UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
Commission File Number 0-25342
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Wells Financial Corp.
------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
Minnesota 41-1799504
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
53 1st Street S.W., P.O. Box 310, Wells MN 56097
------------------------------------------------
(Address of principal executive offices)
(507) 553-3151
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
N/A
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check by |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
The number of shares outstanding of each of the issuer's classes of common stock
as of August 7, 2002:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,198,994 Shares
WELLS FINANCIAL CORP. and SUBSIDIARY
[OBJECT OMITTED]
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION: Page
------------------------------- ----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive Income 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 2002 and December 31, 2001
(Dollars in Thousands)
(Unaudited)
ASSETS
2002 2001
----------------- ----------------
Cash, including interest-bearing accounts
June 30, 2002 $34,261; December 31, 2001 $36,830 $ 35,434 $ 38,070
Certificates of deposit 200 200
Securities available for sale, at fair value 25,579 15,863
Loans held for sale 3,379 10,155
Loans receivable, net 155,640 160,513
Accrued interest receivable 1,982 1,529
Foreclosed real estate 171 252
Premises and equipment 1,816 1,801
Other assets 2,402 2,025
----------------- ----------------
TOTAL ASSETS $ 226,603 $ 230,408
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 175,207 $ 180,999
Borrowed funds 23,000 23,000
Advances from borrowers for taxes and insurance 1,340 1,371
Income taxes:
Curent 89 -
Deferred 1,295 1,224
Accrued interest payable 185 75
Accrued expenses and other liabilities 252 167
----------------- ----------------
TOTAL LIABILITIES 201,368 206,836
----------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 500,000 shares
Authorized; none outstanding - -
Common stock, $.10 par value; authorized 7,000,000
Shares; issued 2,187,500 shares 219 219
Additional paid-in capital 16,881 16,932
Retained earnings, substantially restricted 22,909 21,792
Accumulated other comprehensive income 754 745
Unearned ESOP shares (92) (155)
Unearned compensation restricted stock awards (94) (128)
Treasury stock, at cost, 988,506 shares at June 30, 2002,
and 1,022,399 shares at December 31, 2001 (15,342) (15,833)
----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 25,235 23,572
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 226,603 $ 230,408
================== ================
(See Notes to Consolidated Financial Statements)
1
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- --------------------------------------
2002 2001 2002 2001
------------------ ----------------- ------------------- ----------------
Interest and dividend income
Loans receivable:
First mortgage loans $ 2,323 $ 2,955 $ 4,698 $ 5,962
Consumer and other loans 780 890 1,566 1,789
Investment securities and other
interest bearing deposits 420 250 811 544
---------------- ------------------ ------------------- -----------------
Total interest income 3,523 4,095 7,075 8,295
---------------- ------------------ ------------------- -----------------
Interest Expense
Deposits 1,290 1,874 2,679 3,922
Borrowed funds 310 322 617 723
---------------- ------------------ ------------------- -----------------
Total interest expense 1,600 2,196 3,296 4,645
---------------- ------------------ ------------------- -----------------
Net interest income 1,923 1,899 3,779 3,650
Provision for loan losses - 45 23 60
---------------- ------------------ ------------------- -----------------
Net interest income after provision for
loan losses 1,923 1,854 3,756 3,590
---------------- ------------------ ------------------- -----------------
Noninterest income
Gain on sale of loans originated for sale 268 180 755 286
Loan origination and commitment fees 195 361 500 519
Loan servicing fees 165 109 319 212
Insurance commissions 100 96 180 199
Fees and service charges 201 160 402 284
Other 26 5 34 12
---------------- ------------------ ------------------- -----------------
Total non-interest income 955 911 2,190 1,512
---------------- ------------------ ------------------- -----------------
Noninterest expense
Compensation and benefits 882 773 1,669 1,484
Occupancy and equipment 215 231 448 450
Data processing 101 96 237 197
Advertising 54 44 100 91
Other 428 387 845 739
---------------- ------------------ ------------------- -----------------
Total non-interest expense 1,680 1,531 3,299 2,961
---------------- ------------------ ------------------- -----------------
Income before taxes 1,198 1,234 2,647 2,141
Income tax expense 514 519 1,110 897
---------------- ------------------ ------------------- -----------------
Net Income $ 684 $ 715 $ 1,537 $ 1,244
================ ================== =================== =================
Earnings per share
Basic earnings per share $ 0.58 $ 0.63 $ 1.31 $ 1.07
================ ================== =================== =================
Diluted earnings per share $ 0.56 $ 0.60 $ 1.27 $ 1.03
================ ================== =================== =================
Weighted average number of common shares outstanding:
Basic 1,179,732 1,135,847 1,172,861 1,161,299
