WELLS FINANCIAL CORP.
                               2003 ANNUAL REPORT

     Table of Contents
==============================================================================


     Profile and Stock Market Information............................ 1-2

     Selected Consolidated Financial and Other Data.....................3

     Letter to Stockholders.............................................4

     Management's Discussion and Analysis of Financial
       Condition and Results of Operations...........................5-18

     Independent Auditor's Report......................................19

     Consolidated Statements of Financial Condition....................20

     Consolidated Statements of Income.................................21

     Consolidated Statements of Stockholders' Equity................22-23

     Consolidated Statements of Cash Flows..........................24-26

     Notes to Consolidated Financial Statements.....................27-51

     Office Locations................................................. 52

     Other Corporate Information...................................... 53

==============================================================================


<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, one loan
origination  office in Dakota County,  Minnesota and one loan origination office
located  in Cerro  Gordo  County,  Iowa.  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 three subsidiaries,  Greater Minnesota Mortgage
(GMM), Wells Insurance Agency (WIA) and Wells REIT Holding,  LLC. 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 that
sells property, casualty, life, health and investment products, including mutual
funds.  Wells REIT  Holding,  LLC is the  holding  company of Wells Real  Estate
Investment  Trust,  LLC,  which  invests in real estate loans  acquired from the
Bank.

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.

                                                                Dividends Paid
                                            High         Low       per Share
                                         ---------- ---------- -----------------

   January 1, 2002 - March 31, 2002        $21.38      $17.55        $0.18
   April 1, 2002 - June 30, 2002           $23.04      $19.65        $0.18
   July 1, 2002 - September 30, 2002       $22.75      $17.68        $0.18
   October 1, 2002 - December 31, 2002     $20.64      $17.19        $0.18
   January 1, 2003 - March 31, 2003        $23.33      $20.63        $0.20
   April 1, 2003 - June 30, 2003           $26.78      $22.35        $0.20
   July 1, 2003 - September 30, 2003       $27.75      $24.38        $0.20
   October 1, 2003 - December 31, 2003     $31.72      $26.80        $0.20

                                       1

<PAGE>

         The number of  stockholders  of record of common stock as of the record
date of March 1, 2004, was  approximately  490. This does not reflect the number
of persons or  entities  who held stock in  nominee  or  "street"  name  through
various  brokerage  firms.  At  March  1,  2004,  there  were  1,159,751  shares
outstanding.

         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  2003,  2002 and 2001  the Bank  paid  $3,009,000,
$2,020,000 and $2,186,000 in cash dividends, respectively, 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,                                     2003         2002         2001         2000       1999
---------------------------------------------- ------------ ------------ ------------ ----------- ----------

<S>                                             <C>          <C>          <C>         <C>        <C>
Total assets                                      $223,805     $220,616     $230,408    $221,848   $199,836
Loans held for sale                                  1,997        9,695       10,155       1,955        521
Loans receivable, net                              160,049      145,586      160,513     191,137    172,713
Securities available for sale                       27,410       19,856       15,863      16,225      2,551
Securities held to maturity                              -            -            -           -     15,559
Certificates of deposit                                200          200          200         200        400
Cash and cash equivalents                           25,318       36,571       38,070       7,606      4,200
Deposits                                           169,662      169,126      180,999     163,582    156,984
Borrowed funds                                      23,000       23,000       23,000      33,500     17,000
Stockholders' equity                                27,868       25,223       23,572      22,341     23,457

Summary of Operations
---------------------------------------------- ------------ ------------ ------------ ----------- ----------
Years Ended December 31,                          2003         2002         2001         2000       1999
---------------------------------------------- ------------ ------------ ------------ ----------- ----------

Interest income                                    $11,514      $13,865      $16,376     $15,941    $14,214
Interest expense                                     4,595        6,247        8,609       9,652      7,698
Net interest income                                  6,919        7,618        7,767       6,289      6,516
Provision for loan losses                                -           23          180           -         27
Noninterest income                                   7,750        5,957        4,290       1,781      1,709
Noninterest expense                                  8,899        7,849        6,175       5,055      5,054
Net income                                           3,540        3,340        3,345       1,765      1,874

Other Selected Data
---------------------------------------------- ------------ ------------ ------------ ----------- ----------
Years Ended December 31,                          2003         2002         2001         2000       1999
---------------------------------------------- ------------ ------------ ------------ ----------- ----------

Return on average assets                             1.58%        1.47%        1.51%       0.84%      0.97%
Return on average equity                            13.30%       13.31%       15.06%       7.92%      7.57%
Average equity to average assets                    11.89%       11.06%       10.03%      10.57%     12.77%
Equity to assets                                    12.45%       11.43%       10.23%      10.07%     11.74%
Net interest rate spread (1)                         3.16%        3.16%        3.22%       2.57%      2.89%
Nonperforming assets to  total loans (2)             0.63%        0.61%        0.55%       0.35%      0.10%
Allowance for loan losses to total loans             0.56%        0.62%        0.59%       0.43%      0.49%
Allowance for loan losses to nonperforming          90.31%      102.37%      107.90%      134.1%    702.46%
loans (2)
Basic earnings per share                          $   3.12     $   2.84     $   2.91     $  1.41    $  1.26
Diluted earnings per share                        $   3.05     $   2.75     $   2.79     $  1.39    $  1.23
Cash dividends declared per share                 $   0.80     $   0.72     $   0.64     $  0.61    $  0.60
</TABLE>



(1)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(2)  Nonperforming loans are loans over 90 days past due.  Nonperforming  assets
     include nonperforming loans and foreclosed real estate.

                                       3
<PAGE>

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


To Our Stockholders:

         On behalf of the  Board of  Directors  of Wells  Financial  Corp,  I am
pleased to present our annual report for 2003.  For 2003,  the  Company's  basic
earnings  per  share  and  diluted  earnings  per share  were  $3.12 and  $3.05,
respectively,  both record  earnings for the Company.  The  Company's  return on
average assets was 1.58% and return on average equity was 13.30% for 2003.

         During 2003,  the primary source of income for the Company was from the
origination and sale of mortgage loans to the secondary  market by the Company's
subsidiary,  Wells  Federal Bank.  Due to lower  interest  rates on  residential
mortgage  loans,  the  Bank  and  its  subsidiary  Greater  Minnesota  Mortgage,
originated  and sold to the  secondary  market a record  amount  of  residential
mortgages which resulted in increased fee income.

