[** LOGO **]

WELLS
FINANCIAL
 CORP.

ANNUAL REPORT



<PAGE>


<TABLE>
<CAPTION>


<S>                           <C>
WELLS FINANCIAL CORP.              
ANNUAL REPORT

Wells Federal Bank,  fsb                TABLE OF CONTENTS


MAIN OFFICE:                     Profile and Stock Market Information.....................  1-2

Wells                            Selected Consolidated Financial and Other Data...........    3
53 First Street SW
Wells, Minnesota 56097           Letter to Stockholders...................................    4

BRANCH OFFICES:                  Management's Discussion and Analysis of Financial
                                   Condition and Results of Operations.................... 5-17
Blue Earth                     
303 South Main Street            Independent Auditor's Report.............................   18
Blue Earth, Minnesota 56013    
                                 Consolidated Statements of Financial Condition...........   19
Mankato - Madison East         
Madison East Center              Consolidated Statements of Income........................   20
1400 Madison Avenue            
Mankato, Minnesota 56001         Consolidated Statements of Stockholders' Equity..........   21

North Mankato                    Consolidated Statements of Cash Flows....................22-24
1800 Commerce Drive            
North Mankato, Minnesota  56003  Notes to Consolidated Financial Statements...............25-47

Fairmont                         Office Location and Other Corporate Information..........   48
Five Lakes Centre              
300 South State Street
Fairmont, Minnesota  56031

Albert Lea
Skyline Mall
1710 West Main Street
Albert Lea, Minnesota  56007

St. Peter
523 South Third Street
St. Peter, Minnesota  56082

Owatonna
496 North Street
Owatonna, Minnesota  55060

</TABLE>

<PAGE>


Wells Financial Corp.

Profile

         Wells  Financial  Corp.  (the  "Company")  is a  Minnesota  corporation
organized in December  1994 at the  direction of the Board of Directors of Wells
Federal Bank, fsb (the "Bank") to acquire all of the capital stock that the Bank
issued upon its conversion  from mutual to stock form of ownership.  The Company
is a unitary  savings and loan  holding  company  which,  under  existing  laws,
generally is not restricted in the types of business  activities in which it may
engage  provided  that the Bank  retains a  specified  amount  of its  assets in
housing-related  investments.  At the present time, because the Company does not
conduct any active  business,  the Company does not intend to employ any persons
other than  officers of the Bank but utilizes the support staff of the Bank from
time to time.

         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. The Bank
was founded in 1934 and its 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. The Bank is a member of the
Federal  Home Loan  Bank  ("FHLB")  System.  The Bank is a  community  oriented,
full-service  retail savings  institution.  The Bank attracts  deposits from the
general public and uses such deposits primarily to invest in residential lending
on owner occupied properties,  home equity loans and other consumer loans. Other
lending activities  include  agricultural real estate,  agricultural  operating,
multi-family  residential  and commercial  real estate loans.  Cash in excess of
what is needed for lending operations is used to purchase investment  securities
and to  maintain  required  liquidity.  The Bank has two  subsidiaries,  Greater
Minnesota  Mortgage (GMM) and Wells Insurance Agency (WIA). GMM originates loans
through referrals from community  commercial banks and,  primarily,  sells these
loans to the secondary market.  WIA is a full service insurance agency the sells
property, casualty, life and health insurance products.

Stock Market Information

         Since its issuance on April 11, 1995,  the  Company's  common stock has
been traded on the Nasdaq National Market under the symbol "WEFC." The following
table  reflects  high and low bid  information  during the  periods  shown.  The
quotations reflect inter-dealer  prices,  without retail mark-up,  markdown,  or
commission, and may not represent actual transactions.

                                          HIGH         LOW
                                       -----------------------

January 1, 1997 - March 31, 1997         $16.00       $12.875
April 1, 1997 - June 30, 1997            $15.50       $14.00
July 1, 1997 - September 30, 1997        $17.00       $15.00
October 1, 1997 - December 31, 1997      $19.00       $16.50
January 1, 1998 - March 31, 1998         $19.75       $16.125
April 1, 1998 - June 30, 1998            $21.938      $19.25
July 1, 1998 - September 30, 1998        $21.50       $15.75
October 1, 1998 - December 31, 1998      $18.00       $15.25



         The number of  stockholders  of record of common stock as of the record
date of March 8, 1999, was  approximately  560. This does not reflect the number
of persons or  entities  who held stock in  nominee  or  "street"  name  through
various  brokerage  firms.  At February 15, 1999,  there were  1,652,160  shares
outstanding.
                                       1
<PAGE>


         The Company  declared  quarterly  cash  dividends of $0.12 per share on
January  21,  1998 and  $0.15 per share on April  15,  1998,  July 15,  1998 and
October 21, 1998.  The Company  declared  quarterly  cash dividends of $0.12 per
share on July 16, 1997 and October 15, 1997. No dividends  were declared  during
1995 or 1996.

         The Company's  ability to pay dividends to  stockholders  is subject to
the requirements of Minnesota law. No dividend may be paid by the Company unless
its board of directors determines that the Company will be able to pay its debts
in the ordinary  course of business after payment of the dividend.  In addition,
the Company's ability to pay dividends is dependent, in part, upon the dividends
it receives  from the Bank.  The Bank may not declare or pay a cash  dividend on
any of its stock if the effect thereof would cause the Bank's regulatory capital
to be  reduced  below  (1)  the  amount  required  for the  liquidation  account
established in connection with the Bank's  conversion from mutual to stock form,
or (2) the  regulatory  capital  requirements  imposed  by the  Office of Thrift
Supervision  ("OTS").  During 1998, the Bank paid $9.0 million in cash dividends
to the Company.






                                       2
<PAGE>





WELLS FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>

 Financial Condition
------------------------------------------------------------------------------------------------------------------------------------
 December 31,                                                1994             1995           1996            1997           1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>              <C>            <C>              <C>             <C>    
Total assets                                               $ 182,716        $ 195,158      $ 201,326      $ 201,436       $ 191,876
Loans held for sale                                              114            1,944          1,791          2,012           6,097
Loans receivable, net                                        165,185          169,760        178,447        182,724         154,305
Mortgage-backed securities available for sale                    961              867            428             86               -
Securities available for sale                                  5,951            6,753          7,100          2,640           2,968
Investment securities                                          5,991            4,199          2,049          3,198           5,539
Certificates of deposit                                          100              800            200          1,850             500
Cash and cash equivalents                                      1,480            8,192          8,301          5,971          19,446
Deposits                                                     146,412          146,686        145,010        145,378         158,441
Borrowed funds                                                23,650           18,000         26,500         24,500           5,000
Equity                                                        11,506           28,852         28,202         29,641          25,892

Summary of Operations
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                     1994             1995           1996            1997           1998
------------------------------------------------------------------------------------------------------------------------------------

Interest income                                            $  11,573        $  13,489      $  14,669      $  15,325       $  14,890
Interest expense                                               6,510            8,165          8,146          8,522           8,178
Net interest income                                            5,063            5,324          6,523          6,803           6,712
Provision for loan losses                                        113              166            180            180             120
Noninterest income                                               737              809          1,014          1,109           2,405
Noninterest expense (1)                                        3,574            3,855          5,245          3,987           4,769
Net income                                                     1,283            1,270          1,200          2,220           2,476

Other Selected Data
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                                     1994             1995           1996            1997           1998
------------------------------------------------------------------------------------------------------------------------------------

Return on average assets                                       0.74%            0.67%          0.61%          1.10%           1.26%
Return on average equity                                      11.66%            5.50%          4.24%          7.71%           8.85%
Average equity to average assets                               6.31%           12.11%         14.40%         14.24%          14.25%
Equity to assets                                               6.30%           14.78%         14.01%         14.71%          13.49%
Net interest rate spread (2)                                   2.80%            2.29%          2.72%          2.75%           2.81%
Nonperforming assets to  total loans (3)                       0.53%            0.17%          0.29%          0.26%           0.23%
Allowance for loan losses to total loans                       0.23%            0.30%          0.34%          0.41%           0.53%
Allowance for loan losses to nonperforming loans (3)          45.85%          171.24%        138.20%        172.62%         236.94%
Basic earnings per share (4)                                     N/A     $      0.50     $     0.61     $     1.18     $      1.42
Diluted earnings per share (4)                                   N/A     $      0.50     $     0.61     $     1.16     $      1.38
</TABLE>

------------------------------
(1)  For 1996, includes a special SAIF recapitalization assessment of $1,085.
(2)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(3)  Nonperforming loans are loans over 90 days past due.  Nonperforming  assets
     include nonperforming loans and foreclosed real estate.
(4)  Does not include  earnings  prior to April 11, 1995, the date of conversion
     to stock form.


                                       3
<PAGE>

[LOGO]   WELLS
         FINANCIAL   53 FIRST ST. S.W., P.O.BOX 310, WELLS, MN 56097-0310 
         CORP.                                                  507/553-3151


To Our Stockholders:

We are pleased to present our fourth annual stockholder's report that provides a
summary  of the  Company's  operations  for 1998.  I urge that you  review it in
detail.

Our net income of $2.5 million for the year was the highest in our  history.  As
the earnings  trend became  apparent  early in the year,  the Board of Directors
felt it was  appropriate  to increase  the cash  dividends  from $0.12 per share
declared  for the first  quarter  to $0.15 per  share  for the  following  three
quarters.

The Board also concluded  that  repurchasing  additional  shares of stock was an
appropriate method to enhance  stockholder  value.  Details of this activity are
also included in the report.

In the  letter to the  stockholders  included  with the 1997  report,  I touched
briefly on the formation of Greater  Minnesota  Mortgage,  Inc.  (GMM), a wholly
owned  subsidiary of Wells  Federal  Bank.  GMM completed its first full year of
operation.  The success in  originating  loans through  referrals from community
commercial  banks and the  resulting  profit  contribution  to the  Company  far
exceeded  our highest  expectations.  We continue  to expand  marketing  of this
service and explore areas of additional business  relationships that might be of
mutual benefit to the parties involved.

Your Board of Directors, the management team and the staff continue to strive to
provide better service to our customers and search for ways to enhance the value
of your investment in Wells Financial Corp.
Your continued confidence and support is greatly appreciated.


Best Regards,

/s/ Lawrence H. Kruse
--------------------------------------
Lawrence H. Kruse
President and Chief Executive Officer
Chairman of the Board



                                       4
<PAGE>





MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)

General

         The  Company's  business  activities  to date have been  limited to its
investment in and loan to the Bank and a loan made to the Bank's  Employee Stock
Ownership  Plan ("ESOP") to enable the ESOP to purchase  shares of the Company's
common stock and, to a lesser  degree,  investing in securities  and deposits in
other financial  institutions.  The Company's  investment  securities consist of
obligations  issued  by  agencies  of the U.S.  government.  As a result  of the
limited  operations of the Company,  this  discussion  primarily  relates to the
Bank.  The principal  business of the Bank consists of attracting  deposits from
the general public and using such deposits, together with borrowings,  primarily
to invest in  residential  lending on owner occupied  properties.  The Bank also
makes consumer  loans and  agricultural  related loans and purchases  investment
securities.  The Bank's  investment  securities  consist of U.S.  government and
agency  obligations,  mortgage-backed  securities,  equity  securities  and FHLB
stock.  The Bank's loans consist  primarily of loans secured by residential real
estate  located in its market area and, to a lesser  extent,  agricultural  real
estate loans, commercial real estate loans and consumer loans.

         The Bank's net  earnings  are  dependent  primarily on its net interest
income, which is the difference between interest income earned on its investment
and loan  portfolios  and interest  paid on  interest-bearing  liabilities.  Net
interest  income is determined by (i) the  difference  between  yields earned on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate  spread)  and (ii) the  relative  amounts  of  interest-earning  assets and
interest-bearing  liabilities.  The Bank's  interest  rate spread is affected by
regulatory,  economic,  and competitive  factors that influence  interest rates,
loan demand,  and deposit flows.  To a lesser  extent,  the level of noninterest
income, which primarily consists of service charges and other fees, also affects
the Bank's net  earnings.  In addition,  the level of  noninterest  (general and
administrative) expenses affects net earnings.

         The  operations  of  the  Bank  and  the  entire  thrift  industry  are
significantly affected by prevailing economic conditions,  competition,  and the
monetary  and  fiscal  policies  of  the  federal  government  and  governmental
agencies.  The demand for and supply of housing,  competition among lenders, the
level  of  interest  rates,  and the  availability  of funds  influence  lending
activities. Deposit flows and costs of funds are influenced by prevailing market
rates of interest,  primarily on competing investments,  account maturities, and
the levels of personal income and savings in the Bank's market area.

Asset/Liability Management

         Net interest income,  the primary component of the Bank's net earnings,
is derived from the difference or "spread" between the yield on interest-earning
assets  and the cost of  interest-bearing  liabilities.  The Bank has  sought to
reduce its  exposure to changes in interest  rates by matching  more closely the
effective maturities or repricing characteristics of its interest-earning assets
and  interest-bearing  liabilities.  The  matching  of  the  Bank's  assets  and
liabilities  may be  analyzed  by  examining  the extent to which its assets and
liabilities  are interest rate sensitive and by monitoring the expected  effects
of interest rate changes on its net portfolio value.


                                       5
<PAGE>



(Dollars in Thousands)

         An asset or liability is interest rate sensitive within a specific time
period if it will  mature or  reprice  within  that time  period.  If the Bank's
assets  mature  or  reprice  more  quickly  or  to a  greater  extent  than  its
liabilities,  the Bank's net portfolio  value and net interest income would tend
to increase  during periods of rising interest rates but decrease during periods
of falling interest rates. If the Bank's assets mature or reprice more slowly or
to a lesser extent than its liabilities,  the Bank's net portfolio value and net
interest  income would tend to decrease  during periods of rising interest rates
but increase  during periods of falling  interest  rates.  The Bank's policy has
been to mitigate  the  interest  rate risk  inherent in the  historical  savings
institution  business  of  originating  long-term  loans  funded  by  short-term
deposits by pursuing certain  strategies  designed to decrease the vulnerability
of its  earnings to material  and  prolonged  changes in interest  rates.  These
strategies  include  obtaining  longer term fixed rate  borrowings  at favorable
rates and,  due to the lower rates  currently  available,  the sale of all newly
originated fixed rate mortgage loans to the secondary market.

