10KSB 1 f10ksb_123102-0129.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 small business issuer in its charter) Minnesota 41-1799504 -------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. employer of incorporation or organization) identification no.) 53 First Street, S.W., Wells, Minnesota 56097 ------------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (507) 553-3151 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: ---- Common Stock, par value $0.10 per share --------------------------------------- (Title of class) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Registrant's revenues for the year ended December 31, 2002 were $19.8 million. Registrant's voting stock trades on the Nasdaq National Market under the symbol "WEFC." The aggregate market value of the voting stock held by non-affiliates of registrant, based upon the closing price of such stock as of March 3, 2003 ($23.05 per share), was $24.2 million. As of March 3, 2003, registrant had 1,128,277 shares of Common Stock outstanding. Transition Small Business Disclosure Format (Check One): Yes No X. --- --- DOCUMENTS INCORPORATED BY REFERENCE 1. Part II -- Portions of Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 2002. 2. Part III -- Portions of Registrant's Proxy Statement for the 2003 Annual Meeting of Stockholders. PART I WELLS FINANCIAL CORP. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-KSB AND THE EXHIBITS THERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE FOREGOING. THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY. Item 1. Business ---------------- General Wells Financial Corp. ("Registrant" or the "Company") is a unitary savings and loan holding company that was incorporated in December 1994 under the laws of the State of Minnesota for the purpose of acquiring all of the issued and outstanding common stock of Wells Federal Bank, fsb (the "Bank"). This acquisition occurred in April 1995 at the time the Bank simultaneously converted from a mutual to a stock institution, and sold all of its outstanding capital stock to the Company and the Company made its initial public offering of common stock (the "Conversion"). As of December 31, 2002, the Company had total 1 assets of $220.6 million, total deposits of $169.1 million, and stockholders' equity of $25.2 million or 11.4% of total assets under generally accepted accounting principles ("GAAP") in the United States of America. The only subsidiary of the Company is the Bank. The primary activity of the Company is directing and planning the activities of the Bank, the Company's primary asset. At December 31, 2002, the remainder of the assets of the Company were maintained in the form of a loan to an employee stock ownership plan ("ESOP") that was established for the benefit of the Bank's employees, deposits in interest bearing accounts with other financial institutions and selected investments. The Company engages in no other significant activities. As a result, references to the Company or Registrant generally refer to the Bank, unless the context otherwise indicates. In the discussion of regulation, except for the discussion of the regulation of the Company, all regulations apply to the Bank rather than the Company. The Bank is a federally chartered stock savings bank headquartered in Wells, Minnesota. The Bank has eight full service offices located in Faribault, Martin, Blue Earth, Nicollet, Freeborn and Steele Counties, Minnesota. During 2002, the Bank leased a facility and opened a loan origination office in Dakota County, Minnesota. The Bank was founded in 1934 and obtained its current name in 1991. The Bank's deposits have been federally insured by the Savings Association Insurance Fund ("SAIF") and its predecessor, the Federal Savings and Loan Insurance Corporation ("FSLIC") since 1934, and the Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a community oriented, full service retail savings institution offering traditional mortgage loan products. It is the Bank's intent to remain an independent community savings bank serving the local banking needs of Faribault, Martin, Blue Earth, Nicollet, Steele and Freeborn Counties, Minnesota. The Bank attracts deposits from the general public and uses such deposits primarily to invest in residential lending on owner occupied properties. The Bank also makes consumer loans, commercial loans, and agricultural related loans and purchases mortgage-backed and investment securities. The principal sources of funds for the Registrant's lending activities are deposits, advances from the Federal Home Loan Bank and the amortization, repayment, and maturity of loans, and investment securities. Principal sources of income are interest and fees on loans, investment securities, and deposits held in other financial institutions. The Registrant's principal expense is interest paid on deposits and borrowed funds. Market Area The Company's primary market area consists of Faribault, Martin, Blue Earth, Nicollet, Steele and Freeborn Counties, Minnesota. Located southwest of Minneapolis, this area is primarily rural and contains approximately 50 communities ranging in population size from 200 to 40,000. The primary lending concentration is in the Mankato, North Mankato and Owatonna areas. These areas have a relatively large population base. The Company has an office in each of the Mankato, North Mankato and Owatonna areas. Historically, the economy in the Company's market area has been dependent on agriculture and agriculture related industries. Economic growth in the Company's market area remains dependent upon the local economy. In addition, the deposit and loan activity of the Company is significantly affected by economic conditions in its market area including the agriculture industry. Lending Activities. The Company's loan portfolio predominantly consists of mortgage loans secured by one-to-four family residences. The Company also makes consumer loans and commercial loans. For its mortgage loan portfolio, the Company originates and retains adjustable rate loans. Dependent upon the level of the interest rates at the time mortgage loans on single-family dwellings are originated, the 2 Company may also retain lower loan-to-value ratio fixed rate loans with original maturities that are greater than twenty years. The Company sells other conventional fixed rate mortgage loans to the secondary market. The Company's consumer loan portfolio consists primarily of home equity or improvement loans secured by second liens on real estate on which the Company has the first lien. To a lesser extent, the consumer loan portfolio includes loans secured by vehicles and savings accounts. The Company also originates commercial and multi-family real estate loans, the vast majority of which are secured by farm land. In addition to loans secured by farm real estate, the Company makes commercial business loans, the majority of which are secured by farm operating equipment, livestock, crops on hand, growing crops and farm real estate. The consumer, commercial real estate, and commercial business loan portfolios are primarily composed of adjustable rate loans. The Company's adjustable rate loans reprice based on a cost of funds index that is a lagging market index. A lagging index does not adjust as rapidly as market interest rates and may not adjust as rapidly as would other indices. During periods of increasing interest rates, use of a lagging index results in adjustable rate loans repricing upward at a slower rate than if a leading market index had been used. During periods of decreasing interest rates, use of a lagging index results in adjustable rate loans repricing downward at a slower rate than if a leading market index had been used. 3 Loan Portfolio Composition. The following table sets forth information concerning the composition of the Company's loan portfolio in dollar amounts and in percentages of the total loan portfolio (before deductions for loans in process, deferred loan origination fees and costs and allowances for losses) as of the dates indicated.