         The secondary source of income during 2003 was net interest income.  In
order to maintain  interest rate spread and reduce  interest rate risk, the Bank
began to diversify  its loan  portfolio  with a lesser  emphasis on  residential
mortgages and a greater emphasis on consumer,  commercial and agricultural  real
estate loans and commercial and agricultural operating loans. The Company's loan
portfolio  increased by $14,463,000  from  $145,586,000  at December 31, 2002 to
$160,049,000 at December 31, 2003 which resulted, primarily, from an increase in
commercial real estate loans.  The asset quality of the Company's loan portfolio
remained high with only $4,000 in net charge-offs during 2003.

         We  continually  search for new  markets  and  products  to enhance our
Company.  During 2003, the Bank opened a loan origination  office in Mason City,
Iowa,  its  first  office  outside  the State of  Minnesota.  In order to obtain
greater efficiencies and customer convenience the Bank will be updating three of
its offices during 2004.

         It was a pleasure to lead the Company in 2003, a time of record  volume
and profitability and I look forward to meeting the challenges of 2004.

         Thank you for your  confidence and investment in Wells  Financial Corp.
We hope  that  you use our  many  products  and  services.  Your  referrals  and
testimonies as satisfied customers are our best sales tools.


Sincerely,

/s/Lonnie R. Trasamar

Lonnie R. Trasamar
President and CEO

                                       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.  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  to invest  in loans and  investment
securities.

         During 2003,  the primary source of income for the Company was from the
origination  and sale of mortgage  loans to the secondary  market.  Due to lower
interest rates on  residential  mortgages  during 2003, the Bank  originated and
sold to the secondary market a record amount of residential mortgages.  Included
in the loans that were  originated and sold to the secondary  market during 2003
were loans from the Bank's  mortgage loan  portfolio  that were  refinanced.  In
order to maintain interest rate spread and reduce interest rate risk, management
has elected to diversify the Bank's loan  portfolio by decreasing its investment
in  residential  mortgages and  increasing  its  investment in  agriculture  and
commercial  mortgages,  commercial  operating and term loans and consumer loans.
Using this  strategy,  the Bank was able to increase its loan  portfolio  during
2003, primarily during the fourth quarter.

         The increased volume of originations and sales to the secondary market,
along with improved  market  pricing  during 2003,  resulted in increases in the
gain on sale of loans and loan  origination  and commitment  fees.  Increases in
interest  rates on  residential  mortgages  and changes in market  pricing could
negatively  impact the gain on sale of loans and loan origination and commitment
fees in future periods.

         The  Company's  secondary  source of income for 2003 was the Bank's net
interest income. The Bank's net interest income, which is the difference between
interest  income earned on its investment and loan  portfolios and interest paid
on  interest-bearing  liabilities,  decreased during 2003 when compared to 2002.
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. As stated above,  management  believes that the
diversification  of the loan  portfolio  will help to maintain the interest rate
spread.

         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.

                                       5
<PAGE>

(dollars in thousands)

         The Company may from time to time make written or oral "forward-looking
statements"   including  statements  contained  in  this  report  and  in  other
communications by the Company which are made in good faith pursuant to the "safe
harbor"  provisions  of the Private  Securities  Litigation  Reform Act of 1995.
These  forward-looking  statements,  such as statements of the Company's  plans,
objectives,  estimates and intentions,  involve risks and  uncertainties and are
subject to change based on various  important  factors (some of which are beyond
the Company's  control).  The following factors,  among others,  could cause the
Company's financial performance to differ materially from the plans, objectives,
expectations,   estimates  and  intentions  expressed  in  such  forward-looking
statements:  the  strength  of the United  States  economy  in  general  and the
strength of the local economies in which the Company  conducts  operations;  the
effects  of, and changes  in,  trade,  monetary  and fiscal  policies  and laws,
including  interest  rate  policies  of the Board of  Governors  of the  Federal
Reserve System, inflation, interest rate, market and monetary fluctuations;  the
timely development of and acceptance of new products and services of the Company
and the perceived overall value of the products and services by users, including
the  features,  pricing  and  quality  compared  to  competitor's  products  and
services;  the  willingness  of users to  substitute  competitors'  products and
services for the Company's products and services;  the success of the Company in
gaining  regulatory  approval of its products and services,  when required;  the
impact of changes in financial  services' laws and  regulations  (including laws
concerning taxes,  banking,  securities and insurance);  technological  changes;
acquisitions;  changes in consumer spending and savings habits;  and the success
of the Company at managing the risks involved in the foregoing.

         The Company  cautions that the foregoing  list of important  factors is
not  exclusive.  The Company does not  undertake  to update any  forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Company.

Critical Accounting Estimates

         The consolidated financial statements include amounts that are based on
informed  judgments of management.  These estimates and judgments are the result
of  management's  need to  estimate  the effect of matters  that are  inherently
uncertain. Therefore, actual results could vary significantly from the estimates
used.  Management  considers the following  items to be the critical  accounting
estimates contained in the consolidated financial statements.

         Allowance  for Loan  Loss.  The  allowance  for  loan  loss is based on
management's  periodic review of the loan portfolio.  In evaluating the adequacy
of the allowance for loan loss, management considers factors including,  but not
limited to, specific loan impairment,  historical loss experience,  the size and
composition  of the loan  portfolio and current  economic  conditions.  Although
management  believes  that the  allowance  for  loan  loss is  maintained  at an
adequate  level,  there can be no assurance  that further  additions will not be
made to the allowance and that losses will not exceed the estimated amounts.

         Mortgage  Servicing Rights.  Mortgage  servicing rights are capitalized
and then amortized  over the period of estimated  servicing  income.  Management
periodically evaluates its capitalized mortgage servicing rights for impairment.
The  valuation of mortgage  servicing  rights is based on  estimated  prepayment
speeds,  ancillary income received from servicing the loans and current interest
rates. Changes in these estimates may have a material effect on the valuation of
the mortgage servicing rights.  Although  management believes that the estimates
used to determine  the value of the mortgage  servicing  rights are  reasonable,
future material  adjustments  may be necessary if economic  conditions vary from
those used to estimate the value of the mortgage servicing rights.