         The  Bank's  lending   strategy  is  focused  on  the   origination  of
traditional one to four-family mortgage loans primarily secured by single family
residences in the Bank's primary market area.  During recent  periods,  the Bank
has utilized  borrowings as a way of accommodating loan demand,  consistent with
its goal of maintaining  asset  quality.  The Bank also invests a portion of its
assets in consumer,  agricultural real estate and agricultural  operating loans,
commercial  business and commercial real estate loans and investment  securities
as a  method  of  reducing  interest  rate  risk.  These  loans  typically  have
adjustable  interest  rates and are for  shorter  terms than  residential  first
mortgage loans. The Bank's entire commercial business loan portfolio and most of
the  commercial  real estate  portfolio  are secured by equipment or real estate
used for farming.  These loans typically have higher interest rates than one- to
four-family  loans but have not historically  resulted in greater losses for the
Bank.  Historically,  the Bank  sells  higher  loan to value  ratio  fixed  rate
mortgage loans and mortgage  loans with original  maturities of fifteen years or
less into the secondary  market and retains  adjustable  rate mortgage loans and
lower loan to value ratios  fixed rate loans with  original  maturities  greater
than  fifteen  years.  Due to the lower than normal  interest  rate  environment
during  1998 the Bank  elected to sell the  majority  of the fixed rate loans it
originated during 1998, regardless of the loan to value ratio or the contractual
maturity.  In addition,  the Bank retains servicing on most of the loans that it
sells,  enabling it to generate additional income and maintain certain economies
of scale in loan processing.

         In order to improve the Bank's interest rate sensitivity, improve asset
quality,  and provide  diversification  in the asset mix,  the Bank  maintains a
percentage of its assets in investment  securities,  which generally have either
adjustable rates or shorter terms to maturity. The Bank's purchase of investment
securities is designed  primarily for safety of principal  and  secondarily  for
rate of return.

         On a  weekly  basis,  the  Bank  monitors  the  interest  rates  of its
competitors  and sets its  interest  rates such that its rates are  neither  the
highest  or lowest in its  market  area.  The Bank  intends  for its rates to be
competitive  and  perhaps  slightly  above the  average  rates being paid in its
market area. The Bank has sought to remain competitive in its market by offering
a variety of products. The Bank attempts to manage the interest rates it pays on
deposits while  maintaining a stable deposit base and providing quality services
to its customers.


                                       6
<PAGE>



(Dollars in Thousands)

Net Portfolio Value

         To encourage  associations  to reduce their interest rate risk, the OTS
adopted a rule  incorporating  an interest rate risk ("IRR")  component into the
risk-based capital rules. This rule in not yet in effect. The IRR component is a
dollar  amount  that will be  deducted  from total  capital  for the  purpose of
calculating an institution's  risk-based capital  requirement and is measured in
terms of the  sensitivity  of its net  portfolio  value  ("NPV")  to  changes in
interest rates. NPV is the difference  between incoming and outgoing  discounted
cash flows  from  assets,  liabilities,  and  off-balance  sheet  contracts.  An
institution's  IRR  is  measured  as the  change  to its  NPV as a  result  of a
hypothetical 200 basis point change in market interest rates. A resulting change
in the NPV ratio of more than 2% (200 bp) will require the institution to deduct
from its capital 50% of the amount of change in NPV. The rule  provides that the
OTS will calculate the IRR component quarterly for each institution. The OTS has
informed the Bank, based on asset size and risk-based capital, that it is exempt
from this rule.  Nevertheless,  the following  table  presents the Bank's NPV at
December 31, 1998, as calculated by the OTS,  based on  information  provided to
the OTS by the Bank.


                                          Percent of              Change in
  Change Interest   Estimated  Amount of  Estimated     NPV      NPV Ratio(4)
Rates (basis points)   NPV     Change(1)   NPV(2)     Ratio(3)  (basis points)
--------------------   ---     ---------   ------     --------  --------------
                                (Dollars in thousands)

          +400       $13,033    $(8,918)   (41)%         7.42%       -424 bp
          +300        15,801     (6,151)   (28)%         8.82%       -285 bp
          +200        18,309     (3,643)   (17)%        10.03%       -164 bp
          +100        20,408     (1,543)    (7)%        10.99%        -67 bp
            --        21,951                            11.67%
          -100        23,213       1,262      6%        12.19%         52 bp
          -200        24,609       2,657     12%        12.76%        109 bp
          -300        26,508       4,557     21%        13.53%        186 bp
          -400        28,306       6,354     29%        14.23%        256 bp


----------------------------
(1)  Represents  the excess  (deficiency)  of the  estimated  NPV  assuming  the
     indicated  change in interest  rates minus the  estimated  NPV  assuming no
     change in interest rates.
(2)  Calculated  as the  amount of change in the  estimated  NPV  divided by the
     estimated NPV assuming no change in interest rates.
(3)  Calculated as the estimated NPV divided by average total assets.
(4)  Calculated  as the  excess  (deficiency)  of the  NPV  ratio  assuming  the
     indicated change in interest rates over the estimated NPV ratio assuming no
     change in interest rates.


                                       7

<PAGE>



(Dollars in Thousands)

                                                                   At
                                                              December 31,
                                                                  1998
                                                        ------------------------

*** Risk Measures: 200 bp rate shock ***

Pre-Shock NPV Ratio: NPV as % of PV of                          11.67%
Assets

Exposure Measure: Post-Shock NPV Ratio                          10.03%

Sensitivity Measure: Change in NPV Ratio                        164 bp


         Although  the OTS has  informed  the Bank that it is not subject to the
IRR component  discussed  above, the Bank is still subject to interest rate risk
and, as can be seen above,  rising interest rates will reduce the Bank's NPV. If
the Bank were subject to the IRR  component  at December 31, 1998,  no deduction
from capital would have been required.

         Also, during periods of increasing  interest rates, the Bank's interest
rate sensitive liabilities would reprice faster than its interest rate sensitive
assets  (repricing  periods on  adjustable-rate  loans  affect the  repricing of
interest rate  sensitive  assets,  with longer  repricing  periods  delaying the
repricing of such assets more than  shorter  repricing  periods  would delay the
repricing of such assets),  causing a decline in the Bank's interest rate spread
and  margin.  In times of  decreasing  interest  rates,  the value of fixed rate
assets  could  increase  in value  and the lag in  repricing  of  interest  rate
sensitive assets could be expected to have a positive effect on the Bank.




                                       8
<PAGE>

Average Balance Sheet (Dollars in Thousands)

         The  following  table sets forth  certain  information  relating to the
Bank's  average  balance  sheet and  reflects  the  average  yield on assets and
average cost of  liabilities  for the periods  indicated and the average  yields
earned and rates paid.  Such yields and costs are derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods presented. The yields for the periods presented include loan origination
fees that are considered adjustments to yield. Average balances are derived from
month-end  balances.  Management  does not  believe  that  the use of  month-end
balances instead of daily average balances has caused any material difference in
the information presented.
<TABLE>
<CAPTION>

                                                                          Years Ended December 31,
                                           -----------------------------------------------------------------------------------------
                                                        1996                          1997                         1998
                                           -----------------------------------------------------------------------------------------
                                           Average             Average     Average           Average     Average          Average
                                           Balance   Interest  Yield/Cost  Balance  Interest Yield/Cost  Balance Interest Yield/Cost
                                           -----------------------------------------------------------------------------------------
<S>                                         <C>       <C>        <C>        <C>      <C>         <C>       <C>      <C>     <C>  
Interest-earning assets:                                                              
   Loans receivable (1)                      173,383   13,617     7.85%      183,591  14,570      7.94%     172,219  13,888  8.06%
   Mortgage-backed securities                    661       45     6.81%          250      18      7.20%          12       1  8.33%
   Investments (2)                            18,281    1,007     5.51%       14,426     737      5.11%      20,167   1,001  4.96%
                                           ---------   ------              ---------  ------              ---------  ------
      Total interest-earning assets          192,325   14,669     7.63%      198,267  15,325      7.73%     192,398  14,890  7.74%
                                                       ------                         ------                         ------
                                                                                      
Noninterest earning assets                     4,163                           3,979                          4,049
                                           ---------                       ---------                      ---------
      Total assets                         $ 196,488                       $ 202,246                      $ 196,447
                                           =========                       =========                      =========
Interest bearing liabilities:                                                         
   Savings, NOW and money                                                             
      market accounts                         36,578      949     2.59%       37,010     966      2.61%      40,300   1,046  2.60%
   Certificates of deposit                   110,139    6,111     5.55%      107,394   6,014      5.60%     110,836   6,293  5.68%
   Borrowed funds                             19,269    1,086     5.64%       26,808   1,542      5.75%      14,615     839  5.74%
                                           ---------   ------              ---------  ------              ---------  ------
      Total interest bearing liabilities     165,986    8,146     4.91%      171,212   8,522      4.98%     165,751   8,178  4.93%
                                                       ------                         ------                         ------
                                                                                      
Noninterest bearing liabilities                2,199                           2,232                          2,706
                                           ---------                       ---------                      ---------
      Total liabilities                      168,185                         173,444                        168,457
Equity                                        28,303                          28,802                         27,990
                                           ---------                       ---------                      ---------           
      Total liabilities and equity         $ 196,488                       $ 202,246                      $ 196,447
                                           =========                       =========                      =========
Net interest income                                     6,523                          6,803                          6,712
                                                       ======                         ======                         ======
Interest rate spread (3)                                          2.72%                           2.75%                      2.81%
Net yield on interest earning assets (4)                          3.39%                           3.43%                      3.49%
Ratio of average interest earning assets                                              
   to average interest bearing liabilities     1.16X                           1.16X                                  1.16X
                                           =========                       =========                                 ======
                                                                   
</TABLE>
                                             
------------------------------  
(1)  Average balances include non-accrual loans and loans held for sale.
(2)  Includes interest-bearing deposits in other financial institutions.
(3)  Interest-rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(4)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.



                                       9
<PAGE>





Rate/Volume Analysis  (Dollars in Thousands)

         The table below sets forth  certain  information  regarding  changes in
interest income and interest  expense of the Bank for the years  indicated.  For
each  category  of  interest-earning  assets and  interest-bearing  liabilities,
information  is  provided  on  changes  attributable  to (i)  changes  in volume
(changes  in  average  volume  multiplied  by old rate);  (ii)  changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>


                                                                  Years Ended December 31,
                                   -------------------------------------------------------------------------------
                                                 1997 vs. 1996                              1998 vs. 1997
                                   ----------------------------------------    --------------------------------------
                                          Increase (Decrease) Due to                 Increase (Decrease) Due to
                                   ----------------------------------------    --------------------------------------
                                                            Rate/                                   Rate/   
                                       Volume     Rate      Volume     Net         Volume    Rate   Volume      Net
                                   ----------------------------------------    --------------------------------------
Interest Income:                                                                                            
<S>                                  <C>        <C>       <C>      <C>        <C>        <C>      <C>       <C>     
  Loans receivable                     $   801    $   156 $    (4)  $   953    $   (903)  $   220  $    1    $  (682)
  Mortgage-backed securities               (28)         3      (2)      (27)        (17)        3      (3)       (17)
   Investments                            (212)       (73)     15      (270)        293       (22)     (7)       264
                                   ----------------------------------------    --------------------------------------
    Total interest-earning assets          561         86       9       656        (627)      201      (9)      (435)
                                   ----------------------------------------    --------------------------------------
                                                                              
Interest expense:                                                             
  Deposit accounts                        (141)        62      (1)      (80)        279        82      (2)       359
  Borrowed funds                           425         21      10       456        (701)       (3)      1       (703)
                                   ----------------------------------------    --------------------------------------
    Total interest-bearing liabilities     284         83       9       376        (422)       79      (1)      (344)
                                   ----------------------------------------    --------------------------------------
                                                                              
Net change in interest income         $    277 $        3 $     -   $   280    $   (205)  $   122  $   (8)  $    (91)
                                   ========================================    ======================================
</TABLE>
                                       10
<PAGE>



(Dollars in Thousands)

Financial Condition

         Total assets  decreased by $9,560 from $201,436 at December 31, 1997 to
$191,876 at December 31, 1998 primarily due to a $24,334 decrease in loans, from
$184,736 at December  31, 1997 to  $160,402  at December  31,  1998.  Due to low
interest rates on residential  mortgage loans during 1998, many of the Company's
customers  refinanced  their  existing  loans.  Management  elected  to sell the
majority  of the  residential  loans  originated  during  1998 to the  secondary
market. This is the primary reason for the decrease in loans.

         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. As of December 31, 1997
and  December  31,  1998 the  balance in the  allowance  for loan losses and the
allowance  for loan losses as a percentage  of total loans was $763 and $853 and
0.41% and 0.53%, respectively.

         Loans on which the accrual of interest has been  discontinued  amounted
to $237 and $260 at  December  31,  1997 and 1998,  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 December 31,
1997 and 1998.

         Deposits  increased  by $13,063  from  $145,378 at December 31, 1997 to
$158,441 at December 31, 1998.  Borrowed funds  decreased by $19,500 at year end
1998 when  compared to year end 1997 through the use of cash  received  from the
increase in deposits and from the sale into the  secondary  market of refinanced
loans from the Company's loan portfolio.

