UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
Wells Financial Corp.
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(Exact name of Registrant as Specified in Its Charter)
Minnesota 41-1799504
- ---------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
53 1st Street S.W., P.O. Box 310, Wells MN 56097
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(Address of principal executive offices)
(507) 553-3151
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(Registrant's Telephone Number, including Area Code)
N/A
(Former name, former address and former fiscal year,
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if changed since last report)
Indicate by check by |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
The number of shares outstanding of each of the issuer's classes of common stock
as of November 1, 2002:
Class Outstanding
----- -----------
$.10 par value per share, common stock 1,203,069 Shares
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WELLS FINANCIAL CORP. and SUBSIDIARY
[OBJECT OMITTED]
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION: Page
------------------------------- ----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive Income 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Controls and Procedures 15
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
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WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 2002 and December 31, 2001
(Dollars in Thousands)
(Unaudited)
ASSETS
2002 2001
--------- ---------
Cash, including interest-bearing accounts
September 30, 2002 $27,425; December 31, 2001 $36,830 $ 28,660 $ 38,070
Certificates of deposit 200 200
Securities available for sale, at fair value 21,906 15,863
Loans held for sale 12,533 10,155
Loans receivable, net 155,233 160,513
Accrued interest receivable 1,779 1,529
Foreclosed real estate 237 252
Premises and equipment 2,189 1,801
Other assets 2,550 2,025
--------- ---------
TOTAL ASSETS $ 225,287 $ 230,408
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 172,418 $ 180,999
Borrowed funds 23,000 23,000
Advances from borrowers for taxes and insurance 1,841 1,371
Income taxes:
Current -- --
Deferred 1,305 1,224
Accrued interest payable 227 75
Accrued expenses and other liabilities 532 167
--------- ---------
TOTAL LIABILITIES 199,323 206,836
--------- ---------
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 16,954 16,932
Retained earnings, substantially restricted 23,544 21,792
Accumulated other comprehensive income 745 745
Unearned ESOP shares (60) (155)
Unearned compensation restricted stock awards (159) (128)
Treasury stock, at cost, 984,431 shares at September 30,
2002, and 1,022,399 shares at December 31, 2001 (15,279) (15,833)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 25,964 23,572
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 225,287 $ 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 Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Interest and dividend income
Loans receivable:
First mortgage loans $ 2,253 $ 2,948 $ 6,951 $ 8,910
Consumer and other loans 829 913 2,395 2,702
Investment securities and other
interest bearing deposits 387 268 1,198 812
---------- ---------- ---------- ----------
Total interest income 3,469 4,129 10,544 12,424
---------- ---------- ---------- ----------
Interest Expense
Deposits 1,211 1,793 3,890 5,715
Borrowed funds 314 314 931 1,037
---------- ---------- ---------- ----------
Total interest expense 1,525 2,107 4,821 6,752
---------- ---------- ---------- ----------
Net interest income 1,944 2,022 5,723 5,672
Provision for loan losses -- 45 23 105
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 1,944 1,977 5,700 5,567
---------- ---------- ---------- ----------
Noninterest income
Gain on sale of loans originated for sale 319 349 1,074 635
Loan origination and commitment fees 426 310 926 829
Loan servicing fees 171 118 490 330
Insurance commissions 120 111 300 310
Fees and service charges 177 176 579 460
Other 26 11 60 23
---------- ---------- ---------- ----------
Total noninterest income 1,239 1,075 3,429 2,587
---------- ---------- ---------- ----------
Noninterest expense
Compensation and benefits 848 711 2,517 2,195
Occupancy and equipment 211 204 659 654
Data processing 101 97 338 294
Advertising 62 51 162 142
Other 538 358 1,383 1,097
---------- ---------- ---------- ----------
Total noninterest expense 1,760 1,421 5,059 4,382
---------- ---------- ---------- ----------
Income before taxes 1,423 1,631 4,070 3,772
Income tax expense 577 672 1,687 1,569
---------- ---------- ---------- ----------
Net Income $ 846 $ 959 $ 2,383 $ 2,203
========== ========== ========== ==========
Earnings per share
Basic earnings per share $ 0.72 $ 0.85 $ 2.02 $ 1.91
========== ========== ========== ==========
Diluted earnings per share $ 0.70 $ 0.81 $ 1.97 $ 1.83
========== ========== ========== ==========
Weighted average number of common shares outstanding:
Basic 1,182,522 1,131,202 1,178,437 1,153,496
========== ========== ========== ==========
Diluted 1,213,478 1,184,441 1,212,180 1,203,838
========== ========== ========== ==========
(See Notes to Consolidated Financial Statements)
2
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------- ------- ------- -------
Net Income $ 846 $ 959 $ 2,383 $ 2,203
Other comprehensive income:
Unrealized appreciation on
securities available for sale (15) 143 -- 301
Related deferred income taxes 6 (59) -- (123)
------- ------- ------- -------
Comprehensive income $ 837 $ 1,043 $ 2,383 $ 2,381
======= ======= ======= =======
(See Notes to Consolidated Financial Statements)