                                       6
<PAGE>

(dollars in thousands)

Asset/Liability Management

         Net interest income, a 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.

         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, in periods of lower interest rates,  the sale of all qualifying newly
originated fixed rate mortgage loans to the secondary market.

         Historically the Bank's lending strategy was focused on the origination
of traditional  one-to-four  family mortgage loans  primarily  secured by single
family  residences  and  consumer,  agricultural  real  estate and  agricultural
operating  loans in the  Bank's  primary  market  area.  As a method  to  reduce
interest rate risk the Bank has modified the  composition  of its loan portfolio
to have less of an emphasis on mortgage loans on single family  residences and a
greater emphasis on consumer,  agricultural real estate,  agricultural operating
loans  and,  over the past few years,  commercial  real  estate  and  commercial
operating loans.  Mortgage loans on one-to-four family residences decreased from
36.00% of the Bank's loan  portfolio  at December 31, 2002 to 26.08% at December
31, 2003 while commercial real estate loans, including mortgages on agricultural
real estate,  increased from 34.66% of the loan portfolio to 40.03%.  Due to the
lower than normal interest rate environment during 2001, 2002 and 2003, the Bank
elected  to sell the  majority  of the  one-to-four  family  fixed rate loans it
originated during those time periods. 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 servicing.

         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 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.

                                       7
<PAGE>

(dollars in thousands)

Net Portfolio Value

         The Company  measures its  sensitivity  to interest  rate risk (IRR) by
using the net portfolio value (NPV) provided by the Office of Thrift Supervision
(OTS). 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.  The Bank's  interest  rate risk policy
requires a minimum NPV ratio of 6%. The Bank's NPV ratio at December  31,  2003,
as calculated  by the OTS using  information  provided by the Bank,  exceeds the
Bank's interest rate risk policy as outlined in the following table.

<TABLE>
<CAPTION>
                                                     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)

<S>         <C>          <C>       <C>                 <C>      <C>            <C>
             +300          $26,794   $(8,241)            (24)%    12.05%        -287 bp
             +200           30,148    (4,887)            (14)%    13.29%        -164 bp
             +100           33,041    (1,994)             (6)%    14.29%         -63 bp
               --           35,035        --              --      14.93%          --
             -100           36,218     1,183               3 %    15.24%          32 bp
</TABLE>


(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.

                                       8

<PAGE>

(dollars in thousands)

                                                                 At
                                                            December 31,
                                                                2003
                                                         -------------------

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

Pre-Shock NPV Ratio: NPV as % of PV of Assets                   14.93%

Exposure Measure: Post-Shock NPV Ratio                          13.29%

Sensitivity Measure: Change in NPV Ratio                         164bp




         The Bank is subject to  interest  rate risk and,  as can be seen above,
rising  interest rates will reduce the Bank's NPV.  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.

                                       9

<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 deferred 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,
                                        --------------------------------------------------------------------------------------
                                                    2003                          2002                        2001
                                        --------------------------------------------------------------------------------------
                                                              Average                      Average                     Average
                                          Average             Yield/    Average            Yield/   Average            Yield\
                                          Balance  Interest    Cost     Balance  Interest   Cost    Balance  Interest   Cost
                                          -------  --------    ----     -------  --------   ----    -------  --------   ----
<S>                                   <C>        <C>         <C>    <C>        <C>        <C>   <C>        <C>       <C>
Interest-earning assets:
   Loans receivable (1)                 $ 152,279  $ 10,295    6.76%  $ 162,622  $ 12,339   7.59% $ 186,772  $15,239   8.16%
   Investments (2)                         55,704     1,219    2.19%     56,843     1,526   2.68%    28,524    1,137   3.99%
                                        ---------- --------- -------- ---------- --------- ----------------- -------- -------
      Total interest-earning assets       207,983    11,514    5.54%    219,465    13,865   6.32%   215,296   16,376   7.61%

Noninterest earning assets                 15,808                         7,324                       6,217
                                        ----------                    ----------                  ----------
      Total assets                      $ 223,791                     $ 226,789                   $ 221,513
                                        ==========                    ==========                  ==========

Interest bearing liabilities:
   Savings, NOW and money
      Market accounts                      69,256       604    0.87%     57,183       783   1.37%    46,932    1,024   2.18%
   Certificates of deposit                100,699     2,746    2.73%    117,748     4,219   3.58%   123,809    6,234   5.04%
   Borrowed funds                          23,000     1,245    5.41%     23,000     1,245   5.41%    25,192    1,351   5.36%
                                        ---------- --------- -------- ---------- --------- ----------------- -------- -------
      Total interest bearing liabilities  192,955     4,595    2.38%    197,931     6,247   3.16%   195,933    8,609   4.39%

Noninterest bearing liabilities             4,217                         3,760                       3,373
                                        ----------                    ----------                  ----------

      Total liabilities                   197,172                       201,691                     199,306
Equity                                     26,619                        25,098                      22,207
                                        ----------                    ----------                  ----------
      Total liabilities and equity      $ 223,791                     $ 226,789                   $ 221,513
                                        ==========                    ==========                  ==========
Net interest income                                $  6,919                      $  7,618                    $ 7,767
                                                   =========                     =========                   ========
Interest rate spread (3)                                       3.16%                        3.16%                      3.22%
Net yield on interest earning assets (4)                       3.33%                        3.47%                      3.61%
Ratio of average interest earning assets
  to average interest bearing liabilities   1.08X                         1.11X                       1.10X
                                         =========                    ==========                  ==========

</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.

                                       10
<PAGE>

(dollars in thousands)

Rate/Volume Analysis

         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).  The  combined
effects of changes in both rate and volume that cannot be separately  identified
have been allocated proportionately to the change due to rate and the change due
to volume.