         Equity decreased by $3,749 from $29,641 at December 31, 1997 to $25,892
at December 31, 1998.  The  decrease in equity was  primarily  the result of net
income  for 1998 of  $2,476  being  offset  by the  payment  of  $1,001  in cash
dividends and by the repurchase of 307,200 shares of treasury stock at a cost of
$5,937.  Also  affecting  equity was the  allocation  of $312 of employee  stock
ownership plan shares,  the  amortization of $84 of unearned  compensation and a
$317 increase in accumulated other comprehensive income.

Comparison of Operating Results for the Years Ended December 31, 1998 and 1997

         General. Net income for the year ended December 31, 1998 was $2,476; an
increase  of $256 when  compared to net income for the year ended  December  31,
1997.  The increase in net income for 1998 when  compared to 1997 was  primarily
the result of a $1,296 increase in noninterest  income being partially offset by
a $91  decrease  in  net  interest  income  and a  $782  and  $227  increase  in
noninterest expense and income tax expense, respectively.

                                       11

<PAGE>


(Dollars in Thousands)

         Interest  Income.  Interest income decreased by $435 for the year ended
December  31, 1998 when  compared to the year ended  December  31,  1997. A $682
decrease  in  interest  on loans  was  partially  offset by a $247  increase  in
interest income from investments. The decrease in interest income from loans was
the result of a decrease in the average amount of the loan portfolio during 1998
when compared to 1997. Due to lower  interest  rates on  residential  mortgages,
management  elected to sell the  majority of the  residential  loans  originated
during 1998 to the secondary  market.  Included in the loans originated and sold
during 1998 were loans from the  Company's  mortgage  loan  portfolio  that were
refinanced. This is the primary reason for the decrease in the average amount of
the loan  portfolio.  The increase in interest  income from  investments was the
result of an  increase  in the average  amount of  investments  during 1998 when
compared to 1997.

         Interest  Expense.  During 1998,  average  borrowed funds  decreased by
$12,193 when compared to average borrowed funds during 1997 and average deposits
increased by $3,290 during 1998 when compared to average  deposits  during 1997.
The decrease in the average  amount of borrowed  funds during 1998 when compared
to average  borrowed funds during 1997 is the primary reason for the decrease in
interest  expense for the year ended December 31, 1998 when compared to the year
ended December 31, 1997.

         Net Interest Income.  Net interest income decreased by $91 for the year
ended December 31, 1998 when compared to the year ended December 31, 1997 due to
the changes in interest income and interest expense described above.

         Provision for Loan Losses. The provision for loan loss decreased by $60
for the year ended  December 31, 1998 when  compared to the year ended  December
31, 1997.  Management  monitors the  allowance  for loan loss in relation to the
size and quality of the loan portfolio and adjusts the provision for loan losses
to adequately provide for loan losses. Based on the decrease in size of the loan
portfolio during 1998 when compared to 1997 and  management's  evaluation of the
quality of the loan portfolio, management felt that a reduction in the provision
for loan losses was  warranted.  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 $1,296 for 1998
when compared to 1997. The increase in  noninterest  income was primarily due to
increases in loan  origination  and commitment fees of $791 and the gain on sale
of loans of $353 for the year ended  December 31, 1998 when compared to the year
ended December 31, 1997. These increases resulted from a greater amount of loans
originated  and sold to the secondary  market during 1998 when compared to 1997.
Also affecting noninterest income were increases in fees and service charges and
loan servicing fees of $85 and $69, respectively.


                                       12
<PAGE>



(Dollars in Thousands)

         Noninterest Expense. Noninterest expense increased by $782 for the year
ended  December  31,  1998 when  compared  to the year ended  December  31, 1997
primarily due to increases in compensation and benefits, occupancy and equipment
and other noninterest  expense.  Late in the second quarter of 1997, the Company
converted its loan origination  office in Owatonna,  Minnesota to a full service
banking facility by employing  additional staff and moving to a larger facility.
The lease on the branch office at Riverfront Drive in Mankato expired during the
fourth  quarter of 1998.  The Company  relocated  this branch office to a larger
office with full drive-up facilities on Commerce Drive in North Mankato, an area
that  management  feels will provide  greater growth  potential for the Company.
These changes in facilities resulted in increased  compensation and benefits and
occupancy and equipment.  Also affecting  compensation  and benefits were annual
compensation  increases.  Other  noninterest  expense increased by $196 for 1998
when  compared to 1997,  primarily  due to an increase  in the  amortization  of
mortgage  servicing  rights of $95 for the year  ended  December  31,  1998 when
compared to the year ended December 31, 1997.

         Income Tax Expense.  Income tax expense  increased by $227 for the year
ended December 31, 1998 when compared to the year ended December 31, 1997.  This
increase  was the result of an increase in income  before  income taxes for 1998
when compared to 1997.

Comparison of Operating Results for the Years Ended December 31, 1997 and 1996

         General. Net income for the year ended December 31, 1997 was $2,220; an
increase of $1,020 when  compared to net income for the year ended  December 31,
1996.  The increase in net income for 1997 when  compared to 1996 was  primarily
the result of  legislation  that was passed on September 30, 1996 which required
savings institutions insured by the Savings Association Insurance Fund (SAIF) to
pay a one time special  assessment  on September  30, 1996 to  recapitalize  the
SAIF. The Bank's  assessment  amounted to $1,085,  $640 net of tax affects.  Net
interest income and noninterest income increased by $280 and $95,  respectively,
for 1997  when  compared  to 1996.  Noninterest  expense  decreased  by  $1,258,
primarily due to the legislation  mentioned above, and income taxes increased by
$624 for 1997 when compared to 1996.

         Interest  Income.  Interest income increased by $656 for the year ended
December  31,  1997 when  compared to the year ended  December  31,  1996.  This
increase is primarily  the result of an increase in the average size of the loan
portfolio during 1997 when compared to 1996 and also, to a lesser extent, due to
an increase in interest rates on the loan portfolio.

         Interest  Expense.  During 1997,  average  borrowed funds  increased by
$7,539 when compared to average  borrowed funds during 1996 and average deposits
decreased by $2,313 during 1997 when compared to average  deposits  during 1996.
The  increase in average  borrowed  funds  during 1997 when  compared to average
borrowed  funds  during  1996 is the  primary  reason for the $376  increase  in
interest  expense for the year ended December 31, 1997 when compared to the year
ended December 31, 1996. To a lesser  extent,  an increase in the interest rates
paid on deposits and borrowings  also increased  interest  expense for 1997 when
compared to 1996.

         Net Interest Income. Net interest income increased by $280 for the year
ended  December  31, 1997 when  compared to the year ended  December  31,  1996.
Again,  this change is the result of the changes in interest income and interest
expense that are discussed above.


                                       13
<PAGE>

(Dollars in Thousands)


         Provision  for Loan  Losses.  The  provision  for loan losses  remained
constant for 1997 when compared to 1996.  Management  monitors the allowance for
loan loss in relation to the size and quality of the loan  portfolio and adjusts
the provision for loan losses to adequately  provide for loan losses.  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 estimate amounts.

         Noninterest Income. Noninterest income increased by $95 from $1,014 for
the year ended December 31, 1996 to $1,109 for the year ended December 31, 1997.
This increase is primarily due to an increase in loan origination and commitment
fees and an increase in fees and service charges.

         Noninterest  Expense.  Noninterest  expense  decreased  by $1,258  from
$5,245  for the year  ended  December  31,  1996 to  $3,987  for the year  ended
December 31, 1997. As described  above, the legislation that was signed into law
on September 30, 1996  resulted in a one time special  assessment to the Bank of
$1,085.  This  assessment is the primary  reason for the  increased  noninterest
expense during 1996 when compared to 1997. As a result of his  legislation,  the
Bank's annual SAIF  assessment  was reduced from  twenty-three  basis points per
dollar of deposits to  approximately  six basis  points per dollar of  deposits.
Data processing  expense decreased by $114 from $359 for the year ended December
31, 1996 to $245 for the year ended  December 31, 1997. As part of  management's
commitment to provide  competitive  products and excellent service to the Bank's
customers,  the Bank converted to a new data  processing  software system during
the second  quarter of 1996. The software  conversion  during 1996 resulted in a
non-recurring expense of approximately $132 that was recorded during 1996.

         Income Tax Expense.  Income tax expense increased by $613 from $912 for
the year ended December 31, 1996 to $1,525 for the year ended December 31, 1997.
This increase  resulted  from the $1,633  increase in income before income taxes
for the year ended  December 31, 1997 when  compared to the year ended  December
31,  1996.  Income tax expense as a  percentage  of income  before taxes for the
years ended December 31, 1997 and 1996 was 40.72% and 43.18%.

Liquidity and Capital Resources

The Bank is required under applicable federal  regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S.  Government,  federal
agency and other investments  having  maturities of five years or less.  Current
OTS regulations require that a savings association maintain liquid assets of not
less than 5% of its average daily balance of net  withdrawable  deposit accounts
and borrowings  payable in one year or less, of which  short-term  liquid assets
must consist of not less than 1%. At December 31, 1998, the Bank's liquidity, as
measured for  regulatory  purposes,  was 10.3%.  The Bank  adjusts  liquidity as
appropriate to meet its asset/liability objectives.

The Bank's primary sources of funds are deposits, 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
primary 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 as income until funds are needed to meet required loan funding.


                                       14
<PAGE>

(Dollars in Thousands)

         The Bank's most liquid asset is cash including  investments in interest
bearing accounts at the FHLB of Des Moines that have no withdrawal restrictions.
The levels of these assets are dependent on the Bank's operating,  financing and
investing  activities  during any given period. At December 31, 1998, the Bank's
cash totaled  $14,560.  This compares to the Bank's cash at December 31, 1997 of
$5,902.

         Also  available  to  the  Bank  to  meet  liquidity   requirements  are
borrowings  from the Federal Home Loan Bank. At December 31, 1998,  the Bank had
$5,000 in outstanding advances from the FHLB of Des Moines, which have been used
to fund loan  originations.  At December 31,  1998,  the Bank had the ability to
borrow approximately 16.5 times its then outstanding advances.

         In 1996 and 1998, the Company approved stock buy back programs in which
up to 535,340  shares of the common stock of the Company could be acquired.  The
Company bought 307,200 shares of its common stock during 1998,  which  completed
these  approved buy back programs.  During January 1999, the Company  approved a
stock buy back program in which up to 129,660  shares of the common stock of the
Company can be acquired.

         The Bank is  required  to maintain  specified  amounts of capital.  The
capital  standards  generally  require the  maintenance  of  regulatory  capital
sufficient to meet a tangible capital  requirement,  a core capital  requirement
and a risk-based capital requirement.  At December 31, 1998, the Bank's tangible
capital  totaled $15.9  million,  or 8.70% of adjusted  total  assets,  and core
capital  totaled  $15.9  million,  or  8.70% of  adjusted  total  assets,  which
substantially  exceeded  the  respective  1.5%  tangible  capital  and 3.0% core
capital   requirements  at  that  date  by  $13.2  million  and  $10.4  million,
respectively,  or 7.20% and 5.70% of adjusted  total assets,  respectively.  The
Bank's  risk-based  capital totaled $16.7 million at December 31, 1998 or 14.78%
of  risk-weighted  assets,  which exceeded the current  requirements  of 8.0% of
risk-weighted assets by $7.7 million or 6.78% of risk-weighted assets.

Impact of Inflation and Changing Prices

         The  consolidated  financial  statements  and notes  thereto  presented
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles,  which require the  measurement of financial  position and operating
results in terms of historical  dollars  without  considering  the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased  cost of the Bank's  operations.  Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature.  As a result,  interest  rates have a greater  impact on the
Bank's performance than do the effects of general levels of inflation.  Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.

Impact of New Accounting Standards

         Effective  January 1, 1997, the Company adopted FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial  Assets and  Extinguishments
of Liabilities.  This Statement  establishes the basic principles that an entity
should recognize only assets it controls and liabilities it has incurred. Assets
should be "derecognized" only when they have been extinguished,  and recognition
of financial  assets and  liabilities  should not be affected by the sequence of
transactions  unless the effect of the  transactions  is to  maintain  effective
control over a transferred financial asset. Statement No. 125 also continues the
recognition of mortgage servicing rights on loans sold and supersedes  Statement
No. 122 for transactions after January 1, 1997.



                                       15
<PAGE>


(Dollars in Thousands)

         In  accordance  with the  provisions  of  Statements  No.  122 and 125,
mortgage servicing rights in the amounts of $662, $107 and $105 were capitalized
during the years ended  December  31,  1998,  1997 and 1996,  respectively.  The
Company recognized  amortization of the cost of mortgage servicing rights in the
amounts of $125,  $30 and $17 for the years ended  December 31,  1998,  1997 and
1996,  respectively.  The effect of adopting  Statements  No. 122 and 125 was to
increase  net income by $77 and $88 for the years  ended  December  31, 1997 and
1996, respectively.

         Effective  January 1, 1998, the Company  adopted  Financial  Accounting
Standards Board's Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive  Income  (Statement  No.  130),  which was  issued  in June  1997.
Statement  No.  130  establishes  new rules for the  reporting  and  display  of
comprehensive income and its components,  but has no effect on the Company's net
income or total  stockholder's  equity.  Statement  No. 130 requires  unrealized
gains and losses on the Company's available for sale securities,  which prior to
adoption were reported  separately in  stockholders'  equity,  to be included in
comprehensive  income. Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130.

         Effective  January 1, 1998, the Company  adopted  Financial  Accounting
Standards  Board's  Statement  of  Financial   Accounting   Standards  No.  131,
Disclosures about Segments of an Enterprise and Related  information  (Statement
No.  131).  Statement  No. 131  supersedes  FASB  Statement  No.  14,  Financial
Reporting for Segments of a Business  Enterprise.  Statement No. 131 establishes
standards for how public business enterprises report information about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports.  Statement No. 131 also establishes  standards for related  disclosures
about products and services,  geographic areas, and major customers. The Company
has  determined  that,  for  purposes  of  Statement  No.  131,  it has only one
operating  segment and no  additional  disclosure  is required.  The adoption of
Statement No. 131 did not affect results of operations or financial position.

