 2,901 $ 2,647 $ 2,966 Net interest income 1,707 1,694 1,570 1,948 Provision for loan losses -- -- -- -- Net income 888 1,004 1,135 513 Earnings per share Basic 0.79 0.89 1.00 0.44 Diluted 0.77 0.87 0.98 0.43 Year Ended December 31, 2002 --------------------------------------------- First Second Third Fourth --------------------------------------------- Interest income $ 3,552 $ 3,523 $ 3,469 $ 3,321 Net interest income 1,856 1,923 1,944 1,895 Provision for loan losses 23 -- -- -- Net income 853 684 846 957 Earnings per share Basic 0.73 0.58 0.72 0.81 Diluted 0.71 0.56 0.70 0.78 51 Wells Financial Corp. Corporate Office 53 First Street SW Wells, MN 56097 (507) 553-3151 Wells Federal Bank Office Locations Wells, MN Office Blue Earth, MN Office 53 First Street SW 303 South Main Street Wells, MN 56097 Blue Earth, MN 56013 (507) 553-3151 (507) 526-2163 Mankato, MN Office Fairmont, MN Office 1601 Adams Street 300 South State Street Mankato, MN 56002-4068 Fairmont, MN 56031 (507) 345-4558 (507) 238-4479 North Mankato, MN Office Albert Lea, MN Office 1800 Commerce Drive 1710 West Main Street North Mankato, MN 56003 Albert Lea, MN 56007 (507) 625-1300 (507) 373-7227 St. Peter, MN Office Owatonna, MN Office 1618 South Minnesota Avenue 496 North Street St. Peter, MN 56082 Owatonna, MN 55060 (507) 931-6100 (507) 444-0010 Farmington, MN Office Mason City, IA Office 115 Elm Street Suite I 4700 4th Street SW Suite F Farmington, MN 55024 Mason City, IA 50401 (651) 463-4883 (641) 424-6691 52 Other Corporate Information Board of Directors of Wells Financial Corp. Randel I. Bichler, Chairman of the Board David Buesing Lonnie R. Trasamar Gerald D. Bastian Dale E. Stallkamp Richard Mueller Executive Officers of Wells Financial Corp. Lonnie R. Trasamar James D. Moll, CPA President and Chief Treasurer and Principal Financial Executive Officer and Accounting Officer Gerald D. Bastian Richard Mueller Vice President Secretary ----------------------------------- Corporate Counsel: Independent Auditors: Randel I. Bichler, Esq. McGladrey & Pullen, LLP 28 South Broadway Suite 400 Wells, Minnesota 56097 102 South Broadway Rochester, Minnesota 55904 Special Counsel: Transfer Agent and Registrar: Malizia Spidi & Fisch, PC Registrar and Transfer Company 1100 New York Avenue, N.W. 10 Commerce Drive Suite 340 West Cranford, New Jersey 07016 Washington, D.C. 20005 ----------------------------------- The Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission, is available without charge upon written request. For a copy of the Form 10-KSB or any other investor information, please write to the Secretary of the Company, at the Company's corporate office in Wells, Minnesota. The annual meeting of stockholders will be held on April 21, 2004 at 4:00 p.m. at the Wells Community Center, 189 2nd Street SE, Wells, Minnesota. 53 EX-23 4 ex-23.txt CONSENT LETTER INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement No. 333-3520 of Wells Financial Corp. on Form S-8 (filed with the Securities and Exchange Commission on April 12, 1996) of our report, dated January 29, 2004, included in and incorporated by reference in the Annual Report on Form 10-KSB of Wells Financial Corp. for the year ended December 31, 2003. /s/McGladry & Pullen, LLP Rochester, Minnesota March 17, 2004 EX-31 5 ex-31.txt CERTIFICATIONS - SECTION 302 SECTION 302 CERTIFICATION I, Lonnie R. Trasamar, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-KSB 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 Rule 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 report is being prepared; (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 (as defined in Exchange Act Rules 13a-15(f)) that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer'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 issuer'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 issuer's internal control over financial reporting. Date: March 19, 2004 /s/Lonnie R. Trasamar ------------------------------------------------- Lonnie R. Trasamar President and Chief Executive Officer SECTION 302 CERTIFICATION I, James D. Moll, Treasurer and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-KSB 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 Rule 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 report is being prepared; (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 (as defined in Exchange Act Rules 13a-15(f)) that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer'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 issuer'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 issuer's internal control over financial reporting. Date: March 19, 2004 /s/James D. Moll ------------------------------------- James D. Moll Treasurer and Chief Financial Officer EX-32 6 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 Annual Report on Form 10-KSB for the year ended December 31, 2003 (the "Report") of Wells Financial Corp. (the "Company") as filed with the Securities and Exchange Commission on the date hereof, we, Lonnie R. Trasamar, President and Chief Executive Officer, and James D. Moll, Treasurer and Chief Financial 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. Date: March 19, 2004 /s/Lonnie R. Trasamar /s/James D. Moll - ------------------------------------- ------------------------------------- Lonnie R. Trasamar James D. Moll President and Chief Executive Officer Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----