At December 31, -------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Real Estate Loans: ------------------ One-to-four family.......... $53,967 36.00% $80,613 49.01% $112,579 58.29% $106,292 60.82% $105,088 67.25% Multi-family................ 439 0.29 484 0.29 523 0.27 654 0.37 950 0.61 Commercial.................. 51,958 34.66 41,510 25.24 38,514 19.94 31,928 18.27 20,068 12.84 Construction................ 4,830 3.22 2,185 1.33 2,043 1.06 2,957 1.69 1,279 0.82 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total real estate loans................. 111,194 74.17 124,792 75.87 153,659 79.56 141,831 81.15 127,385 81.52 Other Loans: ------------ Consumer Loans: Savings account............. 387 0.26 635 0.39 558 0.30 578 0.33 395 0.25 Vehicles.................... 5,687 3.79 4,914 2.99 5,333 2.76 4,914 2.81 4,644 2.97 Home equity, home improvement and second mortgages............ 22,826 15.23 26,228 15.95 26,155 13.54 21,315 12.20 18,475 11.83 Other....................... 3,905 2.60 4,314 2.62 4,449 2.30 3,144 1.80 2,970 1.90 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total consumer loans.... 32,805 21.88 36,091 21.95 36,495 18.90 29,951 17.14 26,484 16.95 Commercial business loans..... 5,917 3.95 3,591 2.18 2,967 1.54 2,988 1.71 2,394 1.53 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total other loans....... 38,722 25.83 39,682 24.13 39,462 20.44 32,939 18.85 28,878 18.48 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total loans............. 149,916 100.00% 164,474 100.00% 193,121 100.00% 174,770 100.00% 156,263 100.00% ====== ====== ====== ====== ====== Less: ----- Loans in process............ 3,202 2,694 657 722 655 Deferred loan origination fees and costs.................. 220 315 494 478 450 Allowance for loan losses... 908 952 833 857 853 --------- -------- -------- -------- -------- Total loans receivable, net....... $ 145,586 $160,513 $191,137 $172,713 $154,305 ========= ======== ======== ======== ========
4 Loan Maturity Tables. The following table sets forth the maturity of the Company's loan portfolio at December 31, 2002. The table does not include prepayments, scheduled principal repayments or loans held for sale. All mortgage loans are shown as maturing based on contractual maturities. Commercial Business and Construction Consumer Total ------------ -------- ----- (In Thousands) Amounts Due: Within 1 year or less........... $4,295 $ 4,589 $ 8,884 After 1 year through 5 years.... 535 22,897 23,432 After 5 years................... -- 11,236 11,236 ------ ------- ------- Total amount due.................. $4,830 $38,722 $43,552 ====== ======= ======= The following table sets forth the dollar amount of all loans due after December 31, 2003 that have pre-determined interest rates and which have floating or adjustable interest rates. This table does not include loans held for sale.
Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In Thousands) One-to-four family.......................... $20,380 $27,897 $48,277 Commercial and multi-family real estate..... 46,903 4,545 51,448 Construction................................ 175 360 535 Commercial business and consumer............ 27,144 6,989 34,133 ------- ------- -------- Total..................................... $94,602 $39,791 $134,393 ======= ======= ========
One-to-Four Family Residential Loans. The Company's primary lending activity consists of the origination of single family residential mortgage loans secured by property located in the Company's primary market area. The Company generally originates one-to-four family residential mortgage loans without private mortgage insurance in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property. The Company typically requires private mortgage insurance or government guarantee on any loan at more than 80% of the value of the mortgaged property. The Company originates adjustable rate mortgage loans for retention in its portfolio with loan-to-value ratios of up to 95% and requires private mortgage insurance when the loan-to-value ratio exceeds 80%. The Company's adjustable rate loans provide for annual 1%-2% interest rate adjustments with a maximum adjustment over the term of the loan of between 5% and 6%. The Company also permits adjustable rate loans to be converted into fixed-rate loans. Loan originations are generally obtained from existing customers, members of the local community, and referrals from realtors within the Company's lending area. Mortgage loans originated and held by the Company in its portfolio include due-on sale clauses which provide the Company with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Company's consent. 5 The Company primarily originates fixed and adjustable rate mortgage loans with 15-30 year terms. The Company offers various loan programs, including low documentation loans for loans with lower loan-to- value ratios and other loan programs using cost of funds or one-year U.S. treasury indices for adjustable rate loan repricing. Interest rates charged on mortgage loans are competitively priced based on market conditions and the Company's cost of funds. Throughout the year, origination fees for loans were generally 1% of the loan amount. The Company's standard underwriting guideline for fixed-rate mortgage loans conform to FHLMC guidelines and the loans may be sold in the secondary market to private investors. The Company customarily sells all Federal Housing Administration and Veterans' Administration ("FHA/VA") loans as well as certain conforming fixed rate mortgage loans in the secondary market. The Company also originates adjustable rate mortgages ("ARMs") which adjust every year based upon various indices. At December 31, 2002, the Company was servicing approximately $307.3 million of loans for others, primarily long term fixed rate loans sold to FHLMC. Generally, the Company retains all servicing on loans sold to FHLMC and does not retain servicing on FHA/VA loans sold. Except for document deficiencies that may occur during origination that may require a repurchase by the Company, loans are sold without recourse. Consumer Loans. The Company offers second mortgage loans on one-to-four family residences which are typically offered as adjustable rate loans. Such loans are only made on owner-occupied one- to -four family residences and are subject to a 90% combined loan-to-value ratio. The Company holds the majority of the underlying first mortgages on these loans. The underwriting standards for second mortgage loans are similar to the Company's standards applicable to one-to-four family residential loans. To a lesser extent, the Company makes loans secured by vehicles and by savings accounts held with the Company. Loans secured by vehicles totaled $5.7 million, or 3.79% of the loan portfolio at December 31, 2002. Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to 35% of an institution's assets. In addition, a federal thrift has lending authority above the 35% category for certain consumer loans, property improvement loans, and loans secured by savings accounts. The Company originates consumer loans in order to provide a wide range of financial services to its customers and because the shorter terms and normally higher interest rates on such loans help maintain a profitable spread between its average loan yield and its cost of funds. Consumer loans, however, tend to have a higher risk of default than residential mortgage loans. Typically, based on the Company's experience, a borrower faced with either paying a mortgage loan to avoid foreclosure on the borrower's home or defaulting on a consumer loan will continue paying the mortgage loan. At December 31, 2002, the Company had approximately $142,000 in consumer loans that were more than 90 days delinquent. Commercial Real Estate Loans. In order to enhance yields on its assets, the Company originates loans secured by commercial real estate. Approximately 86% of this portfolio is secured by farm real estate. In addition to originating farm real estate loans, the Company also purchases participations in farm real estate loans that are originated by commercial banks in southern Minnesota. Most of the remainder of the portfolio is secured by commercial real estate. At December 31, 2002, loans secured by farm real estate were originated in amounts up to the lesser of 65% of the appraised value of the property or $1,300 per tillable acre. These loans are evaluated on a cash flow basis in addition to an asset value basis. Loans secured by commercial real estate are generally originated in amounts up to 80% of the appraised value of the property. At December 31, 2002, the Company's largest commercial real estate loan consisted of a $997,000 performing loan secured by commercial real estate. All commercial real estate loans, excluding loans of less than $750,000 secured by commercial real estate, and $1 million secured by farm real estate, require prior approval by the Bank's Board of Directors. As part of its underwriting, the Company requires that borrowers qualify for a commercial loan at the fully indexed interest rate rather than at the origination interest rate. 6 Loans secured by commercial real estate generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. For loans secured by farm real estate, repayment may be affected by weather conditions and government policies and subsidies concerning farming. Commercial Business Loans. The Company's commercial business loans consist of commercial and agricultural operating and term loans. The commercial operating and term loans are generally secured by equipment, inventory, commercial real estate and receivables. The agricultural operating and term loans are primarily secured by farm equipment, livestock, crops and farm real estate. Commercial and agricultural loans generally involve a greater degree of risk than residential mortgage loans. This increased credit risk is a result of several factors, including the effects of general economic conditions and the increased difficulty of evaluating and monitoring these types of loans. Construction Loans. Construction loans are made on single family residential property to the individuals who are the owners and occupants upon completion of construction. These loans are made on a long term basis and are classified as construction permanent loans with no principal payments required during the first six months, after which the payments are set at an amount that will amortize over the term