         In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement
No. 133) which is required to be adopted in years beginning after June 15, 1999.
The  Statement  will require the Company to  recognize  all  derivatives  on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge,  changes in the fair value of  derivatives  will  either be offset
against  the  change in fair value of the hedged  assets,  liabilities,  or firm
commitments through earnings or recognized in other  comprehensive  income until
the  hedged  item is  recognized  in  earnings.  The  ineffective  portion  of a
derivative's  change in fair value will be  immediately  recognized in earnings.
Because the Company does not use  derivatives,  management  does not  anticipate
that the adoption of the new  Statement  will have a  significant  effect on the
Company's earnings or financial position.

Year 2000 Evaluation

         Rapid and  accurate  data  processing  is  essential  to the  Company's
operations.  Many  computer  programs  that can only  distinguish  the final two
digits of the year entered are expected to read entries for the year 2000 as the
year 1900 or as zero and  incorrectly  attempt  to  compute  payment,  interest,
delinquency and other data. We have been evaluating both information  technology
(our computer systems) and  non-information  technology systems (e.g.,  heating,
cooling and ventilation  controls).  We have contacted the third party suppliers
of non-information technology systems (utility companies, etc.) and examined all
of our non-  information  technology  systems.  The  third  party  suppliers  of
non-information technology systems have


                                       16
<PAGE>


(Dollars in Thousands)

assured us they are aware of the  possible  year 2000  issue and are  working to
become  year 2000  compliant  before  December  31,  1999.  We do not expect any
material costs to address our  non-information  technology  systems and have not
had any  material  costs  to  date.  We have  determined  that  the  information
technology  systems  we use have  substantially  more  year  2000  risk than the
non-information  technology  systems we use. We have  evaluated our  information
technology systems risk in three areas: (1) our own computers,  (2) computers of
others used by our  borrowers,  and (3)  computers of others who provide us with
data processing.

         Our own  computers.  Our  strategy  to  address  the year 2000 issue in
regards to the computers  that we own is to replace all  computers  that are not
year 2000  compliant.  At December 31, 1998,  the majority of our  computers had
been replaced.  We expect to spend  approximately  $14 between December 31, 1998
and September 30, 1999 to replace the remaining computers that are not year 2000
compliant.

         Computers of others used by our  borrowers.  We have  evaluated most of
our  borrowers  and do not  believe  that the year 2000  problem  should,  on an
aggregate basis,  impact the borrowers' ability to make payments to the Company.
We believe that most of the Company's residential and consumer borrowers are not
dependent on their home computers for income. As a result, we have not contacted
residential or consumer borrowers concerning this issue and do not consider this
issue in our residential and consumer loan underwriting process. The majority of
the Company's  commercial real estate loans are  collateralized  by agricultural
real estate and the majority of the Company's commercial operating loans are for
farm  machinery  and farm  inputs.  We feel that the year 2000 issue  should not
significantly  impact  the  Company's  commercial  borrowers'  ability  to  make
payments to the Company.

         Computers of others who provide us with data  processing.  This risk is
primarily focused on one third party service bureau that provides  virtually all
of the  Company's  data  processing.  The software  that is used by this service
bureau was designed to be year 2000  compliant.  We are  monitoring the progress
this service  bureau is making in regards to testing their software and hardware
to be year  2000  compliant.  Testing  of this  risk  that  has  been  completed
includes:  testing  of the  software  by the  software  vendor,  testing  of the
software and hardware by the service  bureau,  proxy testing of the software and
hardware by us and other banks using the service  bureau's system and testing by
us of the  communication  links between the Company and the service  bureau.  We
have completed our testing of the software, hardware and communication links and
are  currently   evaluating  the  results.   We  estimate  that  we  will  spend
approximately  $70 from  December 31, 1998 to September 30, 1999 to complete the
testing and upgrading of our data processing and communication systems.

         Contingency  plan. Should this data processing system fail, the Company
has developed a contingency  plan. The contingency plan provides for the service
bureau to furnish  to the  Company a complete  database  tape of our  customers'
accounts,   complete  with  account  history  as  of  December  28,  1999.  This
information will also be supplied in printed form. Each of the Company's offices
will be supplied with a computer  workstation  loaded with a database  front-end
entry screen program for recording transactions on their customers' accounts. If
this labor-intensive  approach is necessary, the Company's employees will become
much less efficient.  However, we believe the Company will be able to operate in
this manner until the existing service bureau,  or its  replacement,  is able to
again provide data processing services.

         Despite  our best  efforts to  address  the year 2000  issue,  the vast
number of external entities that have direct and indirect  relationships with us
makes it  impossible  to assure that a failure to achieve  compliance  by one or
more  of  these  entities  would  not  have a  material  adverse  impact  on the
operations of the Company.


                                       17

<PAGE>


                                     [LOGO]

                            MCGLADREY & PULLEN, LLP
                  --------------------------------------------
                  Certified Public Accountants and Consultants


                          Independent Auditor's Report



To the Board of Directors and Stockholders
Wells Financial Corp. and Subsidiary
Wells, Minnesota

We have audited the accompanying  consolidated statements of financial condition
of Wells  Financial  Corp.  and Subsidiary as of December 31, 1998 and 1997, and
the related  consolidated  statements of income,  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Wells  Financial
Corp.  and Subsidiary as of December 31, 1998 and 1997, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.






                                             /s/ McGladrey & Pullen, LLP
                                             ----------------------------------

Rochester, Minnesota
February 8, 1999


                                       18
<PAGE>


Wells Financial Corp. and Subsidiary

Consolidated Statements of Financial Condition
December 31, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>

ASSETS                                                               1998        1997
--------------------------------------------------------------------------------------
<S>                                                          <C>         <C>        
Cash, including interest-bearing accounts
   1998 $18,523; 1997 $4,838                                 $    19,446 $     5,971
Certificates of deposit (Note 2)                                     500       1,850
Securities available for sale (Notes 3 and 10)                     2,968       2,640
Securities held to maturity (Note 4)                               5,539       3,198
Mortgage-backed securities available for sale (Note 3)                --          86
Loans held for sale (Note 5)                                       6,097       2,012
Loans receivable, net (Notes 5, 10, 16 and 17)                   154,305     182,724
Accrued interest receivable                                          843       1,106
Premises and equipment (Note 8)                                    1,249       1,425
Foreclosed real estate (Note 7)                                       --          35
Other assets (Note 6)                                                929         389
                                                              -----------------------
              Total assets                                   $   191,876 $   201,436
                                                              =======================

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------
Liabilities
   Deposits (Note 9)                                         $   158,441 $   145,378
   Borrowed funds (Note 10)                                        5,000      24,500
   Advances from borrowers for taxes and insurance                 1,220       1,080
   Income taxes (Note 11):
      Current                                                        128         111
      Deferred                                                       885         474
   Accrued interest payable                                          100         139
   Accrued expenses and other liabilities                            210         113
                                                              -----------------------
              Total liabilities                                  165,984     171,795
                                                              -----------------------

Commitments, contingencies and credit risk 
(Notes 15, 16, and 17)

Stockholders' Equity (Notes 12 and 14)
   Preferred stock, no par value; 500,000 shares authorized;  
      none outstanding                                                --          --
   Common stock, $.10 par value; 7,000,000 shares
      authorized; 2,187,500 shares issued                            219         219
   Additional paid-in capital                                     16,840      16,694
   Retained earnings, substantially restricted                    17,211      15,736
   Accumulated other comprehensive income                            901         584
   Unearned Employee Stock Ownership Plan shares                    (591)       (757)
   Unearned compensation-restricted stock awards                     (67)       (151)
   Less cost of treasury stock, 1998 535,340 shares;
      1997 228,140 shares                                         (8,621)     (2,684)
                                                              -----------------------
              Total stockholders' equity                           25,892      29,641
                                                              -----------------------
              Total liabilities and stockholders' equity      $   191,876 $   201,436
                                                              =======================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       19
<PAGE>


Wells Financial Corp. and Subsidiary

Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
(dollars in thousands, except per share data)

                                                  1998      1997       1996
-----------------------------------------------------------------------------
Interest and Dividend Income
   Loans receivable                          
      First mortgage loans                   $   11,257 $  12,112 $   11,558
      Consumer and other loans                    2,631     2,458      2,059
   Investment securities and other interest- 
      bearing deposits                            1,002       755      1,052
                                             --------------------------------
              Total interest income              14,890    15,325     14,669
                                             --------------------------------
Interest Expense
   Deposits                                       7,339     6,980      7,060
   Borrowed funds                                   839     1,542      1,086
                                             --------------------------------
              Total interest expense              8,178     8,522      8,146
                                             --------------------------------
              Net interest income                 6,712     6,803      6,523
Provision for loan losses (Note 5)                  120       180        180
                                             --------------------------------
              Net interest income after
                provision for loan losses         6,592     6,623      6,343
                                             --------------------------------
Noninterest Income
   Gain on sale of loans                            434        81        102
   Loan origination and commitment fees             965       174         81
   Loan servicing fees                              267       198        202
   Insurance commissions                            334       313        318
   Fees and service charges                         381       296        246
   Other                                             24        47         65
                                             --------------------------------
              Total noninterest income            2,405     1,109      1,014
                                             --------------------------------
Noninterest Expenses
   Compensation and benefits (Note 14)            2,521     2,037      1,911
   Occupancy and equipment (Note 15)                735       681        644
   Federal insurance premiums and
      assessment (Note 9)                            91        94      1,406

   Data processing                                  281       245        359
   Advertising                                      190       175        150
   Other                                            951       755        775
                                             --------------------------------
              Total noninterest expenses          4,769     3,987      5,245
                                             --------------------------------
              Income before income taxes          4,228     3,745      2,112
Income tax expense (Note 11)                      1,752     1,525        912
                                             --------------------------------
              Net income                     $    2,476 $   2,220 $    1,200
                                             ================================

Earnings per share (Note 13):
   Basic                                     $     1.42 $    1.18 $     0.61
                                             ================================
   Diluted                                   $     1.38 $    1.16 $     0.61
                                             ================================

See Notes to Consolidated Financial Statements.

                                       20
<PAGE>
Wells Financial Corp. and
Subsidiary
Consolidated Statements of
STOCKHOLDERS' Equity
Years Ended December 31,
1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                                  Unearned
                                                                                  Employee   Unearned
                                                                    Accumulated    Stock   Compensation-
                                                 Additional            Other     Ownership  Restricted             Total
                           Comprehensive Common   Paid-In  Retained Comprehensive   Plan       Stock   Treasury Stockholders'
                              Income     Stock    Capital  Earnings    Income      Shares     Awards   StStock     Equity
-----------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                                     <C>         <C>         <C>       <C>        
Balances, December 31, 1995             $    219 $  16,537 $  12,786 $    318  $   (1,008) $            $         $   28,852
   Comprehensive Income:
      Net income            $     1,200                        1,200                                                   1,200
      Other comprehensive
        income, net of tax:
        Unrealized gains on
        securities, net of
        related taxes                30                                    30                                             30
                           -------------
      Comprehensive income  $     1,230
                           =============
   Treasury stock
   purchases,
      163,640 shares
      (Notes 12 and 14)                                                                                   (1,763)     (1,763)
   Purchase of common stock
      for restricted stock
      awards (Note 14)                                                                            (539)                 (539)
   Amortization of
   unearned
      compensation                                                                                 259                   259
   Allocated ESOP shares                                51                            112                                163
                                       --------------------------------------------------------------------------------------
Balances, December 31, 1996                  219    16,588    13,986      348        (896)        (280)   (1,763)     28,202
   Comprehensive Income:
   Net income               $     2,220                        2,220                                                   2,220
      Other comprehensive
        income, net of tax:
        Unrealized gains on
        securities, net of
        related taxes               236                                   236                                            236
                           -------------
      Comprehensive income  $     2,456
                           =============
   Treasury stock
   purchases,
      64,500 shares (Note                                                                                  (921)        (921)
      12)
   Cash dividends declared
      ($.24 per share)                                          (470)                                                   (470)
   Amortization of
   unearned
      compensation                                                                                 129                   129
   Allocated ESOP shares                               106                            139                                245
                                       --------------------------------------------------------------------------------------
Balances, December 31, 1997                  219    16,694    15,736      584        (757)        (151)   (2,684)     29,641
   Comprehensive Income:
   Net income              $      2,476                        2,476                                                   2,476
      Other comprehensive
        income, net of tax:
        Unrealized gains on
        securities, net of
        related taxes               317                                   317                                            317
                           -------------
      Comprehensive income $      2,793
                           =============
   Treasury stock
   purchases,
      307,200 shares (Note                                                                                (5,937)     (5,937)
      12)
   Cash dividends declared
      ($.57 per share)                                        (1,001)                                                 (1,001)
   Amortization of
   unearned
      compensation                                                                                  84                    84
   Allocated ESOP shares                               146                            166                                312
                                       --------------------------------------------------------------------------------------
Balances, December 31, 1998            $     219$   16,840$   17,211$     901  $     (591) $       (67)$  (8,621)$    25,892
                                       ======================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.