================ ================== =================== =================
Diluted 1,214,891 1,183,136 1,210,548 1,209,177
================ ================== =================== =================
(See Notes to Consolidated Financial Statements)
2
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ -------------- ------------- -------------
Net Income $ 684 $ 715 $ 1,537 $ 1,244
Other comprehensive income:
Unrealized appreciation (depreciation) on
securities available for sale 227 69 15 157
Related deferred income taxes (93) (28) (6) (64)
----------- ------------- ------------- -------------
Comprehensive income $ 818 $ 756 $ 1,546 $ 1,337
=========== ============= ============= =============
(See Notes to Consolidated Financial Statements)
3
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2002
(Dollars in Thousands)
(Unaudited)
Unearned
Employee Unearned
Accumulated Stock Compensation
Additional Other Ownership Restricted Total
Common Paid-In Retained Comprehensive Plan Stock Treasury Stockholders'
Stock Capital Earnings Income Shares Awards Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 219 $ 16,932 $ 21,792 $ 745 $ (155) $ (128) $(15,833) $ 23,572
Net income for the six months
ended June 30, 2002 - - 1,537 - - - - 1,537
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - 9 - - - 9
Treasury stock purchases - - - - - - (172) (172)
Options exercised - (267) - - - - 663 396
Tax benefit related to
exercised options - 128 - - - - - 128
Amortization of unearned
compensation - - - - - 34 - 34
Dividends on common stock - - (420) - - - - (420)
Allocated employee stock
ownership plan shares - 88 - - 63 - - 151
-------------------------------------------------------------------------------------------------
Balance June 30, 2002 $ 219 $ 16,881 $ 22,909 $ 754 $ (92) $ (94) $(15,342) $ 25,235
=================================================================================================
(See Notes to Consolidated Financial Statements)
4
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Six Months Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
2002 2001
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,537 $ 1,244
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 23 60
(Gain) on the sale of loans originated for sale (755) (286)
Compensation on allocation of ESOP shares 151 131
Amortization of restricted stock awards 34 61
Tax benefit from exercised options 128 -
Gain on the sale of foreclosed real estate (7) -
Write-down of foreclosed real estate 30 -
Deferred income taxes 71 53
Depreciation and amortization on premises and equipment 115 126
Amortization of deferred loan origination fees (70) (31)
Amortization of excess servicing fees, mortgage servicing rights and
bond premiums and discounts 258 148
Loans originated for sale (48,807) (38,688)
Proceeds from the sale of loans originated for sale 55,690 34,943
Changes in assets and liabilities:
Accrued interest receivable (453) 5
Other assets 13 (437)
Income taxes payable, current 89 (119)
Accrued expenses and other liabilities 195 185
------------------ ------------------
Net cash provided by (used in) operating activities 8,242 (2,605)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans $ 4,762 $ 5,075
Purchase of certificates of deposit - (1,300)
Purchase of securities available for sale (15,302) (2,249)
Proceeds from the maturities of certificates of deposit - 1,300
Proceeds from the maturities of securities available for sale 5,595 6,326
Proceeds from the sale and redemption of foreclosed real estate 220 -
Purchase of premises and equipment (130) (144)
Investment in foreclosed real estate (4) -
------------------ ------------------
Net cash provided by (used in) investment activities (4,859) 9,008
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ (5,792) $ 6,896
Net increase (decrease) in advances from borrowers
for taxes and insurance (31) 69
Options exercised 396 121
Repayments of borrowed funds - (10,500)
Purchase of treasury stock (172) (1,894)
Dividends on common stock (420) (374)
------------------ ------------------
Net cash (used in) financing activities (6,019) (5,682)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (2,636) 721
CASH:
Beginning 38,070 7,606
------------------ ------------------
Ending $ 35,434 $ 8,327
================== ==================
(See Notes to Consolidated Financial Statements)
5
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Six Months Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
2002 2001
----------------- --------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $ 2,569 $ 3,801
Interest on borrowed funds 617 754
Income taxes 801 964
================= ====================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FIANNCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 158 $ 26
Allocation of ESOP shares to participants 63 68
Net change in unrealized appreciation on securities available for sale 9 93
================= ====================
(See Notes to Consolidated Financial Statements)
6
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The foregoing consolidated financial statements are unaudited. However,
in the opinion of management, all adjustments (which consist of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Results for any interim period are not
necessarily indicative of results to be expected for the year. The interim
consolidated financial statements include the accounts of Wells Financial Corp.