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                    --------------------------------------------------------------
                                             2003 vs. 2002                   2002 vs. 2001
                                    ------------------------------   -----------------------------
                                     Increase (Decrease) Due to        Increase (Decrease) Due to
                                    ------------------------------   -----------------------------
                                     Volume      Rate        Net     Volume       Rate       Net
                                    -------    -------    -------    -------    -------    -------
<S>                               <C>        <C>        <C>        <C>        <C>        <C>
Interest Income:
  Loans receivable                  $  (753)   $(1,291)   $(2,044)   $(1,881)   $(1,019)   $(2,900)
  Investments                           (30)      (277)      (307)       580       (191)       389
                                    -------    -------    -------    -------    -------    -------
    Total interest-earning assets      (783)    (1,568)    (2,351)    (1,301)    (1,210)    (2,511)
                                    -------    -------    -------    -------    -------    -------

Interest expense:
  Deposit accounts                     (424)    (1,228)    (1,652)       (81)    (2,175)    (2,256)
  Borrowed funds                          -          -          -       (119)        13       (106)
                                    -------    -------    -------    -------    -------    -------
     Total interest-bearing
       liabilities                     (424)    (1,228)    (1,652)      (200)    (2,162)    (2,362)
                                    -------    -------    -------    -------    -------    -------

Change in net interest income       $  (359)   $  (340)   $  (699)   $(1,101)   $   952    $  (149)
                                    =======    =======    =======    =======    =======    =======

</TABLE>

                                       11

<PAGE>

(dollars in thousands)

Financial Condition

         Total assets  increased by $3,189 from $220,616 at December 31, 2002 to
$223,805 at  December  31,  2003.  This  increase  was  primarily  the result of
increases in total loans and securities  available for sale, partially offset by
a decrease in cash and loans held for sale.

         Securities  available for sale  increased by $7,554 as the Company used
cash to purchase  securities,  primarily  mortgage-backed  securities  that have
balloon payments.

         Loans held for sale  decreased  from  $9,695 at  December  31,  2002 to
$1,997 at December 31, 2003 due to a decrease in the amount of residential loans
originated for sale to the secondary market during the last quarter of 2003 when
compared to the last  quarter of 2002.  On December  31, 2002 and  December  31,
2003, the Company had firm commitments to sell the loans that were classified as
held for sale. Loans  receivable  increased by $14,463 from $145,586 at December
31, 2002 to $160,049 at December  31,  2003.  The  increase in loans  receivable
resulted from  increases in commercial and  agricultural  mortgage and operating
loans,  partially offset by a decrease in one-to-four  family real estate loans.
In order  to  improve  interest  rate  spreads,  the  Company  has  changed  the
composition of the loan portfolio.  Since December 31, 1999, one- to-four family
real estate  loans  decreased  from 60.82% of the  Company's  loan  portfolio to
26.08% of the loan portfolio  while  commercial real estate loans increased from
18.27% to 40.03% of the loan portfolio and commercial  business loans  increased
from 1.71% to 5.79% of the loan portfolio.

         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.  The increase in the
percentage and volume of commercial loans in the Bank's loan portfolio mentioned
above  could  require an  increase  in the  allowance  for loan losses in future
periods.  As of December  31, 2003 and  December  31,  2002,  the balance in the
allowance  for loan losses and the  allowance for loan losses as a percentage of
total loans were $904 and $908 and 0.56% and 0.62%, respectively.

         Loans on which the accrual of interest had been  discontinued  amounted
to $829 and $428 at  December  31,  2003 and 2002,  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 at December 31, 2003 and 2002 was
$791 and $149, respectively.

         Liabilities  increased by $544,  from  $195,393 at December 31, 2002 to
$195,937 at December 31, 2003.  This increase is primarily due to an increase of
$536 in deposits.

         Stockholders'  equity  increased by $2,645 from $25,223 at December 31,
2002 to $27,868 at December 31, 2003. The increase in  stockholders'  equity was
primarily the result of net income for 2003 of $3,540 being partially  offset by
the payment of $905 in cash dividends.  Accumulated other  comprehensive  income
decreased  by $221 due to a decrease in the net  unrealized  gain on  securities
available  for sale which  resulted  from  changes in interest  rates.  Unearned
compensation-restricted  stock  awards  increased by $423 due to the awarding of
shares  under the Wells  Federal Bank 2003 Stock Bonus Plan that was approved by
stockholders on November 18, 2003.

                                       12
<PAGE>

(dollars in thousands)

Comparison of Operating Results for the Years Ended December 31, 2003 and 2002

         General.  Net income increased by $200, or 5.99% for 2003 when compared
to 2002.  The  increase  in net  income  was due  primarily  to an  increase  in
noninterest  income of $1,793 being  partially  offset by a $699 decrease in net
interest income and a $1,050 increase in noninterest expense.

         Interest Income. Total interest income decreased by $2,351 from $13,865
for the year ended  December 31, 2002 to $11,514 for the year ended December 31,
2003.  Interest  income on loans  decreased by $2,044 for 2003 when  compared to
2002 due  primarily  to a  decrease  in the yield on the loan  portfolio  due to
market conditions. Also contributing to the decrease in interest income from the
loan  portfolio  was a decrease  in the  average  balance of the loan  portfolio
during 2003 when compared to 2002.  The Bank's loan portfolio  increased  during
the fourth quarter of 2003 which may result in an improvement in interest income
from the  loan  portfolio  in  future  periods.  The  average  yield on the loan
portfolio  decreased  by 0.83% from  7.59% for 2002 to 6.76% for 2003.  Interest
income  and the  average  yield on  investments  decreased  by $307  and  0.49%,
respectively, for 2003 when compared to 2002.

         Interest Expense. Total interest expense decreased by $1,652, or 26.4%,
for the year ended  December 31, 2003 when  compared to the year ended  December
31, 2002.  Interest expense on deposits  decreased by $1,652,  or 33.0%,  during
2003 when  compared to 2002 due,  primarily,  to a decrease in the average  rate
paid on deposits from 2.86% for 2002 to 1.97% for 2003. Also affecting  interest
expense on deposits was a decrease in the average balance of deposits.  Interest
expense on borrowed funds remained constant for 2003 when compared to 2002.

         Net Interest  Income.  Net interest income  decreased by $699, or 9.2%,
for the year ended  December 31, 2003 when  compared to the year ended  December
31, 2002 due to the changes in interest  income and interest  expense  described
above.