of the loan. The maximum loan-to-value ratio is 80% and is made at a variable or fixed interest rate. The Company does not originate many speculative loans to builders and limits the loan-to-value ratio to 70% with a maximum loan term of 18 months. In underwriting such loans, the Company takes into consideration the number of units that the builder has on a speculative basis that remain unsold. Construction lending is generally considered to involve a higher degree of credit risk than long-term financing of residential properties. The Company's risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost of construction. If the estimate of construction cost and the marketability of the property upon completion of the project prove to be inaccurate, the Company may be compelled to advance additional funds to complete the development. Furthermore, if the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a property with a value that is insufficient to assure full repayment. For the small number of speculative loans originated to builders, the ability of the builder to sell completed dwelling units will depend, among other things, on demand, pricing, and availability of comparable properties and economic conditions. Loans to One Borrower. Loans-to-one borrower are limited in an amount equal to 15% of unimpaired capital and unimpaired surplus and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate) or $500,000, whichever is higher. The Company's maximum loan-to-one borrower limit was approximately $2.9 million as of December 31, 2002. 7 Loan Delinquencies. The Company's collection procedures provide that when a mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is still delinquent after 30 days past due the customer will receive a letter and/or telephone call and may receive a visit from a representative of the Company. If the delinquency continues, similar subsequent efforts are made to eliminate the delinquency. If the loan continues in a delinquent status for 60 days past due and no repayment plan is in effect, a notice of right to cure default is mailed to the customer giving 30 additional days to bring the account current before foreclosure is commenced. The loan committee meets regularly to determine when foreclosure proceedings should be initiated and the customer is notified when foreclosure has been commenced. Loans are reviewed on a monthly basis and are generally placed on a non-accrual status when a mortgage loan or a non-mortgage loan becomes 120 or 90 days delinquent, respectively, and, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent interest payments, if any, are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. Non-accrual loans fluctuate over time due to a variety of factors. For the Company, non-accrual loans may be affected by the payments on one large loan or a delay in the harvesting of crops due to weather conditions. The Company's experience has been that these fluctuations are normal and are not dependant on any one factor over time. 8 The following table sets forth information regarding non-accrual loans, real estate owned, and certain other repossessed assets and loans.
At December 31, -------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (Dollars in Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: Permanent loans secured by 1-to-4 family residences ............................ $287 $194 $108 $ -- $192 All other mortgage loans ................ -- -- 195 32 -- Non-mortgage loans: Commercial .............................. -- -- -- -- -- Consumer ................................ 141 214 60 79 68 ---- ---- ---- ---- ---- Total ..................................... $428 $408 $363 $111 $260 ==== ==== ==== ==== ==== Accruing loans which are contractually past due 90 days or more: Mortgage loans: Construction loans ...................... $ -- $ -- $ -- $ -- $ -- Permanent loans secured by 1-to-4 family residences ............................ 249 211 258 11 100 All other mortgage loans ................ -- 11 -- -- -- Non-mortgage loans: Commercial .............................. -- -- -- -- -- Consumer ................................ 1 2 4 -- -- ---- ---- ---- ---- ---- Total ..................................... $250 $224 $262 $ 11 $100 ==== ==== ==== ==== ==== Total non-accrual and accruing loans past due 90 days or more ................ $678 $632 $625 $122 $360 ==== ==== ==== ==== ==== Foreclosed real estate .................... $209 $252 $ 54 $ 55 $ -- ==== ==== ==== ==== ==== Other nonperforming assets ................ $ -- $ -- $ -- $ -- $ -- ==== ==== ==== ==== ==== Total nonperforming assets ................ $887 $884 $679 $177 $360 ==== ==== ==== ==== ==== Total non-accrual and accruing loans past due 90 days or more to net loans ........ 0.47% 0.39% 0.33% 0.07% 0.23% ==== ==== ==== ==== ==== Total non-accrual and accruing loans past due 90 days or more to total assets ..... 0.31% 0.27% 0.28% 0.06% 0.19% ==== ==== ==== ==== ==== Total nonperforming assets to total assets 0.40% 0.38% 0.31% 0.09% 0.19% ==== ==== ==== ==== ====
Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of such loans was immaterial for the year ended December 31, 2002. Amounts included in the Company's interest income on non-accrual loans for the year ended December 31, 2002 were likewise immaterial. Classified Assets. Office of Thrift Supervision ("OTS") regulations provide for a classification system for problem assets of insured institutions which covers all problem assets. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as loss are 9 those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets may be designated "special mention" because of potential weakness that do not currently warrant classification in one of the aforementioned categories. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. The following table provides further information about the Company's problem assets as of December 31, 2002. (In Thousands) Special Mention............................. $ 359 Substandard................................. 1,367 Doubtful assets............................. -- Loss assets................................. -- ------- Total.................................. $ 1,726 ------- Allowance for loan loss..................... $ 908 ======= Allowance for Loan Losses. It is management's policy to provide for losses on unidentified loans in its loan portfolio. A provision for loan losses is charged to operations based on management's evaluation of the potential losses that may be incurred in the Company's loan portfolio. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loss provisions may be deemed necessary. There can be no assurance that the allowance for losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required. 10 Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the Company's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable, at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio. The allocation of the allowance for loan losses is based on management's evaluation of the loans in the respective portfolios; the Company does not attempt to manage the percentage of the allocation between loan categories. As part of management's evaluation, for each loan category, the allowance is determined after examination of prior period experience but is adjusted for various factors such as delinquencies, expected charge-offs, recoveries, amount of classified assets, amount of non-accrual loans and any known local economic trends. As a result, the allocation of the allowance does not reflect relative levels of historic charge-offs between loan categories.