                                       21
<PAGE>


  
Wells Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>

                                                              1998     1997       1996
-----------------------------------------------------------------------------------------
<S>                                                       <C>        <C>       <C>      
Cash Flows From Operating Activities
   Net income                                             $    2,476 $   2,220 $   1,200
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Provision for loan losses                                  120       180       180
      Gain on sale of loans                                     (434)      (81)     (102)
      Amortization of mortgage servicing rights                  125        30        17
      Compensation on allocation of ESOP shares                  312       218       163
      Amortization of unearned compensation                       84       129       228
      Write-down of foreclosed real estate                        --        12         8
      Loss (gain) on sale of foreclosed real estate                2       (12)      (17)
      Unrealized loss (gain) on loans held for sale              (14)      (16)       30
      Gain on premises and equipment                             (28)                  7
      Deferred income taxes                                      188       (48)       (8)
      Depreciation and amortization on premises
        and equipment                                            279       273       264
      Amortization of deferred loan origination fees            (245)     (151)     (145)
      Amortization of excess servicing fees                       13        13        14
      Amortization of securities premiums and discounts            9        --        (2)
      Loans originated for sale                              (89,160)  (14,914)  (19,057)
      Proceeds from the sale of loans held for sale           85,089    14,709    19,207
      Changes in assets and liabilities:
        Accrued interest receivable                              263       (46)       60
        Other assets                                            (678)      (52)       67
        Income taxes payable, current                             17       111       (54)
        Accrued expenses and other liabilities                    58        16      (276)
                                                          -------------------------------
              Net cash provided by (used in)
                operating activities                          (1,524)    2,591     1,784
                                                          -------------------------------

</TABLE>

                           (Continued)


                                       22

<PAGE>




Wells Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (continued)
 Years Ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>

                                                             1998        1997       1996
-------------------------------------------------------------------------------------------
<S>                                                     <C>        <C>        <C>       
Cash Flows From Investing Activities
   Net (increase) decrease in loans                      $   28,945 $   (4,252) $  (8,999)
   Certificates of deposit:
      Maturities                                              6,650        200        800
      Purchases                                              (5,300)    (1,850)      (200)
   Purchase of securities available for sale                     --       (171)      (287)
   Proceeds from sales of securities available for sale         212      5,033         --
   Securities held to maturity:
      Maturities and calls                                    4,491      3,649      5,900
      Purchases                                              (6,841)    (4,798)    (3,749)
   Proceeds from principal repayments of
      mortgage-backed securities available for sale              86        340        436
   Proceeds from the disposal of leasehold improvements          75         --         --
   Purchase of premises and equipment                          (150)      (179)      (552)
   Proceeds from the sale and redemption of
      foreclosed real estate                                     69        102        117
   Investment in foreclosed real estate                          (3)       (32)        --
                                                         ----------------------------------
      Net cash provided by (used in) investing activities    28,234     (1,958)    (6,534)
                                                         ----------------------------------

Cash Flows From Financing Activities
   Net increase (decrease) in deposits                       13,063        368     (1,337)
   Net increase (decrease) from advances from
      borrowers for taxes and insurance                         140         60         (2)
   Proceeds from borrowed funds                               5,000     13,500     35,000
   Repayments on borrowed funds                             (24,500)   (15,500)   (26,500)
   Purchase of treasury stock                                (5,937)      (921)    (1,763)
   Purchase of common stock for
      restricted stock awards                                    --         --       (539)
   Dividends paid                                            (1,001)      (470)        --
                                                         ----------------------------------
        Net cash provided by (used in)
           financing activities                             (13,235)    (2,963)     4,859
                                                         ----------------------------------
        Net increase (decrease) in cash                      13,475     (2,330)       109

Cash
   Beginning                                                  5,971      8,301      8,192
                                                         ----------------------------------
   Ending                                                $   19,446 $    5,971 $    8,301
                                                         ==================================

</TABLE>


                                   (Continued)

                                       23

<PAGE>

Wells Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>

                                                            1998     1997     1996
-----------------------------------------------------------------------------------
<S>                                                  <C>        <C>      <C>     
Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest on deposits                            $    7,348 $  6,982 $  7,164
      Interest on borrowed funds                             869    1,527    1,076
      Income taxes                                         1,547    1,450      981
                                                      =============================

Supplemental Schedule of Noncash Investing and
   Financing Activities:
   Other real estate acquired in settlement of loans  $       33 $     27 $    157
   Allocation of ESOP shares to participants                 166      139      112
   Net change in unrealized gain on securities
      available for sale                                     317      236       30
                                                      =============================
</TABLE>


See Notes to Consolidated Financial Statements.


                                       24
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------
 

Note 1.   Summary of Significant Accounting Policies

Nature of operations:  Operations of Wells Financial Corp.  (Company)  primarily
consist of banking  services  through its  subsidiary,  Wells Federal Bank,  fsb
(Bank).  One of the Bank's  subsidiaries,  Wells  Insurance  Agency,  Inc., is a
property  and  casualty  insurance  agency.  The other  subsidiary  of the Bank,
Greater Minnesota Mortgage,  Inc., is a mortgage banking company that originates
loans through  referrals from commercial banks. The Company serves its customers
through the Bank's eight locations in South Central Minnesota.

Basis of financial statement presentation: The consolidated financial statements
have been prepared in conformity with generally accepted accounting  principles.
In preparing the consolidated  financial  statements,  management is required to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities as of the date of the statements of financial condition and revenues
and expenses for the reporting  period.  Actual  results could differ from those
estimates.  A material estimate that is particularly  susceptible to significant
change in the near term relates to the  determination  of the allowance for loan
losses.

Management believes that the allowances for losses on loans are adequate.  While
management  uses  available  information  to recognize  losses on loans,  future
additions  to the  allowances  may be  necessary  based on changes  in  economic
conditions.

In  addition,  various  regulatory  agencies,  as  an  integral  part  of  their
examination process,  periodically review the Company's allowances for losses on
loans.  Such  agencies  may require the Company to  recognize  additions  to the
allowances based on their judgments about  information  available to them at the
time of their examination.

Effective  January 1, 1998, the Company adopted Financial  Accounting  Standards
Board's  Statement  of  Financial   Accounting   Standards  No.  130,  Reporting
Comprehensive  Income  (Statement  No.  130),  which was  issued  in June  1997.
Statement  No.  130  establishes  new rules for the  reporting  and  display  of
comprehensive income and its components,  but has no effect on the Company's net
income or total  stockholders'  equity.  Statement  No. 130 requires  unrealized
gains and losses on the Company's available for sale securities,  which prior to
adoption were reported  separately in  stockholders'  equity,  to be included in
comprehensive  income. Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130.

Effective  January 1, 1998, the Company adopted Financial  Accounting  Standards
Board's Statement of Financial  Accounting  Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (Statement No. 131). Statement
No. 131 supersedes FASB Statement No. 14, Financial  Reporting for Segments of a
Business  Enterprise.  Statement  No. 131  establishes  standards for how public
business  enterprises  report  information  about  operating  segments in annual
financial  statements  and  requires  that  those  enterprises  report  selected
information about operating segments in interim financial reports. Statement No.
131 also  establishes  standards  for related  disclosures  about  products  and
services,  geographic  areas,  and major  customers.  The Company has determined
that,  for purposes of Statement No. 131, it has only one operating  segment and
no additional disclosure is required.  The adoption of Statement No. 131 did not
affect results of operations or financial position.

                                       25
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------
 
Note 1.     Summary of Significant Accounting Policies (Continued)

Principles of consolidation:  The accompanying consolidated financial statements
include the accounts of Wells  Financial  Corp.,  its wholly  owned  subsidiary,
Wells  Federal  Bank,  fsb,  and the Bank's  wholly  owned  subsidiaries,  Wells
Insurance  Agency,  Inc. and Greater  Minnesota  Mortgage,  Inc. All significant
intercompany transactions and balances are eliminated in consolidation.

Securities held to maturity:  Debt securities for which the Company has both the
positive  intent  and  ability to hold to  maturity  are  classified  as held to
maturity and reported at amortized cost.  Amortization of premiums and accretion
of discounts,  computed by the interest method over their contractual  lives, is
included in interest income.

Securities available for sale:  Securities  classified as available for sale are
those debt securities that the Company intends to hold for an indefinite  period
of time,  but not  necessarily  to  maturity.  Any  decision  to sell a security
classified  as available for sale would be based on various  factors,  including
significant  movements  in interest  rates,  changes in the  maturity mix of the
Company's  assets  and  liabilities,   liquidity   needs,   regulatory   capital
considerations, and other similar factors.

Securities  available  for sale are carried at fair value.  Unrealized  gains or
losses,  net of the related deferred tax effect, are reported as a net amount in
other comprehensive income. Amortization of premiums and accretion of discounts,
computed by the interest method over their  contractual  lives, is recognized in
interest income.

Realized  gains or  losses,  determined  on the  basis  of the cost of  specific
securities sold, are included in earnings.

Declines in the fair value of individual securities classified as either held to
maturity or available for sale below their amortized cost that are determined to
be other than temporary  result in  write-downs of the individual  securities to
their fair value with the resulting  write-downs included in current earnings as
realized losses.

Loans held for sale:  Loans held for sale are those  loans that the  Company may
sell or  intends  to sell prior to  maturity.  They are  carried at the lower of
aggregate  cost or  market  value.  Gains  and  losses  on sales  of  loans  are
recognized at settlement dates and are determined by the difference  between the
sales proceeds and the carrying  value of the loans.  All sales are made without
recourse.

Loans receivable: Loans receivable that management has the intent and ability to
hold for the  foreseeable  future or until  maturity or payoff are stated at the
amount of unpaid  principal,  reduced by an  allowance  for loan  losses and net
deferred loan origination fees.


                                       26
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------
 
Note 1.     Summary of Significant Accounting Policies (Continued)

The allowance  for loan losses is increased by provisions  charged to income and
reduced by charge-offs (net of recoveries).  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.  While  management uses its best
information available to make its evaluation, it is possible that adjustments to
the  allowance  may be  necessary if there are  significant  changes in economic
conditions.

A loan is impaired  when it is probable the  creditor  will be unable to collect
all principal and interest payments due in accordance with the terms of the loan
agreement.  Impaired  loans are measured  based on the present value of expected
future cash flows  discounted  at the loan's  effective  interest  rate or, as a
practical expedient,  at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent.

Interest on loans is  recognized  over the terms of the loans and is  calculated
using the simple-interest  method on principal amounts  outstanding.  Accrual of
interest is discontinued when management believes,  after considering economics,
business  conditions,  and collection  efforts,  that the  borrower's  financial
condition is such that  collection  of interest is  doubtful.  Interest on these
loans is  recognized  only when  actually  paid by the borrower if collection of
principal is likely to occur.  Accrual of interest is generally resumed when, in
management's  judgment,  the  borrower's  ability to make periodic  interest and
principal payments is back to normal.

Loan  origination  fees and related  costs:  Loan fees and  certain  direct loan
origination  costs are  deferred,  and the net fee or cost is  recognized  as an
adjustment  to interest  income using the interest  method over the  contractual
life of the loans,  adjusted for  estimated  prepayments  based on the Company's
historical prepayment experience.

Loan  servicing:  The Company  generally  retains the right to service  mortgage
loans  sold to others.  The cost  allocated  to the  mortgage  servicing  rights
retained  has been  recognized  as a separate  asset and is being  amortized  in
proportion to and over the period of estimated net  servicing  income.  Mortgage
servicing  rights are  periodically  evaluated for impairment  based on the fair
value of those rights.  Fair values are estimated  using  discounted  cash flows
based on current market rates of interest. For purposes of measuring impairment,
the rights must be stratified by one or more predominant risk characteristics of
the underlying loans. The Company stratifies its capitalized  mortgage servicing
rights based on the interest rate and term of the underlying  loans.  The amount
of impairment  recognized is the amount,  if any, by which the amortized cost of
the rights for each stratum exceed their fair value.

Foreclosed real estate:  Real estate properties acquired through, or in lieu of,
loan  foreclosure  are  initially  recorded  at lower of cost or fair value less
estimated costs to sell at date of foreclosure. Costs relating to improvement of
property are capitalized,  whereas costs relating to the holding of property are
expensed.

Valuations  are   periodically   performed  by  management  and  charge-offs  to
operations  are made if the carrying  value of a property  exceeds its estimated
fair value less estimated costs to sell.

                                       27
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------
 
Note 1.     Summary of Significant Accounting Policies (Continued)

Income  taxes:  Deferred  taxes are  provided on an asset and  liability  method
whereby deferred tax assets are recognized for deductible temporary  differences
and operating loss or tax credit carry forwards and deferred tax liabilities are
recognized for taxable  temporary  differences.  Temporary  differences  are the
differences  between the amounts of assets and  liabilities  recorded for income
tax and  financial  reporting  purposes.  Deferred  tax assets are  reduced by a
valuation  allowance when management  determines that it is more likely than not
that some  portion  or all of the  deferred  tax  assets  will not be  realized.
Deferred tax assets and  liabilities  are adjusted for the effects of changes in
tax laws and rates on the date of enactment.

Premises  and  equipment:  Land is carried  at cost.  Bank  premises,  leasehold
improvements,  and furniture,  fixtures, and equipment are carried at cost, less
accumulated   depreciation  and  amortization.   Bank  premises  and  furniture,
fixtures,  and equipment are depreciated using the straight-line method over the
estimated  useful  lives of the  assets  ranging  from 10 to 40  years  for bank
premises,  7 to  10  years  for  leasehold  improvements  and 3 to 7  years  for
furniture,  fixtures and equipment.  The cost of leasehold improvements is being
amortized using the straight-line method over the terms of the related leases.

Fair value of financial instruments:  The following methods and assumptions were
used by the Company in estimating the fair value of its financial instruments:

     Cash: The carrying amounts reported for cash and interest-bearing  accounts
     approximate their fair values.

     Certificates of deposit:  The carrying  amounts reported for certificate of
     deposits approximate their fair values.

     Securities:  Fair values for  securities  available for sale and securities
     held to maturity are based on quoted market  prices,  where  available.  If
     quoted  market  prices are not  available,  fair values are based on quoted
     market  prices of comparable  instruments,  except for stock in the Federal
     Home Loan Bank for which fair value is equal to cost.