         Provision for Loan Losses. The provision for loan loss decreased by $23
for the year ended  December 31, 2003 when  compared to the year ended  December
31, 2002. The provision  reflects  management's  monitoring of the allowance for
loan  losses in  relation  to the size and  quality  of the loan  portfolio  and
adjusts the  provision  for loan losses to  adequately  provide for loan losses.
Management  determines  the  amounts  of the  allowance  for  loan  losses  in a
systematic  manner  that  includes  self-correcting  policies  that  adjust loss
estimation  methods  on a  periodic  basis.  Due to  the  increase  in the  loan
portfolio and the changes in the composition of the loan portfolio, it is likely
that the provision for loan losses will increase in future periods.

         Noninterest  Income.  Noninterest income increased by $1,793, or 30.1%,
for 2003 when compared to 2002  primarily due to an increase of $611 in the gain
on sale of loans originated for sale and an increase of $554 in loan origination
and commitment  fees.  Due to low interest  rates on residential  mortgage loans
during 2003, the Company  originated  and sold to the secondary  market a larger
volume of loans during 2003 when compared to 2002. Market conditions during 2003
when  compared to 2002 allowed the Company to obtain a more  favorable  price on
the loans sold to the secondary  market.  These increased prices and an increase
in the volume of loans sold to the secondary  market are the primary reasons for
the  increases  in the  gain on sale of  loans  originated  for  sale  and  loan
origination  and  commitment  fees.  Changes in interest rates and the amount of
loan originations and sales to the secondary market will impact the gain on sale
of loans  originated for sale and loan origination and commitment fees in future
periods.

                                       13
<PAGE>

(dollars in thousands)

         Noninterest Expense. Noninterest expense increased by $1,050, or 13.4%,
for the year ended  December 31, 2003 when  compared to the year ended  December
31, 2002  primarily due to a $619 increase in  compensation  and benefits  which
resulted from annual compensation  adjustments and increases in commissions paid
to loan officers for the origination of loans. If loan originations  decrease in
future periods,  it is expected that commissions paid to loan officers will also
decrease.  Also  affecting  noninterest  expense  was a $463  increase  in other
noninterest  expense which resulted  primarily from increased  costs  associated
with the increase in loan originations during 2003.

         Income Tax Expense.  Income tax expense decreased by $133 for 2003 when
compared  to 2002.  During  2003 the  Company  was able to reduce its  effective
income tax rate by using certain tax  strategies  to reduce its taxable  income.
The Company expects its current tax rate to remain relatively constant in future
periods.


Comparison of Operating Results for the Years Ended December 31, 2002 and 2001

         General. Net income decreased by $5, or 0.15% for 2002 when compared to
2001. The decrease in net income was due primarily to an in noninterest  expense
of  $1,674  for 2002 when  compared  to 2001  which was not fully  offset by the
$1,667 increase in noninterest income.

         Interest  Income.  Interest income  decreased by $2,511,  or 15.3%, for
2002 when  compared to 2001.  The decrease in interest  income  resulted  from a
$2,900  decrease in interest  income from the Company's loan portfolio which was
the result of a decrease in the average  balance of the Company's loan portfolio
during  2002 when  compared to 2001 and,  to a lesser  extent,  due to a general
decrease in the yield on the Company's loan portfolio.  Partially offsetting the
decrease in interest  income on the Company's loan portfolio was a $389 increase
in interest income on securities and interest bearing accounts.  The increase in
interest income from investment securities and interest-bearing accounts was the
result of an increase in the average  balance of the  Company's  securities  and
interest-bearing accounts during 2002 when compared to 2001.

         Interest Expense. Total interest expense decreased by $2,362, or 27.4%,
for the year ended  December 31, 2002 when  compared to the year ended  December
31, 2001.  Interest expense on deposits  decreased by $2,256,  or 31.1%,  during
2002 when  compared to 2001 due,  primarily,  to a decrease in the average  rate
paid on deposits and, to a lesser extent,  to a decrease in the average  balance
of deposits.  Interest expense on borrowed funds decreased by $106, or 7.8%, due
to a decrease in the average balance of borrowed funds during 2002 when compared
to 2001.

         Net Interest  Income.  Net interest income  decreased by $149, or 1.9%,
for the year ended  December 31, 2002 when  compared to the year ended  December
31, 2001 due to the changes in interest  income and interest  expense  described
above.

         Provision for Loan Losses.  The  provision  for loan loss  decreased by
$157 for the year  ended  December  31,  2002 when  compared  to the year  ended
December  31,  2001  due,  primarily,  to the  decrease  in the  Company's  loan
portfolio.  The provision reflects management's  monitoring of the allowance for
loan  losses in  relation  to the size and  quality  of the loan  portfolio  and
adjusts the  provision  for loan losses to  adequately  provide for loan losses.
Management  determines  the  amounts  of the  allowance  for  loan  losses  in a
systematic  manner  that  includes  self-correcting  policies  that  adjust loss
estimation  methods  on a  periodic  basis.  While  the  Company  maintains  its
allowance  for loan  losses at a level  that is  considered  to be  adequate  to
provide for potential  losses,  there can be no assurance that further additions
will not be made to the loss allowance and that losses will not exceed estimated
amounts.

                                       14
<PAGE>

(dollars in thousands)

         Noninterest  Income.  Noninterest income increased by $1,667, or 38.9%,
for 2002 when compared to 2001  primarily due to an increase in the gain on sale
of loans  originated  for sale and, to a lesser  extent,  loan  origination  and
commitment fees. Market conditions during 2002 when compared to 2001 allowed the
Company  to obtain a more  favorable  price on the loans  sold to the  secondary
market.  These  increased  prices and an increase in the volume of loans sold to
the  secondary  market are the primary  reasons for the  increase in the gain on
sale of loans originated for sale.

         Noninterest Expense. Noninterest expense increased by $1,674, or 27.1%,
for the year ended  December 31, 2002 when  compared to the year ended  December
31,  2001  primarily  due  to  increases  in  the   amortization  and  valuation
adjustments for mortgage  servicing rights and  compensation  and benefits.  The
amortization and valuation  adjustments for mortgage  servicing rights increased
by $1,070 primarily due to a $660 valuation adjustment that the Company realized
during 2002.  The increase in  compensation  and benefits  resulted  from annual
compensation  adjustments and increases in commissions paid to loan officers for
the origination of loans.

         Income Tax Expense. Income tax expense remained relatively constant for
2002 when compared to 2001.