(Company), its subsidiary, Wells Federal Bank (Bank), and the Bank's
subsidiaries, Greater Minnesota Mortgage, Inc. and Wells Insurance Agency, Inc.
NOTE 2. REGULATORY CAPITAL
The following table presents the Bank's regulatory capital amounts and
percents at June 30, 2002 and December 31, 2001.
June 30, 2002 December 31, 2001
Amount Percent Amount Percent
---------------------------------------------------------------------------
(Dollars in Thousands)
Tier 1 (Core) Capital
Required $ 8,824 4.00% $ 9,052 4.00%
Actual 19,088 8.65% 18,474 8.16%
Excess 10,264 4.65% 9,422 4.16%
Risk-based Capital
Required 11,348 8.00% 11,403 8.00%
Actual 20,019 14.11% 19,425 13.63%
Excess 8,671 6.11% 8,022 5.63%
7
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements Continued
(Unaudited)
NOTE 3. EARNINGS PER SHARE
Earnings per share are calculated and presented in accordance with FASB
Statement No. 128, Earnings per Share. The Statement requires the presentation
of earnings per share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic earnings per-share amounts. All other entities are
required to present basic and diluted earnings per-share amounts. Diluted
per-share amounts assume the conversion, exercise or issuance of all potential
common stock instruments unless the effect is to reduce a loss or increase the
income per common share from continuing operations.
A reconciliation of the common stock share amounts used in the
calculation of basic and diluted earnings per share is presented in the
following chart.
Number of Shares
Three months ended June 30, Six months ended June 30,
---------------------------------------------------------------
2002 2001 2002 2001
------------------------------- -----------------------------
Basic EPS 1,179,732 1,135,847 1,172,861 1,161,299
Effect of dilutive securities:
Stock options 35,159 47,289 37,687 47,878
------------------------------- -----------------------------
Diluted EPS 1,214,891 1,183,136 1,210,548 1,209,177
=============================== =============================
NOTE 4. SELECTED FINANCIAL DATA
For the six months ended
June 30,
2002 2001
-----------------------------------
Return on assets
(ratio of net income to average total assets) (1) 1.34% 1.14%
Return on equity
(ratio of net income to average equity) (1) 12.57% 11.45%
Equity to assets ratio
(ratio of average equity to average total assets) 10.67% 9.93%
Net interest margin
(ratio of net interest income to average interest earning assets) (1) 3.48% 3.48%
(1) Net income and net interest income have been annualized.
8
WELLS FINANCIAL CORP. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
And Results of Operations
General:
Wells Financial Corp. (Company) was incorporated under the laws of the
State of Minnesota in December 1994 for the purpose of owning all of the
outstanding stock of Wells Federal Bank, fsb (Bank) issued in the mutual to
stock conversion of the Bank. On April 11, 1995, the conversion was completed
and $8.4 million of the net proceeds from the sale of the stock were provided to
the Bank in exchange for all of the Bank's stock. The consolidated financial
statements included herein are for the Company, the Bank and the Bank's wholly
owned subsidiaries, Greater Minnesota Mortgage, Inc. and Wells Insurance Agency,
Inc.
The income of the Company is derived primarily from the operations of
the Bank and the Bank's subsidiaries, and to a lesser degree from interest
income from securities and certificates of deposit with other banks. The Bank's
net income is primarily dependent upon the difference (or spread) between the
average yield earned on loans, investments and mortgage-backed securities and
the average rate paid on deposits and borrowings, as well as the relative
amounts of such assets and liabilities. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. Net income is also affected by, among other things,
provision for loan losses, gains on the sale of interest earning assets, service
charges, servicing fees, subsidiary activities, operating expenses, and income
taxes.
The Bank has eight full service offices located in Faribault, Martin,
Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota.