     Loans  held for sale:  Fair  values  are based on quoted  market  prices of
     similar loans sold on the secondary market.

     Loans and accrued interest receivable: For variable-rate loans that reprice
     frequently and that have experienced no significant  change in credit risk,
     fair values are based on carrying  values.  Fair values for all other loans
     are  estimated  based  on  discounted  cash  flows,  using  interest  rates
     currently  being  offered for loans with similar  terms to  borrowers  with
     similar credit quality.  The carrying amount of accrued interest receivable
     approximates its fair value.



                                       28
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------
 
Note 1.     Summary of Significant Accounting Policies (Continued)

     Deposits  and other  liabilities:  The fair values of demand  deposits  and
     savings accounts equal their carrying amounts,  which represent the amounts
     payable on demand.  Fair values for fixed-rate  certificates of deposit are
     estimated using a discounted cash flow  calculation  that applies  interest
     rates  currently  being offered on certificates to a schedule of aggregated
     expected monthly maturities on those certificates.  The carrying amounts of
     advances by borrowers for taxes and insurance and accrued  interest payable
     approximate their fair values.

     Borrowed  funds:  The fair value of long term fixed rate borrowed funds are
     estimated  by using a  discounted  cash  flow  analysis  based  on  current
     incremental  borrowing  rates for similar types of borrowing  arrangements.
     The fair value of the variable rate borrowed  funds  approximates  carrying
     value as these borrowings reprice monthly.

     Off-statement of financial condition instruments: Since the majority of the
     Company's  off-statement of financial condition  instruments consist of non
     fee-producing,  variable rate commitments,  the Company has determined they
     do not have a distinguishable fair value.


Note 2.   Certificates of Deposit

Certificates of deposit with a carrying value of $500 and $1,850 at December 31,
1998 and 1997,  respectively,  had weighted  average  yields of 5.81% and 5.68%,
respectively, and contractual maturities of less than one year.


Note 3.   Securities Available for Sale
<TABLE>
<CAPTION>
                                                                     December 31, 1998
                                                    -----------------------------------------------------------
                                                                       Gross          Gross
                                                      Amortized      Unrealized     Unrealized
                                                         Cost          Gains          Losses       Fair Value
---------------------------------------------------------------------------------------------------------------
<CAPTION>
<S>                                                <C>           <C>            <C>             <C>                
Stock in Federal Home Loan Bank                     $       1,421 $           -- $          --  $        1,421
FHLMC stock                                                    24          1,523            --           1,547
                                                    -----------------------------------------------------------
                                                    $       1,445 $        1,523 $          --  $        2,968
                                                    ===========================================================
                                                                     December 31, 1997
                                                    -----------------------------------------------------------
                                                                       Gross          Gross
                                                      Amortized      Unrealized     Unrealized
                                                         Cost          Gains          Losses       Fair Value
---------------------------------------------------------------------------------------------------------------
Stock in Federal Home Loan Bank                     $       1,633 $           -- $          --  $        1,633
FHLMC stock                                                    24            983            --           1,007
                                                    -----------------------------------------------------------
                                                            1,657            983            --           2,640
Mortgage-backed securities                                     86             --            --              86
                                                    -----------------------------------------------------------
                                                    $       1,743 $          983 $          --  $        2,726
                                                    ===========================================================
</TABLE>


                                       29
<PAGE>
Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------
Note 3.     Securities Available for Sale (Continued)

Equity securities do not have contractual maturities. Mortgage-backed securities
lack a single  maturity  date as the  borrowers  retain  the right to prepay the
obligations.

The Company's  subsidiary,  as a member of the Federal Home Loan Bank system, is
required to maintain an  investment  in capital  stock of the Federal  Home Loan
Bank in an amount  equal to 1% of its  outstanding  home loans.  No ready market
exists for the bank stock,  and it has no quoted  market value.  For  disclosure
purposes, such stock is assumed to have a market value which is equal to cost.

Changes in unrealized gains on securities available for sale:
<TABLE>
<CAPTION>

                                                            Years Ended December 31,
                                                ---------------------------------------------------
                                                       1998             1997             1996
---------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>              <C>             
Balance, beginning                              $            584 $            348 $            318
   Unrealized gains during the year                          540              399               56
   Deferred tax effect relating to unrealized
      appreciation                                          (223)            (163)             (26)
                                                ---------------------------------------------------
Balance, ending                                 $            901 $            584 $            348
                                                ===================================================
</TABLE>

Note 4.   Securities Held to Maturity
<TABLE>
<CAPTION>
                                                                       December 31, 1998
                                              -----------------------------------------------------------
                                                                   Gross          Gross
                                                  Amortized     Unrealized     Unrealized
                                                    Cost           Gains         Losses       Fair Value
-----------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>            <C>              <C>       
Debt securities:
   U.S. Government corporations and agencies  $      5,539    $      10      $     (7)        $    5,542
                                              =============================================================
</TABLE>
<TABLE>
<CAPTION>

                                                                   December 31, 1997
                                              -------------------------------------------------------------
                                                                   Gross          Gross
                                                  Amortized     Unrealized     Unrealized
                                                    Cost           Gains         Losses       Fair Value
-----------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>             <C>              <C>       
Debt securities:
   U.S. Government corporations and agencies  $     3,198     $        4      $     (1)        $    3,201
                                              =============================================================
</TABLE>

Contractual maturities:  The scheduled maturities of securities held to maturity
at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
                                                                            Amortized        Fair
                                                                            Cost             Value
--------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>              <C>  
Due in one year or less                                                     $             -- $             --
Due from one to five years                                                             5,539            5,542
                                                                            ----------------------------------
                                                                            $          5,539 $          5,542
                                                                            ----------------------------------
</TABLE>

Securities with a carrying value of $700 and $500 at December 31, 1998 and 1997,
respectively,  were pledged to secure public  deposits and for other purposes as
required or permitted by law.

                                       30
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 5.   Loans Receivable and Loans Held for Sale
<TABLE>
<CAPTION>

Composition of loans receivable:                                      Years Ended December 31,
                                                                      ------------------------
                                                                        1998          1997
----------------------------------------------------------------------------------------------
<S>                                                                  <C>         <C>       
First mortgage loans (principally conventional):
   Principal balances:
      Secured primarily by one-to-four family residences              $   104,433 $  141,346
      Secured by other properties, primarily agricultural real estate      21,018     12,012
      Construction                                                          1,279      1,943
   Less net deferred loan origination fees                                   (450)      (642)
                                                                      -----------------------
              Total first mortgage loans                                  126,280    154,659
                                                                      -----------------------
Consumer and other loans:
   Principal balances:
      Home equity, home improvement and second mortgages                   18,475     18,781
      Agricultural operating loans                                          2,394      1,299
      Vehicle loans                                                         4,644      4,988
      Other                                                                 3,365      3,760
                                                                      -----------------------
              Total consumer and other loans                               28,878     28,828
                                                                      -----------------------
              Total loans                                                 155,158    183,487
Less allowance for loan losses                                               (853)      (763)
                                                                      -----------------------
              Loan receivable, net                                    $   154,305 $  182,724
                                                                      =======================
</TABLE>

Allowance for loan losses:
                                      Years Ended December 31,
                                    ---------------------------
                                       1998      1997     1996
---------------------------------------------------------------
Balance, beginning                  $    763 $    615 $    512
   Provision for loan losses             120      180      180
   Loans charged off                    (46)     (66)     (88)
   Recoveries                             16       34       11
                                    ---------------------------
Balance, ending                     $    853 $    763 $    615
                                    ===========================

Nonaccrual  loans:  Loans on which the accrual of interest has been discontinued
totaled $260, $237, and $298 at December 31, 1998, 1997 and 1996,  respectively.
The effect of nonaccrual loans was not significant to the results of operations.

The Company  includes all loans  considered  impaired in nonaccrual  loans.  The
amount of impaired loans was not material at December 31, 1998 and 1997.

Related  party  loans:  The  Company  has  entered  into  transactions  with its
executive officers,  directors,  significant shareholders,  and their affiliates
(related  parties).  The aggregate  amounts of loans to such related  parties at
December 31, 1998 and 1997 were $294 and $452,  respectively.  During 1998,  new
loans to such related parties were $104 and repayments were $262.

                                       31
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 5.    Loans Receivable and Loans Held for Sale (Continued)

Loans held for sale: As of December 31, 1998 and 1997, the Company's  loans held
for sale were  $6,097 and $2,012,  respectively,  and  consisted  of one to four
family  residential real estate loans.  Loans held for sale have been reduced by
estimated  unrealized  market  losses of $-0- and $14 at  December  31, 1998 and
1997,  respectively.  Outstanding commitments to sell loans at December 31, 1998
were $6,097.


Note 6.   Loan Servicing

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated statements of financial condition. The unpaid principal balances of
these  loans as of  December  31,  1998  and 1997  were  $136,336  and  $72,192,
respectively,  and consist of one-to-four  family residential real estate loans.
These  loans  are  serviced   primarily  for  the  Federal  Home  Loan  Mortgage
Corporation.

Custodial  escrow  balances  maintained  in connection  with the foregoing  loan
servicing, and included in advances from borrowers for taxes and insurance, were
$636 and $387 at December 31, 1998 and 1997, respectively.

Effective  January  1,  1996,  the  Company  adopted  FASB  Statement  No.  122,
Accounting  for  Mortgage  Servicing  Rights.  this  Statement  requires  that a
mortgage  banking  enterprise that acquires  mortgage  servicing  rights through
either  the  purchase  or  origination  of  mortgage  loans  and  then  sells or
securitizes those loans with servicing rights retained should allocate the total
cost of the mortgage loans to the mortgage  servicing rights and the loans based
on their  relative  fair  values if it is  practicable  to  estimate  those fair
values.

Effective  January  1,  1997,  the  Company  adopted  FASB  Statement  No.  125,
Accounting for Transfers and Servicing of Financial  Assets and  Extinguishments
of Liabilities.  This Statement  establishes the basic principles that an entity
should recognize only assets it controls and liabilities it has incurred. Assets
should be  "derecognized"  only when control has been  surrendered,  liabilities
should be "derecognized" only when they have been extinguished,  and recognition
of financial  assets and  liabilities  should not be affected by the sequence of
transactions  unless the effect of the  transactions  is to  maintain  effective
control over a transferred financial asset. Statement No. 125 also continues the
recognition of mortgage servicing rights on loans sold and supersedes  Statement
No. 122 for transactions after January 1, 1997.

Mortgage  servicing  rights in the  amounts  of $662 and $107  were  capitalized
during the years ended December 31, 1998 and 1997, respectively. The fair values
of capitalized mortgage servicing rights were $722 and $166 at December 31, 1998
and 1997,  respectively.  The fair values of the mortgage  servicing rights were
estimated  as the  present  value of the  expected  future  cash  flows  using a
discount  rate  of 15%.  The  Company  recognized  amortization  of the  cost of
mortgage  servicing  rights in the  amounts of $125 and $30 for the years  ended
December 31, 1998 and 1997, respectively.  The effect of adopting Statements No.
122  and 125 was to  increase  net  income  by $77 and $88 for the  years  ended
December 31, 1997 and 1996, respectively.

                                       32
<PAGE>




Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 7.   Foreclosed Real Estate

The Company had investment in real estate acquired through foreclosure or deeded
to the Company in lieu of  foreclosure  of $-0- and $35 as of December  31, 1998
and 1997, respectively.  No allowances for losses on foreclosed real estate were
required at these dates.


Note 8.   Premises and Equipment

Premises and equipment are summarized as follows:
                                                        December 31,
                                                    ---------------------
                                                       1998        1997
-------------------------------------------------------------------------
Cost:
   Land                                             $       71 $      71
   Buildings and improvements                            1,075     1,075
   Leasehold improvements                                  330       537
   Furniture, fixtures and equipment                     2,005     1,861
                                                    ---------------------
                                                         3,481     3,544
   Less accumulated depreciation and amortization        2,232     2,119
                                                    ---------------------
                                                    $    1,249 $   1,425
                                                    =====================


Note 9.   Deposits

Composition of deposits:                               December  31,
                                                  ----------------------
                                                     1998         1997
------------------------------------------------------------------------
Demand and NOW accounts                           $   24,781 $   20,940
Savings accounts                                      18,377     16,117
Certificates of deposit                              115,283    108,321
                                                  ----------------------
                                                  $  158,441 $  145,378
                                                  ======================

The  aggregate  amount of  certificates  of deposit  over $100 was  $10,524  and
$10,387 at December 31, 1998 and 1997, respectively.


                                       33
<PAGE>




Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 9.    Deposits (Continued)

A summary of scheduled maturities of certificates of deposits is as follows:

Years Ending December 31,
--------------------------------------------------------------------------------
1999                           $   78,785
2000                               19,242
2001                               13,583
2002                                3,673
                               -----------
                               $  115,283
                               ===========

Eligible  savings  accounts  are insured up to $100 by the  Savings  Association
Insurance  Fund  (SAIF)  under  management  of  the  Federal  Deposit  Insurance
Corporation  (FDIC).  On  September  30, 1996,  legislation  was signed into law
requiring savings  institutions  insured by the SAIF to pay a special assessment
to  recapitalize  the fund.  The Company  recorded its  assessment  of $1,085 in
September, 1996.


Note 10.  Borrowed Funds

Borrowed  funds  consisted of advances  from  Federal Home Loan Bank (FHLB),  as
follows:

                                       December 31,
                            ----------------------------------
                                   1998             1997
--------------------------------------------------------------
 Due Date   Interest Rate
---------------------------
 01/16/08       5.34%       $    5,000             $       --
 04/08/98       6.13%               --                  3,000
 05/04/98       5.46%               --                  5,000
 05/26/98       5.61%               --                  6,000
 06/23/98       5.86%               --                 10,500
                           ----------------------------------
                            $    5,000             $   24,500
                           ==================================

The advance due on January  16, 2008 has a fixed  interest  rate and is callable
beginning  January  16,  2003.  Prepayment  of  the  advance  will  result  in a
prepayment penalty.