Liquidity and Capital Resources

         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.  Due to the amount
of the Bank's mortgage loans that were refinanced  during the past two years, it
is expected that cash flows from the  prepayments of mortgage loans will be less
than during 2003 and 2002. 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 income until
funds are needed to meet required loan funding.

         The Bank's most liquid asset is cash, including investments in interest
bearing  accounts at United Bankers Bank and 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, 2003 and 2002, the Bank's  noninterest  bearing cash was $7,663 and
$1,393, respectively.

         At December 31, 2003, the Bank had $23,000 in outstanding advances from
the FHLB of Des  Moines,  which  have been used to fund  loan  originations.  At
December 31, 2003,  the Bank had the ability to borrow an  additional $6 million
based  upon  the  pledged  collateral.  The  Bank  has the  option  of  pledging
additional collateral which will increase the amount available to borrow.

         During 2002 the Company approved stock buy back programs in which up to
120,000 shares of the common stock of the Company could be acquired. During 2002
the  Company  bought  80,000  shares of its  common  stock  under  this buy back
program. No shares were purchased under this program during 2003.

                                       15
<PAGE>

(dollars in thousands)

         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, 2003, the Bank's tangible
capital  totaled  $19,516,  or 9.01% of adjusted total assets,  and core capital
totaled $19,516, or 9.01% of adjusted total assets, which substantially exceeded
the respective 1.5% tangible capital and 4.0% core capital  requirements at that
date by $16,266 and $10,850,  respectively, or 7.51% and 5.01% of adjusted total
assets, respectively.  The Bank's risk-based capital totaled $20,420 at December
31,  2003  or  12.86%  of  risk-weighted  assets,  which  exceeded  the  current
requirements of 8.0% of risk-weighted assets by $7,720 or 4.86% 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  accounting  principles  generally
accepted in the United  States of America,  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 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.

Off Balance Sheet Arrangements

         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 $39,440 and
$53,717 at December 31, 2003 and 2002, respectively.  The portion of commitments
to extend  credit that  related to fixed rate loans is $32,432 and $48,539 as of
December 31, 2003 and 2002, 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.

                                       16

<PAGE>

Impact of New Accounting Standards

         In January 2003, the Financial  Accounting  Standards Board issued FASB
Interpretation No. 46 (FIN 46),  Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51. It establishes accounting
guidance for  consolidation of variable interest entities (VIE) that function to
support the activities of the primary  beneficiary.  Prior to the implementation
of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise
had a controlling  financial  interest through ownership of a majority of voting
interest in the entity. The provisions of FIN 46 were effective  immediately for
all arrangements entered into after January 31, 2003. In December 2003, the FASB
issued a revision  to FIN 46 (FIN46R)  which  clarified  certain  implementation
issues and revised  implementation  dates for VIE's created  before  January 31,
2003.  Under  the new  guidance,  special  effective  date  provisions  apply to
enterprises that have fully or partially applied FIN 46 prior to issuance of the
revised  Interpretation.  Otherwise,  application  of FIN  46R  (or  FIN  46) is
required in  financial  statements  of public  entities  that have  interests in
special-purpose entities for periods ending after December 15, 2003. The Company
adopted FIN 46 in connection with its consolidated  financial statements for the
year ending  December 31, 2003.  The adoption had no  significant  impact on its
financial condition.

         In  April  2003,  the  Financial   Accounting  Standards  Board  issued
Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities."  SFAS No.  149  amends  and  clarifies  accounting  for  derivative
instruments  and hedging  activities  under  Statement  133. In  addition,  this
Statement  clarifies  under what  circumstances  a contract  with an initial net
investment  meets  the  characteristic  of a  derivative  and when a  derivative
contains a financing  component that warrants special reporting in the statement
of cash flows.  This  statement  is  effective  for  contracts  entered  into or
modified after June 30, 2003. The Company adopted the provisions of SFAS No. 149
effective July 1, 2003, with no significant effect to the consolidated financial
statements.  The Company's  derivative  instruments  outstanding during the year
ended December 31, 2003 include  commitments  to fund loans  originated for sale
and forward loan sale agreements.

         In  accordance  with  SFAS  No.  133  and  SFAS  No.  149,   derivative
instruments are recognized in the balance sheet at fair value and changes in the
fair value  thereof  are  recognized  in the  statement  of income.  The Company
originates  single-family  residential  loans for sale pursuant to programs with
FHLMC.  Under the structure of the programs,  at the time the Company  initially
issues a loan commitment in connection with such programs, it does not lock in a
specific  interest  rate.  At the time the  interest  rate is  locked  in by the
borrower,  the Company  concurrently  enters into a forward loan sale  agreement
with  respect to the sale of such loan at a set price in an effort to manage the
interest rate risk inherent in the locked loan commitment.

         The  forward  loan  sale  agreement  also  meets  the  definition  of a
derivative  instrument  under SFAS No. 133.  Any change in the fair value of the
loan commitment  after the borrower locks in the interest rate is  substantially
offset by the  corresponding  change in the fair value of the forward  loan sale
agreement  related to such loan.  The period from the time the borrower locks in
the interest  rate to the time the Company  funds the loan and sells it to FHLMC
is generally  60 days.  The fair value of each  instrument  will rise or fall in
response  to  changes  in  market  interest  rates  subsequent  to the dates the
interest  rate locks and forward loan sale  agreements  are entered into. In the
event that  interest  rates rise after the Company  enters into an interest rate
lock,  the fair value of the loan  commitment  will decline.  However,  the fair
value of the forward loan sale agreement  related to such loan commitment should
increase by substantially the same amount, effectively eliminating the Company's
interest rate and price risk.

         At December 31, 2003, the Company had $2.9 million of loan  commitments
outstanding related to loans being originated for sale all of which were subject
to interest rate locks forward loan sale agreements as described above.

                                       17
<PAGE>

         In May 2003, the Financial  Accounting Standards Board issued Statement
150, "Accounting for Certain Financial  Instruments with Characteristics of both
Liabilities and Equity".  This Statement establishes standards for how an issuer
classifies and measures certain financial  instruments with  characteristics  of
both  liabilities  and equity and requires that certain  freestanding  financial
instruments be reported as  liabilities  in the balance sheet.  For the Company,
the  Statement is effective  for the fiscal year  beginning  January 1, 2005 and
implementation is not expected to have a significant  impact on the consolidated
financial statements.