The Company may from time to time make written or oral "forward-looking
statements" including statements contained in this report and in other
communications by the Company which are made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements, such as statements of the Company's plans,
objectives, estimates and intentions, involve risks and uncertainties and are
subject to change based on various important factors (some of which are beyond
the Company's control). The following factors, among others, could cause the
Company's financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements: the strength of the United States economy in general and the
strength of the local economies in which the Company conducts operations; the
effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System, inflation, interest rate, market and monetary fluctuations; the
timely development of and acceptance of new products and services of the Company
and the perceived overall value of the products and services by users, including
the features, pricing and quality compared to competitor's products and
services; the willingness of users to substitute competitors' products and
services for the Company's products and services; the success of the Company in
gaining regulatory approval of its products and services, when required; the
impact of changes in financial services' laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; changes in consumer spending and savings habits; and the success
of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
9
Comparison of Financial Condition at June 30, 2002 and December 31, 2001:
Total assets decreased by $3,805,000, from $230,408,000 at December 31,
2001 to $226,603,000 at June 30, 2002. Loans held for sale decreased by
$6,776,000 from December 31, 2001 to June 30, 2002 as loans that were committed
to be sold at the end of 2001 were delivered to the secondary market during the
first half of 2002. Loans receivable decreased by $4,873,000 during the first
half of 2002 due to the continued refinance market. Due to lower interest rates
on residential mortgages, management continued to sell to the secondary market
the majority of the residential mortgage loans that were originated during the
first half of 2002. Included in the loans that were originated and sold during
the first half of 2002 were loans from the Company's mortgage loan portfolio
that were refinanced resulting in the decrease in loans receivable. Cash
received from the decrease in the loan portfolio was used to purchase securities
resulting in a $9,716,000 increase in securities during the first six months of
2002.
In accordance with the Bank's internal classification of assets policy,
management evaluates the loan portfolio on a quarterly basis to identify and
determine the adequacy of the allowance for loan losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current economic conditions. As of June 30, 2002 and
December 31, 2001 the balances in the allowance for loan losses and the
allowance for loan losses as a percentage of total loans were $932,000 and
$952,000 and 0.59% and 0.56%, respectively.
Activity in the Company's allowance for loan losses for the six months
ended June 30, 2002 and 2001 is summarized as follows:
2002 2001
--------------------------------
Balance on January 1, $ 951,862 $ 833,248
Provision for loan losses 22,500 60,000
Charge-offs (56,598) (24,078)
Recoveries 13,999 10,363
------------- -------------
Balance on June 30, $ 931,763 $ 879,533
============= =============
Loans on which the accrual of interest has been discontinued amounted
to $448,000 and $408,000 at June 30, 2002 and December 31, 2001, respectively.
The effect of nonaccrual loans was not significant to the results of operations.
The Company includes all loans considered impaired under FASB Statement No. 114
in nonaccrual loans. The amount of impaired loans was not material at June 30,
2002 and December 31, 2001.
Liabilities decreased by $5,468,000 from $206,836,000 at December 31,
2001 to $201,368,000 at June 30, 2002. This decrease is primarily due to a
$5,792,000 decrease in deposits.
Equity increased by $1,663,000 from $23,572,000 at December 31, 2001 to
$25,235,000 at June 30, 2002. The increase in equity was primarily the result of
net income for the first half of 2002 of $1,537,000 and an increase in equity of
$396,000 which resulted from the exercise of 49,480 options being partially
offset by the payment of $420,000 in cash dividends and by the purchase of 8,860
shares of treasury stock at a cost of $172,000. On July 23, 2002, the Board of
Directors of the Company declared a $0.18 per share cash dividend to be paid on
August 15, 2002 to the stockholders of record on August 2, 2002. Subject to the
Company's earnings and capital, it is the current intention of the Company to
continue to pay regular quarterly cash dividends.
10
Comparison of Operating Results for the Three and Six-Month Periods Ended June
30, 2002 and June 30, 2001.
Net Income. Net income decreased by $31,000, or 4.3% for the
three-month period ended June 30, 2002 when compared to the same period during
2001. The decrease in net income was primarily due to increases in net interest
income and noninterest income being offset by an increase in noninterest expense
for the second quarter of 2002 when compared to the second quarter of 2001.
