10QSB 1 f10qsb_093002-0129.txt FORM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 Incorporation or Organization) Identification No.) 53 1st Street S.W., P.O. Box 310, Wells MN 56097 ------------------------------------------------------ (Address of principal executive offices) (507) 553-3151 ------------------------------------------------------ (Registrant's Telephone Number, including Area Code) N/A (Former name, former address and former fiscal year, ------------------------------------------------------ if changed since last report) Indicate by check by |X| whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No The number of shares outstanding of each of the issuer's classes of common stock as of November 1, 2002: Class Outstanding ----- ----------- $.10 par value per share, common stock 1,203,069 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 9-14 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 ================================================================================ 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