                                       18
<PAGE>


McGladrey & Pullen
Certified Public Accountants





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, 2003 and 2002, and
the related  consolidated  statements of income,  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 2003.  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 auditing standards generally accepted
in the  United  States of  America.  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, 2003 and 2002, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.


                                       /s/ McGladrey & Pullen, LLP
Rochester, Minnesota
January 29, 2004



                                       19
<PAGE>


Wells Financial Corp. and Subsidiary

Consolidated Statements of Financial Condition
December 31, 2003 and 2002
(dollars in thousands)

<TABLE>
<CAPTION>

Assets                                                                  2003         2002
-------------------------------------------------------------------------------------------

<S>                                                                <C>          <C>
Cash, including interest-bearing accounts
  2003 $17,655; 2002 $35,178 (Note 16)                               $  25,318    $  36,571
Certificates of deposit (Note 2)                                           200          200
Securities available for sale (Note 3)                                  27,410       19,856
Federal Home Loan Bank Stock, at cost (Note 9)                           1,303        1,875
Loans held for sale (Note 4)                                             1,997        9,695
Loans receivable, net of allowance for loan losses of $904 in 2003
  and $908 in 2002 (Notes 4, 9, 15 and 16)                             160,049      145,586
Accrued interest receivable                                              1,209        1,387
Premises and equipment (Note 7)                                          3,585        2,975
Mortgage servicing rights, net (Note 5)                                  2,681        2,179
Other assets (Note 6)                                                       53          292
                                                                     ----------------------
    Total assets                                                     $ 223,805    $ 220,616
                                                                     ======================

Liabilities and Stockholders' Equity
-------------------------------------------------------------------------------------------
Liabilities
  Deposits (Note 8)                                                  $ 169,662    $ 169,126
  Borrowed funds (Note 9)                                               23,000       23,000
  Advances from borrowers for taxes and insurance (Note 5)               1,585        1,347
  Deferred income taxes (Note 10)                                        1,456        1,376
  Accrued interest payable                                                  34           50
  Accrued expenses and other liabilities                                   200          494
                                                                     ----------------------
    Total liabilities                                                  195,937      195,393
                                                                     ======================

Commitments, contingencies and credit risk (Notes 14, 15, and 16)

Stockholders' Equity (Notes 11 and 13)
  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                                            17,154       16,985
  Retained earnings, substantially restricted                           26,922       24,287
  Accumulated other comprehensive income                                   525          746
  Unearned Employee Stock Ownership Plan shares                             --          (29)
  Unearned compensation-restricted stock awards                           (561)        (138)
  Less cost of treasury stock, 2003 1,033,673 shares;
    2002 1,062,435 shares                                              (16,391)     (16,847)
                                                                   ------------------------
    Total stockholders' equity                                          27,868       25,223
                                                                   ------------------------
    Total liabilities and stockholders' equity                       $ 223,805    $ 220,616
                                                                   ========================
</TABLE>


See Notes to Consolidated Financial Statements.


                                       20

<PAGE>


Wells Financial Corp. and Subsidiary

Consolidated Statements of Income
Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                 2003      2002      2001
---------------------------------------------------------------------------

<S>                                          <C>       <C>       <C>
Interest and Dividend Income
  Loans receivable:
    First mortgage loans                       $ 7,447   $ 9,153   $11,658
    Consumer and other loans                     2,848     3,186     3,581
  Investment securities and interest-
    bearing deposits                             1,219     1,526     1,137
                                               ----------------------------
    Total interest income                       11,514    13,865    16,376
                                               ----------------------------
Interest Expense
  Deposits                                       3,350     5,002     7,258
  Borrowed funds                                 1,245     1,245     1,351
                                               ----------------------------
    Total interest expense                       4,595     6,247     8,609
                                               ----------------------------
    Net interest income                          6,919     7,618     7,767
Provision for loan losses (Note 4)                  --        23       180
                                               ----------------------------
    Net interest income after
      provision for loan losses                  6,919     7,595     7,587
                                               ----------------------------
Noninterest Income
  Gain on sale of loans                          2,840     2,229     1,150
  Loan origination and commitment fees           2,250     1,696     1,457
  Loan servicing fees                              947       661       464
  Insurance commissions                            459       405       410
  Fees and service charges                       1,058       892       774
  Other                                            196        74        35
                                               ----------------------------
    Total noninterest income                     7,750     5,957     4,290
                                               ----------------------------
Noninterest Expenses
  Compensation and benefits (Note 13)            4,159     3,540     3,025
  Occupancy (Note 14)                            1,153       885       856
  Data processing (Note 14)                        471       446       403
  Advertising                                      293       236       213
  Amortization and valuation adjustments for
    mortgage servicing rights (Note 5)           1,071     1,453       383
  Other                                          1,752     1,289     1,295
                                               ----------------------------
    Total noninterest expenses                   8,899     7,849     6,175
                                               ----------------------------
    Income before income taxes                   5,770     5,703     5,702
Income tax expense (Note 10)                     2,230     2,363     2,357
                                               ----------------------------
    Net income                                 $ 3,540   $ 3,340   $ 3,345
                                               ============================

Cash dividends declared per share              $  0.80   $  0.72   $  0.64
                                               ============================

Earnings per share (Note 12):
  Basic                                        $  3.12   $  2.84   $  2.91
                                               ============================
  Diluted                                      $  3.05   $  2.75   $  2.79
                                               ============================
</TABLE>


See Notes to Consolidated Financial Statements.