3
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2002
(Dollars in Thousands)
(Unaudited)
Accumu- Unearned
lated Employee Unearned
Other Stock Compensation Total
Additional Compre- Ownership Restricted Stock-
Common Paid-In Retained hensive Plan Stock Treasury holders'
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 nine months
ended September 30, 2002 - - 2,383 - - - - 2,383
Net change in unrealized
appreciation on securities
available for sale, net of
related deferred taxes - - - - - - - -
Treasury stock purchases - - - - - - (172) (172)
Options exercised - (262) - - - - 658 396
Tax benefit related to
exercised options - 128 - - - - - 128
Amortization of unearned
compensation - 24 - - - (31) 68 61
Cash dividends declared ($0.54
per share) - - (631) - - - - (631)
Allocated employee stock
ownership plan shares - 132 - - 95 - - 227
-------------------------------------------------------------------------------------------------
Balance September 30, 2002 $ 219 $ 16,954 $ 23,544 $ 745 $ (60) $ (159) $ (15,279) $ 25,964
=================================================================================================
(See Notes to Consolidated Financial Statements)
4
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,383 $ 2,203
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 23 105
(Gain) on the sale of loans originated for sale (1,074) (635)
Compensation on allocation of ESOP shares 227 199
Amortization of restricted stock awards 61 92
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 81 165
Depreciation and amortization on premises and equipment 173 181
Amortization of deferred loan origination fees (96) (53)
Amortization of excess servicing fees, mortgage servicing
rights and bond premiums and discounts 464 243
Loans originated for sale (93,228) (69,372)
Proceeds from the sale of loans originated for sale 90,982 66,327
Changes in assets and liabilities:
Accrued interest receivable (250) (126)
Other assets (32) 226
Accrued expenses and other liabilities 345 225
-------- --------
Net cash provided by (used in) operating activities 210 (220)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans $ 5,117 $ 11,916
Purchase of certificates of deposit (100) (1,500)
Purchase of securities available for sale (17,287) (6,462)
Proceeds from the maturities of certificates of deposit 100 1,500
Proceeds from the maturities of securities available for sale 11,229 7,357
Proceeds from the sale and redemption of foreclosed real estate 234 --
Purchase of premises and equipment (389) (182)
Investment in foreclosed real estate (6) (3)
-------- --------
Net cash provided by (used in) investment activities (1,102) 12,626
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ (8,581) $ 9,806
Net increase in advances from borrowers
for taxes and insurance 470 742
Options exercised 396 144
Repayments of borrowed funds -- (10,500)
Purchase of treasury stock (172) (2,006)
Dividends on common stock (631) (555)
-------- --------
Net cash (used in) financing activities (8,518) (2,369)
-------- --------
Net increase (decrease) in cash and cash equivalents (9,410) 10,037
CASH:
Beginning 38,070 7,606
-------- --------
Ending $ 28,660 $ 17,643
======== ========
(See Notes to Consolidated Financial Statements)
5
WELLS FINANCIAL CORP. and SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
Nine Months Ended September 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
2002 2001
------ ------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest on deposits $3,738 $5,539
Interest on borrowed funds 931 1,068
Income taxes 1,501 1,079
====== ======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans to foreclosed real estate $ 236 $ 111
Allocation of ESOP shares to participants 95 102
Net change in unrealized appreciation on securities available for sale -- 178
Building costs in accounts payable 172 --
====== ======
(See Notes to Consolidated Financial Statements)
6
WELLS FINANCIAL CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands)
(Unaudited)
NOTE 1. 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 September 30, 2002 and December 31, 2001.
September 30, 2002 December 31, 2001
Amount Percent Amount Percent
-------------------------------------------------------------------
(Dollars in Thousands)
Tier 1 (Core) Capital
Required $ 8,778 4.00% $ 9,052 4.00%
Actual 19,423 8.85% 18,474 8.16%
Excess 10,645 4.85% 9,422 4.16%
Risk-based Capital
Required 11,773 8.00% 11,403 8.00%
Actual 20,351 13.83% 19,425 13.63%
Excess 8,578 5.83% 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 Nine months ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
-------------------------- --------------------------
Basic EPS 1,182,522 1,131,202 1,178,437 1,153,496
Effect of dilutive securities:
Stock options 30,956 53,239 33,743 50,342
-------------------------- --------------------------
Diluted EPS 1,213,478 1,184,441 1,212,180 1,203,838
========================== ==========================
NOTE 4. SELECTED FINANCIAL DATA
For the nine months ended
September 30,
2002 2001
--------------------------------
Return on assets
(ratio of net income to average total assets) (1) 1.39% 1.34%
Return on equity
(ratio of net income to average equity) (1) 12.80% 13.40%
Equity to assets ratio
(ratio of average equity to average total assets) 10.87% 9.96%
Net interest margin
(ratio of net interest income to average interest earning assets) (1) 3.45% 3.61%
(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 Bank will have another subsidiary, Wells Real Estate Investment Trust
(Wells REIT), which will begin operations during the fourth quarter of 2002.