Net income for the six months ended June 30, 2002 increased by
$293,000, or 23.6%, when compared to the first six months of 2001. This increase
in net income was primarily the result of increases of $678,000 and $129,000 in
noninterest income and net interest income, respectively, being partially offset
by a $338,000 increase in noninterest expense.
Interest Income. Interest income decreased by $572,000 and $1,220,000,
or 14.0% and 14.7%, for the three and six month periods ended June 30, 2002,
respectively, when compared to the same periods in 2001 primarily due to
decreases in interest income from the Company's loan portfolio. The decrease in
interest income from the Company's loan portfolio resulted from a decrease in
the average amount of loans receivable during the first half of 2002 when
compared to the same period in 2001. Partially offsetting the decrease in
interest income from the loan portfolio was an increase in interest income from
investments.
Interest Expense. Total interest expense decreased by $596,000 and
$1,349,000, or 27.1% and 29.0%, for the quarter and six months ended June 30,
2002 when compared to the same periods in 2001. The decrease in interest expense
was primarily the result of the downward repricing of the Company's deposits due
to lower market interest rates and a decrease in the average amount of borrowed
funds during the first half of 2002 when compared to the first half of 2001.
Net Interest income. Net interest income increased by $24,000 and
$129,000, or 1.3% and 3.5%, for the three and six-month periods ended June 30,
2002, respectively, when compared to the same periods in 2001 due to the changes
in interest income and interest expense described above.
Provision for loan losses. The provision for loan losses decreased by
$45,000 and $37,000 for the quarter and six months ended June 30, 2002 when
compared to the same periods in 2001. Management evaluates the quality of the
loan portfolio on a quarterly basis to identify and determine the adequacy of
the allowance for loan loss. Classified loans were 1.1% and 1.08% of total loans
at June 30, 2002 and December 31, 2001, respectively. Nonaccrual loans were
$448,000 and $408,000 at June 30, 2002 and December 31, 2001, respectively. The
provision reflects management's monitoring of the allowance for loan losses in
relation to the size and quality of the loan portfolio and adjusts the provision
for loan losses to adequately provide for loan losses. Management determines the
amounts of the allowance for loan losses in a systematic manner that includes
self-correcting policies that adjust loss estimation methods on a periodic
basis. While the Company maintains its allowance for loan losses at a level that
is considered to be adequate to provide for potential losses, there can be no
assurance that further additions will not be made to the loss allowance and that
losses will not exceed estimated amounts.
Noninterest Income. Noninterest income increased by $44,000 and
$678,000, or 4.8% and 44.8%, for the three and six-month periods ended June 30,
2002, respectively, when compared to the same periods in 2001 primarily due to
increases in the gain on sale of loans originated for sale and loan origination
and commitment fees. Due to low interest rates on residential mortgage loans
during the first half of 2002, the Company sold to the secondary market a larger
volume of loans during that period when compared to the same period in 2001,
resulting in increases in the gain on sale of loans originated for sale and loan
origination and commitment fees recognized immediately in income.
11
Noninterest Expense. Noninterest expense increased by $149,000 and
$338,000, or 9.7% and 11.4%, for the three and six-months ended June 30, 2002,
respectively, when compared to the same periods during 2001 primarily due to
increases in other noninterest expense and in compensation and benefits. The
increase in other noninterest expense was primarily due to an increase in the
amortization of mortgage servicing rights. The increase in compensation and
benefits resulted from annual compensation adjustments and increases in
commissions paid to loan officers for the origination of loans. Also affecting
compensation and benefits was an increase in the Employee Stock Ownership Plan
expense that resulted from the appreciation of the Company's stock.
Income Tax Expense. Income tax expense decreased by $5,000 and
increased by $213,000 for the three and six-month periods ended June 30, 2002,
respectively, when compared to the same periods in 2001. These changes are
proportionate to the change in income before income taxes for the quarter and
six months ended June 30, 2002 when compared to the same periods in 2001.
Non-performing Assets. The following table sets forth the amounts and
categories of non-performing assets at June 30, 2002 and December 31, 2001.