At December 31, --------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 -------------------- ------------------- -------------------- ------------------ ------------------- Percent of Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category to Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in Thousands) At end of year allocated to: Mortgage............. $ 566 74.17% $ 574 75.87% $ 749 79.56% $ 749 81.15% $ 722 81.52% Consumer and non-mortgage....... 342 25.83 378 24.13 84 20.44 108 18.85 131 18.48 ------- ------ ----- ------ ------ ------ ------ ------ ----- ------ Total allowance...... $ 908 100.00% $ 952 100.00% $ 833 100.00% $ 857 100.00% $ 853 100.00% ======= ====== ===== ====== ====== ====== ====== ====== ===== ======
11 Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Company's allowance for loan losses for the years indicated:
At December 31, -------------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- (Dollars in Thousands) Total loans outstanding .............. $ 149,916 $ 164,474 $ 193,121 $ 174,770 $ 156,263 ========= ========= ========= ========= ========= Average loans outstanding ............ $ 162,622 $ 186,772 $ 184,773 $ 161,444 $ 172,219 ========= ========= ========= ========= ========= Beginning allowance balances ......... $ 952 $ 833 $ 857 $ 853 $ 763 Provision: One-to-four family ................. 23 (175) -- 27 120 Commercial and multi-family real estate ...................... -- -- -- -- -- Consumer ........................... -- 355 -- -- -- Charge-offs: One-to-four family ................. 31 -- -- -- -- Commercial and multi-family real estate ...................... -- -- -- -- -- Consumer ........................... 55 89 49 43 46 Recoveries: One-to-four family ................. -- -- -- -- -- Commercial and multi-family real estate ...................... -- -- -- -- -- Consumer ........................... 19 28 25 20 16 Other ................................ -- -- -- -- -- --------- --------- --------- --------- --------- Ending allowance balance ............. $ 908 $ 952 $ 833 $ 857 $ 853 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of total loans outstanding ......... 0.61% 0.58% 0.43% 0.49% 0.55% Net loans charged off as a percent of average loans outstanding .......... 0.04% 0.03% 0.01% 0.01% 0.02%
12 Investment Activities The Company is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and certain other investments. The Company has maintained a liquidity portfolio in excess of regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of future yield levels, as well as management's projections as to the short-term demand for funds to be used in the Company's loan origination and other activities. At December 31, 2002, the Company had an investment portfolio of approximately $21.9 million, consisting primarily of U.S. government corporate and agency obligations. To a lesser extent, the portfolio also includes FHLMC stock, certificates of deposit and FHLB stock, as permitted by the OTS regulations. The Company classifies its investments, including debt and equity securities, as either held to maturity or available for sale, in accordance with SFAS 115. The Company will continue to seek high quality investments. The primary and secondary goals of the investment portfolio are safety of principal and rate of return, respectively. Investment Portfolio. The following table sets forth the carrying value of the Company's investments, including short-term investments, FHLB stock, and mortgage-backed securities, at the dates indicated. At December 31, 2002, the Company's securities that were classified as available for sale had an unrealized net gain of $1.26 million. At December 31, 2002, the market value for the interest bearing deposits shown below approximated their cost. At December 31, --------------------------------- 2002 2001 2000 ------- ------- ------- (In Thousands) Securities available for sale: Equity securities ................... $ 945 $ 1,047 $ 1,102 U.S. Agency Securities .............. 18,473 12,503 13,012 Obligations of state and political subdivisions ...................... 438 438 236 ------- ------- ------- Total securities available for sale 19,856 13,988 14,350 FHLB stock ............................ 1,875 1,875 1,875 Certificates of deposit ............... 200 200 200 ------- ------- ------- Total investments ................. $21,931 $16,063 $16,425 ======= ======= ======= 13 Investment Portfolio Maturities. The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Company's investment securities portfolio.