Wells REIT will invest in real estate loans acquired from the Bank.
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. During the third
quarter of 2002 the Bank leased a facility and opened a loan origination office
in Dakota County, 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
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 and ancillary income received from servicing the loans. Changes in the
prepayment speeds and ancillary income from the estimates used may have a
material effect on the valuation of the mortgage servicing rights. Although
management believes that the assumptions 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.
10
Comparison of Financial Condition at September 30, 2002 and December 31, 2001:
Total assets decreased by $5,121,000, from $230,408,000 at December 31,
2001 to $225,287,000 at September 30, 2002. Loans held for sale increased by
$2,378,000 from December 31, 2001 to September 30, 2002. Loans receivable
decreased by $5,280,000 during the first nine months 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 nine months
of 2002. Included in the loans that were originated and sold during the first
nine months of 2002 were loans from the Company's residential mortgage loan
portfolio that were refinanced resulting in the decrease in loans receivable.
Partially offsetting the decrease in residential mortgage loans was a $3.7
million increase in commercial real estate and operating loans including loans
totaling $3.3 million secured by commercial real estate, equipment, inventory
and farm real estate to one borrower. Cash received from the decrease in the
loan portfolio was used to purchase securities resulting in a $6,043,000
increase in securities during the first nine 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 September 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 $928,000 and
$952,000 and 0.55% and 0.56%, respectively.
Activity in the Company's allowance for loan losses for the nine months
ended September 30, 2002 and 2001 is summarized as follows:
2002 2001
--------- ---------
Balance on January 1, $ 951,862 $ 833,248
Provision for loan losses 22,500 105,000
Charge-offs (64,827) (59,904)
Recoveries 18,567 15,824
--------- ---------
Balance on September 30, $ 928,102 $ 894,168
========= =========
Loans on which the accrual of interest has been discontinued amounted
to $496,000 and $408,000 at September 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 September 30, 2002 and December 31, 2001.
Liabilities decreased by $7,513,000 from $206,836,000 at December 31,
2001 to $199,323,000 at September 30, 2002. This decrease is primarily due to a
$8,581,000 decrease in deposits.
Equity increased by $2,392,000 from $23,572,000 at December 31, 2001 to
$25,964,000 at September 30, 2002. The increase in equity was primarily the
result of net income for the first nine months of 2002 of $2,383,000 and an
increase in equity of $396,000 which resulted from the exercise of 49,480
options being partially offset by the payment of $631,000 in cash dividends and
by the purchase of 8,860 shares of treasury stock at a cost of $172,000 during
the nine month period. On October 22, 2002, the Board of Directors of the
Company declared a $0.18 per share cash dividend to be paid on November 18, 2002
to stockholders of record on November 4, 2002. Subject to the Company's earnings
and capital requirements, it is the current intention of the Company to continue
to pay regular quarterly cash dividends.
11
Comparison of Operating Results for the Three and Nine-Month Periods Ended
September 30, 2002 and September 30, 2001.
Net Income. Net income decreased by $113,000, or 11.8% for the
three-month period ended September 30, 2002 when compared to the same period
during 2001. The decrease in net income was primarily due an increase in
noninterest expense for the three months ended September 30, 2002 when compared
to the same period in 2001.
Net income for the nine months ended September 30, 2002 increased by
$180,000, or 8.2%, when compared to the first nine months of 2001. This increase
in net income was primarily the result of increases of $842,000 and $51,000 in
noninterest income and net interest income, respectively, being partially offset
by a $677,000 increase in noninterest expense.
Interest Income. Interest income decreased by $660,000 and $1,880,000,
or 16.0% and 15.1%, for the three and nine-month periods ended September 30,
2002, respectively, when compared to the same periods in 2001 due to decreases
in interest income from the Company's loan portfolio. The decrease in interest
income from the Company's loan portfolio resulted primarily from a decrease in
the average amount of loans receivable during the first nine months of 2002 when
compared to the same period in 2001. Partially offsetting the decrease in
interest income from the loan portfolio were increases in interest income from
investments of $119,000 and $386,000, or 44.4% and 47.5%, for the three and nine
months ended September 30, 2002, respectively, when compared to the same periods
in 2001.
Interest Expense. Total interest expense decreased by $582,000 and
$1,931,000, or 27.6% and 28.6%, for the quarter and nine months ended September
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 deposits and borrowed funds during the first nine months of 2002 when
compared to the first nine months of 2001.
Net Interest income. Net interest income decreased by $78,000, or 3.9%
for the quarter ended September 30, 2002 when compared to the same period in
2001 and increased by $51,000, or 0.9%, for the nine-month period ended
September 30, 2002 when compared to the same period 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 $82,000 for the quarter and nine months ended September 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 1.1% of total
loans at September 30, 2002 and December 31, 2001, respectively. Nonaccrual
loans were $496,000 and $408,000 at September 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 $164,000 and
$842,000, or 15.3% and 32.5%, for the three and nine-month periods ended
September 30, 2002, respectively, when compared to the same periods in 2001. The
increase in noninterest income for the quarter ended September 30, 2002 was
primarily due to increases in loan origination and commitment fees and in loan
servicing fees. The increase in noninterest income for the nine-month period
ended September 30, 2002 was primarily due to increases in the gain on sale of
loans originated for sale, loan servicing fees and loan origination and
commitment fees. Due to low interest rates on residential mortgage loans during
the first nine months 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.
12
Noninterest Expense. Noninterest expense increased by $339,000 and
$677,000, or 23.9% and 15.4%, for the three and nine months ended September 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, increases in commissions
paid to loan officers for the origination of loans and an increase in the
accrual for employee bonuses. 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 $95,000 and
increased by $118,000 for the three and nine-month periods ended September 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
nine months ended September 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 September 30, 2002 and December 31, 2001.
September 30, 2002 December 31, 2001
---------------------------------------
(Dollars in Thousands)
Non-accruing loans
One to four family real estate $ 425 $ 194
Agricultural real estate -- --
Commercial -- --
Consumer 71 214
--------- ---------
Total $ 496 $ 408
--------- ---------
Accruing loans which are contractually
past due 90 days or more
One to four family real estate $ 200 $ 224
Commercial real estate -- --
--------- ---------
Total $ 200 $ 224
--------- ---------
Total non-accrual and accruing loans
past due 90 days or more $ 696 $ 632
========= =========
Repossessed and non-performing assets
Repossessed property $ 237 $ 252
Other non-performing assets -- --
--------- ---------
Total repossessed and non-performing assets $ 237 $ 252
--------- ---------
Total non-performing assets $ 933 $ 884
========= =========
Total non-accrual and accruing loans
past due 90 days or more to total loans 0.41% 0.39%
========= =========
Total non-accrual and accruing loans
past due 90 days or more to total assets 0.31% 0.27%
========= =========
Total nonperforming assets to total assets 0.41% 0.38%
========= =========
13
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
September 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, May 13, 2002 and August 15, 2002. On October 22, 2002 the Company declared
a cash dividend of $0.18 per share payable on November 18, 2002 to stockholders
of record on November 4, 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 September 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 8.85% at September 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 of which $363,000 has been incurred and capitalized
as of September 30, 2002. Completion of this project is scheduled for January
2003.
14
WELLS FINANCIAL CORP. and SUBSIDIARIES
Item 3. Controls and Procedures.
- -------------------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-QSB, the Registrant's principal executive
officer and principal financial officer have concluded that the
Registrant's disclosure controls and procedures (as defined in Rules
13a-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in the
Registrant's internal controls or other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
15
WELLS FINANCIAL CORP. and SUBSIDIARIES
September 30, 2002
FORM 10-QSB
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other information
-----------------
None
Item 6. Exhibits and Reports of Form 8-K
--------------------------------
a. Exhibits: 99.1 Certification pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b. A report on Form 8-K was filed on July 30, 2002
pursuant to a press release issued by the Registrant
announcing that the Registrant revised its second
quarter earnings previously released for the three and
six-month periods ended June 30, 2002.
No other information is required to be filed under Part II of the form
================================================
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLS FINANCIAL CORP.
By: /s/ Lonnie R. Trasamar Date: November 1, 2002
--------------------------------------------- ----------------
Lonnie R. Trasamar
President and Chief Executive Officer
By: /s/ James D. Moll Date: November 1, 2002
--------------------------------------------- ----------------
James D. Moll
Treasurer and Principal Financial & Accounting Officer
SECTION 302 CERTIFICATION
I, Lonnie R. Trasamar, President and Chief Executive Officer of Wells
Financial Corp., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Wells Financial
Corp.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002 /s/Lonnie R. Trasamar
-------------------------------------
Lonnie R. Trasamar
President and Chief Executive Officer
SECTION 302 CERTIFICATION
I, James D. Moll, Treasurer and Principal Financial and Accounting
Officer of Wells Financial Corp., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Wells Financial
Corp.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002 /s/James D. Moll
--------------------------------------------------------
James D. Moll
Treasurer and Principal Financial and Accounting Officer