The  advances are  collateralized  by FHLB stock and first  mortgage  loans with
balances exceeding 125% of the amount of the advances.


                                       34
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 11.  Income Tax Matters

The Company and its subsidiary file consolidated federal income tax returns. For
years prior to 1996, the Company was allowed a special bad debt deduction  based
on a  percentage  of  taxable  income (8  percent)  or on  specified  experience
formulas.  Effective for the year ended  December 31, 1996,  federal  income tax
laws changed to  eliminate  the  percentage  of taxable  income  formula for the
Company  and only allow bad debt  deductions  based on actual  charge-offs.  The
Company is required to recapture into income the excess of its December 31, 1995
loan loss reserves for "qualifying" and "nonqualifying"  loans over its December
31, 1987 loan loss reserves for "qualifying"  and  "nonqualifying"  loans.  This
excess,  which is $177,  is required to be  recaptured  ratably  over a six year
period.  At December 31, 1998, the Company  recorded a deferred tax liability of
$36 to provide for the  remaining  recapture of the loan loss reserves and it is
netted against the deferred tax asset.

The components of income tax expense are as follows:

                                            Years Ended December 31,
                           --------------------------------------------------
                                     1998             1997            1996
-----------------------------------------------------------------------------
Federal:
   Current                 $          1,181 $          1,186 $           690
   Deferred (credit)                    143             (36)             (6)
                           --------------------------------------------------
                                      1,324            1,150             684
                           --------------------------------------------------
State:
   Current                              383              387             230
   Deferred (credit)                     45             (12)             (2)
                           --------------------------------------------------
                                        428              375             228
                           --------------------------------------------------
              Total        $          1,752 $          1,525 $           912
                           ==================================================

Total  income tax expense  differed  from the amounts  computed by applying  the
statutory  U.S.  Federal  income tax rates to income  before  income  taxes as a
result of the following:
<TABLE>
<CAPTION>

                                                            Years Ended December 31,
                                                           ---------------------------
                                                              1998     1997     1996
--------------------------------------------------------------------------------------
<S>                                                       <C>      <C>      <C>     
Statutory rate applied to income before income taxes taxes $  1,480 $  1,311 $    739
State income taxes, net of federal benefit                      273      242      137
Effect of graduated rates                                       (42)     (37)     (21)
Other                                                            41        9       57
                                                           ---------------------------
              Income tax expense                           $  1,752 $  1,525 $    912
                                                           ===========================
</TABLE>

                                       35

<PAGE>




Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 11.    Income Tax Matters (Continued)

The net deferred  tax  liability  included in  liabilities  in the  accompanying
statements of financial condition includes the following amounts of deferred tax
assets and liabilities:
                                            December 31,
                                    ---------------------------
                                         1998             1997
---------------------------------------------------------------
Deferred tax assets:
   Allowance for loan losses        $     310       $      261
   Management stock bonus plan             63               71
   Accrued vacation                        39               33
   Other                                   21               24
                                    ---------------------------
                                          433              389
   Less valuation allowance
                                    ---------------------------
                                          433              389
                                    ---------------------------
Deferred tax liabilities:
   Premises and equipment                 155              165
   Securities available for sale          622              399
   FHLB stock dividends                   217              217
   Mortgage servicing rights              284               67
   Deferred loan origination fees          10
   Other                                   30               15
                                    ---------------------------
                                        1,318              863
                                    ---------------------------
                                    $   (885)       $    (474)
                                    ===========================

Retained earnings at December 31, 1998 includes  approximately $1,839 related to
the pre-1987  allowance for loan losses for which no deferred federal income tax
liability has been recognized. This amount represents an allocation of income to
bad debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debts or  adjustments  arising from carryback of net
operating  losses would  create  income for tax  purposes  only,  which would be
subject to the then current  corporate income tax rate. The unrecorded  deferred
income tax  liability on the above amount for financial  statement  purposes was
approximately $736 at December 31, 1998.


Note 12.  Stockholders' Equity, Regulatory Capital and Dividend Restrictions

In April 1996, the Company  initiated a stock buy back program.  Shares totaling
307,200,  64,500 and 163,640 were purchased  during the years ended December 31,
1998, 1997 and 1996, respectively.

On January 20,  1999,  the Company  declared a dividend of $.15 per common share
payable on February 12, 1999 to  stockholders  of record as of February 1, 1999.
The scheduled dividend is $247,824.


                                       36
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 12. Stockholders' Equity, Regulatory Capital and Dividend Restrictions
         (Continued)

The Bank is subject to various regulatory capital  requirements  administered by
the federal banking agencies.  Failure to meet minimum capital  requirements can
initiate certain mandatory - and possibly additional  discretionary - actions by
regulators  that,  if  undertaken,  could have a direct  material  effect on the
Bank's  financial   statements.   Under  capital  adequacy  guidelines  and  the
regulatory  framework for prompt corrective  action, the Bank must meet specific
capital  guidelines  that involve  quantitative  measures of the Bank's  assets,
liabilities,  and certain off-balance-sheet items as calculated under regulatory
accounting  practices.  The Bank's capital amounts and  classification  are also
subject to  qualitative  judgments  by the  regulators  about  components,  risk
weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require  the Bank to  maintain  minimum  amounts  and ratios of total and Tier I
capital (as defined in the  regulations) to  risk-weighted  assets (as defined),
and of Tier I capital (as defined) to average  assets (as  defined).  Management
believes,  as of December  31,  1998,  that the Bank meets all capital  adequacy
requirements to which it is subject.

The most recent examination by the Office of Thrift Supervision,  as of December
29,  1997,  categorized  the Bank as "well  capitalized"  under  the  regulatory
framework  for  Prompt  Corrective  Action.  To  be  categorized  as  adequately
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I  leverage  ratios.  There  are no  conditions  or events  since  that
notification that management believes have changed the Bank's category.

The following table summarizes the Bank's compliance with its regulatory capital
requirements:
<TABLE>
<CAPTION>

                                Bank's Capital    Required Capital    Excess Capital
                               --------------------------------------------------------
As of December 31, 1998:        Amount   Percent   Amount   Percent    Amount   Percent
                               --------------------------------------------------------
<S>                           <C>       <C>      <C>       <C>       <C>       <C>   
Tier 1 (leverage) capital      $15,896    8.70 %  $ 5,480   3.00 %    $10,416   5.70 %
Risk-based capital              16,745   14.78 %    9,066   8.00 %      7,679   6.78 %


                                Bank's Capital    Required Capital    Excess Capital
                               -----------------------------------------------------------------------------
As of December 31, 1997:        Amount   Percent   Amount   Percent    Amount   Percent
                               -----------------------------------------------------------------------------
Tier 1 (leverage) capital      $22,790   11.41 %  $ 5,990   3.00 %    $16,800   8.41 %
Risk-based capital              23,544   20.00 %    9,417   8.00 %     14,127  12.00 %

</TABLE>

                                       37
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 12.    Stockholders' Equity, Regulatory Capital and Dividend Restrictions 
            (Continued)

Under  current  regulations,  the Bank is not  permitted to pay dividends on its
stock if its regulatory  capital would reduce below (i) the amount  required for
the liquidation  account  established to provide a limited priority claim to the
assets of the bank to certain qualifying depositors who had deposits at the Bank
and who continue to maintain those deposits after its conversion  from a Federal
mutual savings and loan  association to a Federal stock savings bank pursuant to
its Plan of  Conversion  (Plan)  adopted  October 19,  1994,  or (ii) the Bank's
regulatory capital requirements.  As a "Tier 1" institution (an institution with
capital  in excess of its  capital  requirements,  both  immediately  before the
proposed capital distribution and after giving effect to such distribution), the
Bank may make capital  distributions  without the prior consent of the Office of
Thrift  Supervision in any calendar year. The capital  distribution  is equal to
the greater of 100% of net income for the year to date plus 50% of the amount by
which the  lesser of the  institution's  tangible,  core or  risk-based  capital
exceeds its capital requirement for such capital commitment,  as measured at the
beginning of the  calendar  year or up to 75% of net income over the most recent
four quarter period. The Bank paid dividends of $9 million to the Company during
the year ended December 31, 1998.


Note 13.  Earnings Per Share

Earnings per share (EPS) 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.


                                       38
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 13.   Earnings Per Share (Continued)

A  reconciliation  of the numerators and  denominators  of the basic and diluted
earnings per-share computations follows:

                                       For the Year Ended December 31, 1998
                                       ---------------------------------
                                           Income      Shares  Per-Share
                                        (Numerator) (Denominator) Amount
------------------------------------------------------------------------
Basic EPS
   Net income                            $   2,476   1,747,325 $   1.42
                                                               =========
Effect of Dilutive Securities
   Stock options                                --      49,966
                                         ----------------------
Diluted EPS
   Net income plus assumed conversions   $   2,476   1,797,291 $   1.38
                                         ===============================

                                       For the Year Ended December 31, 1997
                                       ---------------------------------
                                          Income       Shares   Per-Share
                                        (Numerator) (Denominator) Amount
------------------------------------------------------------------------
Basic EPS
   Net income                            $   2,220   1,873,499 $   1.18
                                                               =========
Effect of Dilutive Securities
   Stock options                                --      37,016
                                         -------------------------------
Diluted EPS
   Net income plus assumed conversions   $   2,220   1,910,515 $   1.16
                                         ===============================

 For the Year Ended December 31, 1996

                                          Income      Shares   Per-Share
                                        (Numerator)(Denominator) Amount
------------------------------------------------------------------------
Basic EPS
   Net income                            $   1,200   1,960,731 $   0.61
                                                               =========
Effect of Dilutive Securities
   Stock options                                --       6,454
                                         ----------------------
Diluted EPS
   Net income plus assumed conversions   $   1,200   1,967,185 $   0.61
                                         ===============================


                                       39
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

                                     
Note 14.  Employee Benefit Plans

Defined  Contribution  401(k) Plan: The Bank provides a 401(k) plan which covers
substantially  all of the Bank's employees who are eligible as to age and length
of service. A participant may elect to make contributions of up to 15 percent of
the  participant's  annual  compensation.  At the  discretion  of the  Board  of
Directors,  the Bank may make matching  contributions of up to 4 percent of each
participant's contribution. There were no contributions made by the Bank for the
years ended December 31, 1998, 1997 and 1996.

Employee  Stock  Ownership  Plan: An Employee  Stock  Ownership  Plan (ESOP) was
adopted on April 11, 1995  covering all  full-time  employees of the Company who
have attained age 21 and completed one year of service during which they work at
least 1,500 hours.

The  Company  makes  annual  contributions  to the ESOP equal to the ESOP's debt
service.  The ESOP's debt was incurred  when the Company  loaned the ESOP $1,120
which  was  used by the  ESOP to  purchase  common  stock  of the  Company.  All
dividends  received by the ESOP on unallocated shares are used to pay additional
principal on the debt. The ESOP shares  initially were pledged as collateral for
its debt.  As the debt is  repaid,  shares  are  released  from  collateral  and
allocated to employees based on the proportion of debt service paid in the year.
The shares  pledged as  collateral  are deducted  from  stockholders'  equity as
unearned ESOP shares in the accompanying  statement of financial  condition.  As
shares are released from collateral,  the Company reports  compensation  expense
equal  to the  current  market  price  of the  shares,  and  the  shares  become
outstanding  for earnings per share  computations.  Dividends on allocated  ESOP
shares  are  recorded  as  a  reduction  of  retained  earnings;   dividends  on
unallocated ESOP shares are recorded as compensation expense.

Compensation  expense  for the ESOP was $312,  $218 and $163 for the years ended
December 31, 1998, 1997 and 1996, respectively.

Shares of the  Company  held by the ESOP at  December  31,  1998 and 1997 are as
follows:

                                                     1998             1997
--------------------------------------------------------------------------------
Shares released for allocation                          62,991           42,248
Unreleased (unearned) shares                            73,897           94,640
                                              ----------------------------------
                                                       136,888          136,888
                                              ----------------------------------

Fair value of unreleased (unearned) shares    $          1,164 $          1,692
                                              ----------------------------------

Stock Option Plan:  The Company,  effective  November 15, 1995,  adopted a stock
option plan  (Plan).  Pursuant  to the Plan,  stock  options for 218,750  common
shares may be granted to  directors,  officers  and key  employees  of the Bank.
Options  granted under the Plan may be either  options that qualify as Incentive
Stock Options,  as defined in Section 422 of the Internal  Revenue Code of 1986,
as amended, or options that do not so qualify.

                                       40
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

                                     
Note 14.    Employee Benefit Plans (Continued)

The exercise  price under the awards was  established  at $11.00 per share which
was the fair market price on the date of adoption.  Under APB Opinion No. 25, no
expense has been  recorded  for these  options for the years ended  December 31,
1998, 1997 and 1996 as the option price is the quoted market price of the shares
at the date of the award.

Grants under the Plan are accounted for following APB Opinion No. 25 and related
Interpretations. Accordingly, no compensation cost has been recognized, as noted
above, for this Plan. Had  compensation  cost for the Plan been determined based
on the grant date fair values of awards (the method  described in FASB Statement
No. 123),  additional  compensation  cost charged to income would have been $61,
$100  and  $176  for  the  years  ended  December  31,  1998,   1997  and  1996,
respectively.  Reported net income and earnings per common share would have been
reduced to the pro forma amounts shown below:

                                            Years Ended December 31,
                               ---------------------------------------------
                                      1998            1997             1996
----------------------------------------------------------------------------
Net income:
   As reported                 $     2,476     $     2,220      $     1,200
   Pro forma                         2,440           2,161            1,095

Basic earnings per share:
   As reported                 $      1.42     $      1.18      $      0.61
   Pro forma                          1.40            1.15             0.56

Diluted earnings per share:
   As reported                 $      1.38     $      1.16      $      0.61
   Pro forma                          1.36            1.14             0.56

The Plan may grant  options to  purchase up to 218,750  shares of common  stock,
with a maximum term of 10 years,  at the market price on the date of grant.  The
options vest at the rate of 20% per year.

The fair value of the options  granted was estimated at the grant date using the
Black-Scholes option-pricing model using a dividend rate of 0%, price volatility
of 10%, a risk-free  interest rate of 5.65%,  and an estimated  life of 6 years.
The estimated fair value was $408 at November 15, 1995, the grant date.

                                       41
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

                             
Note 14.   Employee Benefit Plans (Continued)

The status of the Company's  fixed stock option plan as of December 31, 1998 and
1997, and changes during the years ended on those dates are presented below:

                                       Years Ended December 31,
                      ----------------------------------------------------------
                               1998                       1997
                      ----------------------------------------------------------
                                   Weighted-Average             Weighted-Average
Fixed Options            Shares    Exercise          Shares     Exercise
                                   Price                        Price
--------------------------------------------------------------------------------
Outstanding at 
  beginning of year     125,405   $     11           125,405   $      11
Granted                      --         --                --          --
Exercised                    --         --                --          --
Forfeited                    --         --                --          --
                      ----------------------------------------------------------
Outstanding at end
  of year               125,405   $     11           125,405   $      11
                      ==========================================================

As of December 31, 1998, there were 125,405 options outstanding, all options had
an exercise price of $11 per share, and their remaining contractual life was 6.8
years. As of December 31, 1998 and 1997, 75,243 and 50,162 shares, respectively,
were exercisable.

Management  Stock Bonus Plan:  The Bank  adopted a  Management  Stock Bonus Plan
(Plan) which was approved by the  Company's  stockholders  on November 15, 1995.
Restricted  stock awards covering  shares  representing an aggregate of up to 4%
(87,500 shares) of the common stock issued by the Company in the mutual to stock
conversion  may be granted to directors and employees of the Bank.  These awards
vest at the rate of 20% per year of continuous service with the Bank. The status
of shares  awarded as of December  31, 1998 and 1997 and the changes  during the
years ended on those dates is presented below:

                                      Years Ended December 31,
                                     --------------------------
                                        1998             1997
---------------------------------------------------------------
Outstanding at beginning of year       28,785           38,380
Granted                                    --               --
Vested and distributed                (11,345)          (9,595)
Forfeited                                  --               --
                                     --------------------------
Outstanding at end of year             17,440           28,785
                                     ==========================

The Bank  recorded  expense  of $84  relating  to this  Plan for the year  ended
December 31, 1998 and $129 for the year ended December 31, 1997.

The Company contributed funds to the Plan's trust to allow the trust to purchase
all 87,500 shares on the open market.  The trust purchased these shares in 1996.
49,735 shares were  purchased for  outstanding  awards and the remaining  37,765
shares are recorded as treasury stock. Unearned compensation cost, recognized in
an amount  equal to the fair value of the awarded  shares at the award date,  is
recorded in stockholders' equity and amortized to operations as the shares vest.


                                       42
<PAGE>



Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 15.  Lease Commitments

The Company leases certain branch facilities under operating leases. Some leases
require the Company to pay related insurance,  maintenance and repairs, and real
estate taxes.  Future minimum rental  commitments  under operating  leases as of
December 31, 1998 are as follows:

Years Ending     
---------------------------------
1998             $           183
1999                         129
2000                         129
2001                         118
2002                          80
                 ----------------
                 $           639
                 ================

Total rental expense related to operating  leases was  approximately  $206, $174
and $162 for the years ended December 31, 1998, 1997 and 1996, respectively.


Note 16.  Financial Instruments with Off-Statement of Financial Condition Risk

The Company is a party to financial  instruments with off-statement of financial
condition  risk in the normal course of business to meet the financing  needs of
its customers.  These financial  instruments  include  primarily  commitments to
extend credit. Those instruments involve, to varying degrees, elements of credit
risk  and  interest-rate  risk  in  excess  of  the  amount  recognized  in  the
consolidated statement of financial condition.  The contract or notional amounts
of  those  instruments  reflect  the  extent  of the  Company's  involvement  in
particular classes of financial instruments.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other  party to the  financial  instrument  for  commitments  to extend  credit,
standby letters of credit,  and financial  guarantees  written is represented by
the contractual notional amount of those instruments.  The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-statement of financial condition instruments.

Commitments to extend credit on loans totaled  approximately $22,685 and $12,512
at December  31, 1998 and 1997,  respectively.  The  portion of  commitments  to
extend  credit  that  related  to fixed  rate  loans is $7,280  and $3,201 as of
December 31, 1998 and 1997, respectively.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since some of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future cash  requirements.  The  Company  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
it is deemed  necessary  by the Company upon  extension  of credit,  is based on
management's  credit evaluation of the counterparty.  Collateral held varies but
normally includes real estate and personal property.

                                       43
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------


Note 17.  Concentrations

Concentration   by  geographic   location:   The  Company  makes   agricultural,
commercial,  residential  and  consumer  loans to  customers  primarily in south
central Minnesota.  Although the Company's loan portfolio is diversified,  there
is a  relationship  in this  region  between  the  agricultural  economy and the
economic performance of loans made to nonagricultural  customers.  The Company's
lending policies for agricultural and nonagricultural customers require loans to
be well-collateralized  and supported by cash flows. Collateral for agricultural
loans includes  equipment,  crops,  livestock and land. Credit losses from loans
related  to  the   agricultural   economy  are  consistent  with  credit  losses
experienced  in the  portfolio as a whole.  The  concentration  of credit in the
regional  agricultural  economy is taken into  consideration  by  management  in
determining the allowance for loan losses.

Concentration by institution: As of December 31, 1998 the Company had $18,523 on
deposit with the FHLB of Des Moines.


Note 18.  Fair Values of Financial Instruments

The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>

                                                 Years Ended December 31,
                                          -----------------------------------------
                                                 1998                   1997
-----------------------------------------------------------------------------------
                                          Carrying     Fair      Carrying     Fair
                                           Amount      Value      Amount     Value
                                     ----------------------------------------------
<S>                                 <C>         <C>         <C>        <C>       
Financial assets
   Cash                              $    19,446 $    19,446 $    5,971 $    5,971
   Certificates of deposit                   500         500      1,850      1,850
   Securities and mortgage backed
      securities available for sale        2,968       2,968      2,726      2,726
   Securities held to maturity             5,539       5,542      3,198      3,201
   Loans receivable, net                 154,305     155,650    182,724    184,336
   Loans held for sale                     6,097       6,097      2,012      2,012
   Accrued interest receivable               843         843      1,106      1,106

Financial liabilities
   Deposits                              158,441     158,509    145,378    145,443
   Borrowed funds                          5,000       4,930     24,500     24,496
   Advances from borrowers for
      taxes and insurance                  1,220       1,220      1,080      1,080
   Accrued interest payable                  100         100        139        139
                                     ==============================================
</TABLE>


                                       44
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------


Note 19.  Financial Information of Wells Financial Corp. (Parent Only)

The Company's  condensed  statements  of financial  condition as of December 31,
1998 and 1997 and related condensed statements of income and cash flows for each
of the years in the three year period ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>

Condensed Statements of Financial Condition                1998             1997

--------------------------------------------------------------------------------------
<S>                                                <C>              <C>             
Assets
   Cash, including deposits with Wells Federal
      Bank, fsb 1998 $195; 1997 $318                $          5,081 $            387
   Certificates of deposit                                       200              350
   Securities held to maturity                                 2,499              750
   Investment in Wells Federal Bank, fsb                      18,091           24,148
   Loan to Wells Federal Bank, fsb                                              4,000
   Accrued interest receivable and other assets                   21               12
                                                    ----------------------------------
              Total assets                          $         25,892 $         29,647
                                                    ==================================

Liabilities and Stockholders' Equity
   Liabilities                                      $                $              6
   Stockholders' equity                                       25,892           29,641
                                                    ----------------------------------
     Total liabilities and stockholders' equity     $         25,892 $         29,647
                                                    ==================================
</TABLE>

Condensed Statements of Income            1998        1997        1996
------------------------------------------------------------------------
Interest income                        $    261    $    402    $    466
Other expenses                              125          52          73
                                       ---------------------------------
     Income before income taxes             136         350         393
Income tax expense                           55          87         169
                                       ---------------------------------
     Net income before equity in net
       income of subsidiary                  81         263         224
Equity in net income of subsidiary        2,395       1,957         976
                                       ---------------------------------
     Net income                        $  2,476    $  2,220    $  1,200
                                       ---------------------------------




                                       45
<PAGE>

Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 19.   Financial Information of Wells Financial Corp. (Parent Only) 
           (Continued)
<TABLE>
<CAPTION>


Condensed Statements of Cash Flows                            1998         1997        1996
---------------------------------------------------------------------------------------------
<S>                                                       <C>         <C>        <C>     
Cash Flows From Operating Activities
   Net income                                               $    2,476  $  2,220   $  1,200
   Adjustment to reconcile net income to net cash
      provided by operating activities:
      Equity in undistributed net income of subsidiary         (2,395)    (1,957)      (976)
      (Increase) decrease in accrued interest receivable          (10)         3         (5)

      Increase (decrease) in other liabilities                     (6)       (55)        59

                                                           ----------------------------------
              Net cash provided by
                operating activities                               65        211        278
                                                           ----------------------------------
Cash Flows From Investing Activities
   Purchase of certificates of deposit                           (100)      (350)      (200)
   Purchase of securities held to maturity                     (2,499)    (1,750)    (1,999)
   Proceeds from the maturities of
      certificates of deposit                                     250        200        800
   Proceeds from maturity of securities
      held to maturity                                            750      1,499      1,700
   Dividends from subsidiaries                                  9,000
   Decrease in loan to Wells Federal Bank, sb                   4,000                 1,000
                                                           ----------------------------------
              Net cash provided by (used in
                investing activities                           11,401       (401)     1,301
                                                           ----------------------------------
Cash Flows From Financing Activities
   Payments relating to ESOP stock                                166        139        112
   Purchase of treasury stock                                  (5,937)      (921)    (1,362)
   Dividends paid                                              (1,001)      (470)
                                                           ----------------------------------
              Net cash (used in) financing activities          (6,772)    (1,252)    (1,250)
                                                           ----------------------------------
              Net increase in cash                              4,694     (1,442)       329
Cash:
   Beginning of period                                            387      1,829      1,500
                                                           ----------------------------------
   End of period                                           $    5,081   $    387   $  1,829
                                                           ==================================
</TABLE>


                                       46
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to consolidated financial statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 20.  Selected Quarterly Financial Data (Unaudited)                         
          (dollars in thousands, except per share data)

                                  Year Ended December 31, 1998
----------------------------------------------------------------------
                              First      Second      Third     Fourth
                           -------------------------------------------
Interest income            $  3,942    $  3,806   $  3,592   $  3,550
Net interest income           1,751       1,683      1,640      1,638
Provision for loan losses        30          30         30         30
Net income                      658         622        576        620
Earnings per share
   Basic                       0.35        0.34       0.34       0.39
   Diluted                     0.34        0.33       0.33       0.38

                                          
                                          
                                          
                                          
                                   Year Ended December 31,1997
--------------------------------------------------------------------
                               First     Second     Third    Fourth
                            ----------------------------------------
Interest income             $  3,756   $  3,817   $ 3,862   $ 3,890
Net interest income            1,716      1,701     1,689     1,697
Provision for loan losses         45         45        45        45
Net income                       560        539       561       560
Earnings per share
   Basic                        0.29       0.29      0.30      0.30
   Diluted                      0.29       0.28      0.30      0.29


                                       47
<PAGE>


                OFFICE LOCATION AND OTHER CORPORATE INFORMATION


                                CORPORATE OFFICE
                             Wells Financial Corp.
                             53 First Street, S.W.
                             Wells, Minnesota 56097


                  Board of Directors of Wells Financial Corp.


Lawrence H. Kruse                      David Buesing
President, Wells Federal Bank          President, Wells Concrete Products, Inc.

Gerald D. Bastian                      Randel I. Bichler
Branch Manager, Wells Federal Bank     Attorney, Bichler Law Office

Wallace J. Butson                      Richard Mueller
Secretary, Wells Federal Bank          Pharmacist, Wells Drug, Co. 

                  Executive Officers of Wells Financial Corp.

Lawrence H. Kruse                      James D. Moll, CPA
President and Chief Executive Officer  Treasurer and Principal Financial and
                                       Accounting Officer

Gerald D. Bastian                      Wallace J. Butson
Vice President                         Secretary

                              --------------------

Corporate Counsel:                     Independent Auditors:

Randel I. Bichler, Esq.                McGladrey & Pullen, LLP
28 South Broadway                      Suite 400
Wells, Minnesota 56097                 102 South Broadway
                                       Rochester, Minnesota 55904

Special Counsel:                       Transfer Agent and Registrar:

Malizia, Spidi, Sloane & Fisch, P.C.   Registrar & Transfer Company
One Franklin Square                    10 Commerce Drive
Suite 700 East                         Cranford, New Jersey 07016
1301 K. Street, N.W.                    
Washington, D.C. 20005   

                              ---------------------

The Company's Annual Report for the Year ended December 31, 1998, filed with the
Securities  and Exchange  Commission on Form 10 KSB is available  without charge
upon  written  request.  For a copy  of the  Form 10 KSB or any  other  investor
information,  please  write  the  Secretary  of the  Company,  at the  Company's
corporate office in Wells, Minnesota. The annual meeting of stockholders will be
held on April 21, 1998 at 4:00 p.m. at eh corporate Office, wells, Minnesota.