At December 31, 2002 ------------------------------------------------------------------------------------------------- More than Total One Year or Less One to Five Years Five to Ten Years Ten Years Investment Securities ---------------- ----------------- ----------------- ----------------- ------------------------ Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) U.S. Agency Obligations (1)....... $ 20 6.32% $18,891 5.16% $ -- -- % $ -- -- % $18,911 5.16% 18,911 FHLB Stock........................ -- -- -- -- -- -- -- -- 1,875 -- 1,875 Equity Securities................. -- -- -- -- -- -- -- -- 945 -- 945 Certificates of Deposit........... 200 2.46% -- --% -- -- % -- -- % 200 2.46% 200 ------- ------- ------ ------ ------- ------- Total........................... $ 220 $18,891 $ -- $ -- $21,931 $21,931 ======= ======= ====== ====== ======= =======
(1) Includes obligations of state and political subdivisions. 14 Sources of Funds General. Deposits are the major external source of the Company's funds for lending and other investment purposes. The Company derives funds from amortization and prepayment of loans and, to a much lesser extent, maturities of investment securities, borrowings and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. The Company may also borrow from the FHLB of Des Moines as a source of funds. Deposits. Consumer and commercial deposits are attracted principally from within the Company's primary market area through the offering of a broad selection of deposit instruments including regular savings accounts, NOW accounts, and term certificate accounts. The Company also offers IRA and KEOGH accounts. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit and the interest rate, among other factors. The interest rates paid by the Bank on deposits can be set daily at the direction of senior management. Senior management determines the interest rate to offer the public on new and maturing accounts. Senior management obtains the interest rates being offered by other financial institutions within its market area. This data along with a report showing the dollar value of certificates of deposit maturing is reviewed and interest rates are determined. Non-interest bearing demand accounts constituted $4.3 million, or 2.6% of the Bank's deposit portfolio at December 31, 2002. Money market accounts and NOW accounts constituted $34.7 million, or 20.5% of the Bank's deposit portfolio at December 31, 2002. Regular savings accounts constituted $22.4 million, or 13.2 % of the Bank's deposit portfolio at December 31, 2002. Certificates of deposit constituted $107.7 million or 63.7% of the deposit portfolio, including $9.6 million of which had balances of $100,000 and over. As of December 31, 2002, the Bank had no brokered deposits. Jumbo Certificate Accounts. The following table indicates, at December 31, 2002, the amount of the Company's certificates of deposit of $100,000 or more by time remaining until maturity. Certificates of Deposit Weighted Maturity Period (In Thousands) Interest Rate --------------- -------------- ------------- Within three months................ $ 301 2.5 % Three through six months........... 1,059 2.12 Six through twelve months.......... 1,018 2.26 Over twelve months................. 7,186 3.37 --------- ---- $ 9,564 3.09% ========= ==== Borrowings. Deposits are the primary source of funds of the Company's lending and investment activities and for its general business purposes. Through the Bank, the Company may obtain advances from the FHLB of Des Moines to supplement its supply of lendable funds. Advances from the FHLB of Des Moines are typically secured by a pledge of the Bank's stock in the FHLB of Des Moines and a portion of the Company's first mortgage loans and certain other assets. The Bank, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit 15 withdrawal requirements. At December 31, 2002, the Company had $23.0 million in advances outstanding from the FHLB of Des Moines (see Note 10 of the Notes to the Company's Consolidated Financial Statements). Future use of advances depends on the rates on advances as compared to the rates on deposits. The following table sets forth certain information as to FHLB advances at the dates indicated.
As of and for the Years Ended December 31, ------------------------------------------ 2002 2001 2000 ---- ---- ---- (Dollars in Thousands) FHLB advances.......................... $23,000 $23,000 $33,500 Weighted average interest rate of FHLB advances..................... 5.34% 5.34% 5.77% Maximum amount of advances............. $23,000 $33,500 $37,500 Average amount of advances............. $23,000 $25,192 $25,538 Weighted average interest rate of average amount of advances........ 5.41% 5.36% 6.08%
Subsidiary Activity The Company has one wholly owned subsidiary, the Bank. The Bank has two wholly owned subsidiaries, known as Wells Insurance Agency, Inc. ("WIA") and Greater Minnesota Mortgage, Inc. ("GMM"). The Bank is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, subsidiary corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. Under the 2% limitation, as of December 31, 2002, the Bank was authorized to invest up to approximately $4.4 million in the stock of, or loans to, service corporations. WIA was incorporated under the laws of the State of Minnesota in 1976. WIA offers life, health, casualty, and business insurance on behalf of others and also offers fixed-rate annuities. The Bank's investment in WIA totaled $1.1 million at December 31, 2002. GMM was incorporated under the laws of Minnesota in 1997. GMM originates loans through referrals from community commercial banks and, primarily, sells these loans to the secondary market. During 2002, GMM originated $47.6 million in single family dwelling loans, which were sold to the secondary market. At December 31, 2002, the Bank's investment in GMM totaled $1.8 million. Personnel As of December 31, 2002, the Bank had 87 full-time and 7 part-time employees. None of the Bank's employees are represented by a collective bargaining group. The Company, with no employees of its own, utilizes those of the Bank. 16 Competition The competition for deposit products includes banks ranging in size from larger, Minneapolis-based regional banks with branches in the Company's market area to local independent community banks. Deposit competition also includes a number of insurance products sold by local agents and investment products sold by local and regional sales people. Loan competition varies depending upon market conditions. Loan competition includes branches of large Minneapolis-based commercial banks and thrifts, credit unions, mortgage bankers with local sales staff and local banks. The Company believes that it is one of the few area lenders that has consistently offered a variety of loans throughout all types of economic conditions. The Company has traditionally maintained a leadership position in mortgage loan volume and market share throughout its service area by virtue of its local presence. The Company believes that it has been able to effectively market its larger variety of loan and other financial products and services when compared to other local-based institutions and its superior customer service when compared to branches of larger institutions based outside of the Company's market area. Regulation of the Company Set forth below is a brief description