June 30, 2002 December 31, 2001
-------------------------------------
(Dollars in Thousands)
Non-accruing loans
One to four family real estate $ 413 $ 194
Agricultural real estate - -
Commercial - -
Consumer 35 214
--------------- ----------------
Total $ 448 $ 408
--------------- ----------------
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $ 99 $ 224
Commercial real estate - -
--------------- ----------------
Total $ 99 $ 224
--------------- ----------------
Total non-accrual and accruing loans
past due 90 days or more $ 547 $ 632
=============== ================
Repossessed and non-performing assets
Repossessed property $ 171 $ 252
Other non-performing assets - -
--------------- ----------------
Total repossessed and non-performing assets $ 171 $ 252
--------------- ----------------
Total non-performing assets $ 718 $ 884
=============== ================
Total non-accrual and accruing loans
past due 90 days or more to net loans 0.35% 0.39%
=============== ================
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.24% 0.27%
=============== ================
Total nonperforming assets to total assets 0.32% 0.38%
=============== ================
12
Financial Standards Board Statement No. 114, Accounting by Creditors
for Impairment of a Loan, and Statement No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, require that impaired
loans within the scope of these Statements be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate; or as a practical expedient, either at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent. At June
30, 2002 and December 31, 2001, the value of loans that would be classified as
impaired under these Statements is considered to be immaterial.
Liquidity and Capital Resources:
The Bank's primary sources of funds are deposits, borrowed funds,
amortization and prepayment of loans, maturities of investment securities and
funds provided from operations. While scheduled loan repayments are a relatively
predictable source of funds, deposit flows and loan prepayments are
significantly influenced by general interest rates, economic conditions and
competition. If needed, the Bank's source of funds can be supplemented by
wholesale funds obtained through additional advances from the Federal Home Loan
Bank system. The Bank invests excess funds in overnight deposits, which not only
serve as liquidity, but also earn interest income until funds are needed to meet
required loan funding.
On December 21, 2000, the Company approved a stock buy back program in
which up to 125,000 shares of the common stock of the Company could be acquired.
During the first three months of 2002 the Company completed this buy back
program.
The Company paid a cash dividend of $0.18 per share on February 15,
2002 and May 13, 2002. On July 23, 2002 the Company declared a cash dividend of
$0.18 per share payable on August 15, 2002 to stockholders of record on August
2, 2002. Subject to the Company's earnings and capital, it is the current
intention of the Company to continue to pay regular quarterly cash dividends.
Savings institutions like the Bank are required to meet prescribed
regulatory capital requirements. If a requirement is not met, regulatory
authorities may take legal or administrative actions, including restrictions on
growth or operations or, in extreme cases, seizure. Institutions not in
compliance may apply for an exemption from the requirements and submit a
recapitalization plan. At June 30, 2002, the Bank exceeded all current capital
requirements.
The Office of Thrift Supervision (OTS) has adopted a core capital
requirement for savings institutions comparable to the requirement for national
banks. The OTS core capital requirement for the Bank is 4% of adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness. The Bank had core capital of 8.65% at June 30, 2002.
During the second quarter of 2002 the Bank entered into agreements to
purchase a tract of land and to construct a full service bank facility that will
replace the Bank's office currently located in the Madison East Center, Mankato,
Minnesota. Total cost for this project, including land, building and equipment,
is estimated at $1.3 million. Completion of this project is scheduled for
December 2002.
13
WELLS FINANCIAL CORP. and SUBSIDIARIES
June 30, 2002
FORM 10-QSB
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on
April 17, 2002 at 4:00 p.m. The Meeting was for the purpose of
the election of two directors for terms to expire in 2005.
The following is a record of the votes cast in the election
of directors of the Company:
For Withheld
--------- --------
Randel I. Bichler 1,099,327 11,900
Dale E. Stallkamp 1,103,627 7,600
Accordingly, Randel I. Bichler and Dale E. Stallkamp were
declared to be duly elected directors of the Company for
terms to expire as stated above.
The following Directors continued in office - Lawrence H.
Kruse, Gerald D. Bastian, Richard Mueller and David Buesing.
Item 5. Other information
-----------------
None
Item 6. Exhibits and Reports of Form 8-K
--------------------------------
a. Exhibits: 99.1 Certification
b. No reports on Form 8-K were filed
- --------------------------------------------------------------------------------
No other information is required to be filed under Part II of the form
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLS FINANCIAL CORP.
By: /s/ Lonnie R. Trasamar Date: August 6, 2002
---------------------- --------------
Lonnie R. Trasamar
President and Chief Executive Officer
By: /s/ James D. Moll Date: August 6, 2002
----------------- --------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer