10QSB 1 f10qsb_063002-0129.txt 10QSB 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 ------- 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