of certain laws that relate to the regulation of the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. As a unitary savings and loan holding company, the Company generally is not subject to any restrictions on its business activities. While the Gramm-Leach-Bliley Act (the "GLB Act") terminated the "unitary thrift holding company" exemption from activity restrictions on a prospective basis, the Company enjoys grandfathered status under this provision of the GLB Act because it acquired the Bank prior to May 4, 1999. As a result, the Company's freedom from activity restrictions as a unitary savings and loan holding company was not affected by the GLB Act. However, if the Company were to acquire control of an additional savings institution, its business activities would be subject to restriction under the Home Owners' Loan Act. Furthermore, if the Company were in the future to sell control of the Bank to any other company, such company would not succeed to the Company's grandfathered status under the GLB Act and would be subject to the Home Owner's Loan Act's activity restrictions. The continuation of the Company's exemption from restrictions on business activities as a unitary savings and loan holding company is also subject to the Company's continued compliance with the QTL Test. See "- Regulation of the Bank - Qualified Thrift Lender Test." Recent Legislation to Curtail Corporate Accounting Irregularities. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). The Securities and Exchange Commission 17 (the "SEC") promulgated certain regulations pursuant to the Act which were effective August 29, 2002, and will continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. These new regulations, which are intended to curtail corporate fraud, require the chief executive officer and chief financial officer of the Company to personally certify certain SEC filings and financial statements and to certify as to the existence of disclosure controls and procedures within the Company are designed to ensure that information required to be disclosed by the Company in its SEC filings is processed, summarized and reported accurately. The Act and regulations promulgated thereunder by the SEC also impose additional measures to be taken by the Company's officers, directors and outside auditors and impose accelerated reporting requirements by officers and directors of the Company in connection with certain changes in their equity holdings of the Company. Implementation of and compliance with the Act and corresponding regulations will likely increase the Company's expenses. Regulation of the Bank General. As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that are found in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC, or the Congress could have a material adverse impact on the Company, the Bank, and their operations. Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The FDIC administers two separate deposit insurance funds. Generally, the Bank Insurance Fund (the "BIF") insures the deposits of commercial banks and the SAIF insures the deposits of savings institutions. The FDIC is authorized to increase deposit insurance premiums if it determines such increases 18 are appropriate to maintain the reserves of either the SAIF or BIF or to fund the administration of the FDIC. In addition, the FDIC is authorized to levy emergency special assessments of BIF and SAIF members. The FDIC has set the deposit insurance assessment rates for SAIF member institutions for the first six months of 2003 at 0% to 0.27% of insured deposits on an annualized basis, with the assessment rate for most savings institutions set at 0%. In addition, all institutions insured by the FDIC are required to pay quarterly assessments, totaling approximately 0.0190% of insured deposits for the 2002 calendar year, to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the Financing Corporation bonds mature in 2017. Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 4.0% of total adjusted assets for most savings institutions, and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. The Bank exceeded these minimum standards at December 31, 2002. The Bank's capital ratios are set forth in Note 12 to the Company's Consolidated Financial Statements. Regulations that enable the OTS to take prompt corrective action against savings institutions effectively impose higher capital requirements on the Bank. Dividend and Other Capital Distribution Limitations. The Bank must give the OTS 30 days advance notice of any proposed distribution of capital, such as a declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit any payment of dividends to the Company that it deems to constitute an unsafe or unsound practice. In addition, the Bank may not declare or pay a dividend on its capital stock if the dividend would (1) reduce the regulatory capital of the Bank below the amount required for the liquidation account established in connection with the conversion from mutual to stock form or (2) reduce the amount of capital of the Bank below the amounts required in accordance with other OTS regulations. In contrast, the Company has fewer restrictions on its payment of dividends to its stockholders. During 2002, the Company declared four $0.18 per share quarterly dividends to its shareholders. During 2001, the Company declared four $0.16 per share quarterly dividends to its shareholders. The Company's dividend payout ratio for 2002 was 25.3% and for 2001 was 22.0%. Qualified Thrift Lender Test. Savings institutions must meet a QTL test. If the Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Des Moines. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 20% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. As of December 31, 2002, the Bank was in compliance with its QTL requirement. Loans-to-One Borrower. See "Business -- Loans-to-One Borrower." Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily 19 from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. Item 2. Description of Properties --------------------------------- The Company does not own any real property but utilizes the offices of the Bank. The Bank operates from its main full service office located at 53 First Street, S.W., Wells, Minnesota, seven additional full service offices, and one loan origination office. The Bank owns the offices in Wells and one branch facility, and leases the remaining locations. In the opinion of the Bank's management, the physical condition of each of the offices is good and is adequate for the conduct of the Bank's business. Item 3. Legal Proceedings ------------------------- There are various claims and lawsuits in which Registrant is periodically involved, such as claims to enforce liens, condemnation proceedings on properties in which Registrant holds security interests, claims involving the making and servicing of real property loans, and other issues incident to Registrant's business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------- Not Applicable. PART II Item 5. Market for Common Equity and Related Stockholder Matters ------------------------------------------------------------------ The information contained under the section captioned "Stock Market Information" on pages 1 and 2 of the Company's 2002 Annual Report to Stockholders (the "Annual Report"), is incorporated herein by reference. Item 6. Management's Discussion and Analysis or Plan of Operation ------------------------------------------------------------------- The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. 20 Item 7. Financial Statements ------------------------------ The following financial statements and the report of independent accountants of Registrant included in Registrant's Annual Report to Stockholders are incorporated herein by reference. Independent Auditor's Report. Consolidated Statements of Financial Condition as of December 31, 2002 and 2001. Consolidated Statements of Income for the Years Ended December 31, 2002, 2001, and 2000. Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001, and 2000. Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000. Notes to Consolidated Financial Statements. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure -------------------------------------------------------------------------------- Not applicable. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act ---------------------------------------------------------------------- The information required under this item is incorporated herein by reference to the Proxy Statement for the Registrant's 2003 Annual Meeting of Stockholders (the "Proxy Statement") under the sections captioned "Proposal I - Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance". Item 10. Executive Compensation -------------------------------- The information contained under the section captioned "Director and Executive Officer Compensation" in the Proxy Statement is incorporated herein by reference. Item 11. Security Ownership of Certain Beneficial Owners and Management ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" in the Proxy Statement. 21 (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the first table under "Proposal I - Election of Directors" in the Proxy Statement. (c) Management of Registrant knows of no arrangements, including any pledge by any person of securities of Registrant, the operation of which may at a subsequent date result in a change in control of Registrant. (d) Securities Authorized for Issuance Under Equity Compensation Plans Set forth below is information as of December 31, 2002 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION (a) (b) (c) Number of securities Number of Weighted- remaining available securities to be average exercise for future issuance issued upon price of under equity exercise of outstanding compensation plans outstanding options, (excluding securities options, warrants warrants and reflected in column and rights rights (a)) ----------------- ------------ ------------------- Equity compensation plans approved by shareholders 1995 Stock Option Plan 81,119 $13.18 41,375 Management Stock Bonus Plan and Trust Agreements 18,450 -- 11,473 Equity compensation plans not approved by shareholders N/A N/A N/A ------ ------ ------ TOTAL............................. 99,569 $10.74 52,848 ====== ====== ======
22 Item 12. Certain Relationships and Related Transactions -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Certain Relationships and Related Transactions" in the Proxy Statement. Item 13. Exhibits, List, and Reports on Form 8-K ------------------------------------------------ (a) The following exhibits are included in this Report or incorporated herein by reference:
3(i) Articles of Incorporation of Wells Financial Corp.* 3(ii) Bylaws of Wells Financial Corp.** 10.1 1995 Stock Option Plan of Wells Financial Corp.*** 10.2 Management Stock Bonus Plan and Trust Agreements*** 10.3 Change in Control Severance Agreement with James D. Moll**** 10.4 Change in Control Severance Agreement with Gerald D. Bastian**** 13 Annual Report to Stockholders for the fiscal year ended December 31, 2002 (only those portions incorporated by reference in this document are deemed filed) 21 Subsidiaries of Registrant**** 23 Consent of McGladrey & Pullen, LLP 99.1 Certification pursuant to 18 USC Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
23 (b) Reports on Form 8-K. None _____________________ * Incorporated by reference to the registration statement on Form S-1 (File No. 33-87922) declared effective by the SEC on February 13, 1995. ** Incorporated by reference to the identically numbered exhibit to the Registrant's Form 10-KSB for the year ended December 31,1998 (File No. 0-25342). *** Incorporated by reference to the exhibits to the Registrant's proxy statement for a special meeting of stockholders held on November 15, 1995 and filed with the SEC on October 2, 1995 (File No. 0-25342). **** Incorporated by reference to the identically numbered exhibit to the Registrant's Form 10-K for the year ended December 31, 1995. Item 14. 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 Annual Report on Form 10-KSB, 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) and 15d-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 in 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. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 25, 2003. WELLS FINANCIAL CORP. By: /s/ Lonnie R. Trasamar -------------------------------------- Lonnie R. Trasamar President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 25, 2003.
/s/ Lonnie R. Trasamar /s/ James D. Moll ----------------------------------------------- -------------------------------------------- Lonnie R. Trasamar James D. Moll President, Chief Executive Officer and Director Treasurer and Principal Financial and (Principal Executive Officer) Accounting Officer (Principal Financial and Accounting Officer) /s/ Dale E. Stallkamp /s/ Gerald D. Bastian ----------------------------------------------- -------------------------------------------- Dale E. Stallkamp Gerald D. Bastian Director Vice President and Director /s/ Randel I. Bichler /s/ Richard A. Mueller ----------------------------------------------- -------------------------------------------- Randel I. Bichler Richard A. Mueller Chairman of the Board Director /s/ David Buesing ----------------------------------------------- David Buesing Director
SECTION 302 CERTIFICATION I, Lonnie R. Trasamar, President and Chief Executive Officer of Wells Financial Corp., certify that: 1. I have reviewed this Annual Report on Form 10-KSB of Wells Financial Corp.; 2. Based on my knowledge, this Annual 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 Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual 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 Annual 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 annual report (the "Evaluation Date"); and (c) presented in this Annual 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 Annual 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: March 25, 2003 /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 Annual Report on Form 10-KSB of Wells Financial Corp.; 2. Based on my knowledge, this Annual 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 Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual 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 Annual 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 Annual Report (the "Evaluation Date"); and (c) presented in this Annual 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 Annual 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: March 25, 2003 /s/James D. Moll ------------------------------------- James D. Moll Treasurer and Principal Financial and Accounting Officer