                                       21
<PAGE>


Wells Financial Corp. and Subsidiary

Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                Additional
                                                                 Comprehensive      Common       Paid-In
                                                                    Income          Stock        Capital
----------------------------------------------------------------------------------------------------------
<S>                                                            <C>                <C>          <C>
Balances, December 31, 2000                                                         $  219       $ 17,011
  Comprehensive Income:
  Net income                                                     $      3,345           --             --
    Other comprehensive income, net of tax:
      Unrealized gains on securities, net of related taxes                 47           --             --
                                                                 ------------
    Comprehensive income                                         $      3,392
                                                                 ============
  Treasury stock purchases, 116,140 shares (Note 11)                                    --             --
  Cash dividends declared ($0.64 per share)                                             --             --
  Amortization of unearned compensation                                                 --             --
  Options exercised, 41,192 options (Note 13)                                           --           (211)
  Allocated ESOP shares                                                                 --            132
                                                                                    ----------------------
Balances, December 31, 2001                                                            219         16,932
  Comprehensive Income:
  Net income                                                     $      3,340           --             --
    Other comprehensive income, net of tax:
      Unrealized gains on securities, net of related taxes                  1           --             --
                                                                 ------------
    Comprehensive income                                         $      3,341
                                                                 ============
  Treasury stock purchases, 88,860 shares (Note 11)                                     --             --
  Cash dividends declared ($0.72 per share)                                             --             --
  Amortization of unearned compensation                                                 --              -
  Options exercised, 54,364 options (Note 13)                                           --           (293)
  Award of management stock bonus
    plan shares, 4,375 shares (Note 13)                                                 --             23
  Tax benefit related to exercised options                                              --            152
  Allocated ESOP shares                                                                 --            171
                                                                                    ----------------------
Balances, December 31, 2002                                                            219         16,985
  Comprehensive Income:
  Net income                                                     $      3,540           --             --
    Other comprehensive income, net of tax:
      Unrealized gains on securities, net of related taxes               (221)          --             --
                                                                 ------------
    Comprehensive income                                         $      3,319
                                                                 ============
  Cash dividends declared ($0.80 per share)                                             --             --
  Amortization of unearned compensation                                                 --              -
  Options exercised, 19,569 options (Note 13)                                           --           (146)
  Award of management stock bonus
    plan shares, 17,500 shares (Note 13)                                                --            251
  Tax benefit related to exercised options                                              --             14
  Allocated ESOP shares                                                                 --             50
                                                                                    ----------------------
Balances, December 31, 2003                                                         $  219       $ 17,154
                                                                                    ======================
</TABLE>
                                  (Continued)


                                       22
<PAGE>

Wells Financial Corp. and Subsidiary

Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2003, 2002 and 2001 (Continued)
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                                      Unearned
                                                                                      Employee    Unearned
                                                                         Accumulated    Stock   Compensation-
                                                                            Other     Ownership  Restricted               Total
                                                              Retained  Comprehensive   Plan       Stock      Treasury Stockholders'
                                                              Earnings      Income     Shares      Awards      Stock      Equity
                                                              ----------------------------------------------------------------------
<S>                                                         <C>           <C>        <C>        <C>         <C>        <C>
Balances, December 31, 2000                                   $ 19,182      $ 698      $ (290)    $ (237)     $(14,242)  $ 22,341
  Comprehensive Income:
  Net income                                                     3,345         --          --         --            --      3,345
    Other comprehensive income, net of tax:
      Unrealized gains on securities, net of related taxes          --         47          --         --            --         47

    Comprehensive income

  Treasury stock purchases, 116,140 shares (Note 11)                --         --          --         --        (2,006)    (2,006)
  Cash dividends declared ($0.64 per share)                       (735)        --          --         --            --       (735)
  Amortization of unearned compensation                             --         --          --        109            --        109
  Options exercised, 41,192 options (Note 13)                       --         --          --         --           415        204
  Allocated ESOP shares                                             --         --         135         --            --        267
                                                              ----------------------------------------------------------------------
Balances, December 31, 2001                                     21,792        745        (155)      (128)      (15,833)    23,572
  Comprehensive Income:
  Net income                                                     3,340         --          --         --            --      3,340
    Other comprehensive income, net of tax:
      Unrealized gains on securities, net of related taxes          --          1          --         --            --          1

    Comprehensive income

  Treasury stock purchases, 88,860 shares (Note 11)                 --         --          --         --        (1,771)    (1,771)
  Cash dividends declared ($0.72 per share)                       (845)        --          --         --            --       (845)
  Amortization of unearned compensation                             --         --          --         81            --         81
  Options exercised, 54,364 options (Note 13)                       --         --          --         --           689        396
  Award of management stock bonus
    plan shares, 4,375 shares (Note 13)                             --         --          --        (91)           68         --
  Tax benefit related to exercised options                          --         --          --         --            --        152
  Allocated ESOP shares                                             --         --         126         --            --        297
                                                              ----------------------------------------------------------------------
Balances, December 31, 2002                                     24,287        746         (29)      (138)      (16,847)    25,223
  Comprehensive Income:
  Net income                                                     3,540         --          --         --            --      3,540
    Other comprehensive income, net of tax:
      Unrealized gains on securities, net of related taxes          --       (221)         --         --            --       (221)

    Comprehensive income

  Cash dividends declared ($0.80 per share)                       (905)        --          --         --            --       (905)
  Amortization of unearned compensation                             --         --          --        105            --        105
  Options exercised, 19,569 options (Note 13)                       --         --          --         --           179         33
  Award of management stock bonus
    plan shares, 17,500 shares (Note 13)                            --         --          --       (528)          277         --
  Tax benefit related to exercised options                          --         --          --         --            --         14
  Allocated ESOP shares                                             --         --          29         --            --         79
                                                              ----------------------------------------------------------------------
Balances, December 31, 2003                                   $ 26,922      $ 525       $  --     $ (561)     $(16,391)  $ 27,868
                                                              ======================================================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       23
<PAGE>


Wells Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands)

<TABLE>
<CAPTION>
                                                            2003          2002        2001
---------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>          <C>
Cash Flows From Operating Activities
  Net income                                             $   3,540    $   3,340    $   3,345
  Adjustments to reconcile net income to net
    cash provided by (used in) operating activities:
    Provision for loan losses                                   --           23          180
    Gain on sale of loans                                   (2,840)      (2,229)      (1,150)
    Amortization and valuation adjustments for
      mortgage servicing rights                              1,071        1,453          383
    Compensation on allocation of ESOP shares                   79          297          267
    Amortization of unearned compensation                      105           81          109
    Tax benefit from exercised options                          14          152           --
    (Gain) loss on sale of foreclosed real estate              (23)           6           --
    Write-down of foreclosed real estate                         3           30           --
    Deferred income taxes                                      234          151          338
    Depreciation and amortization on premises
      and equipment                                            357          244          237
    Amortization of net deferred loan origination fees        (117)        (165)        (240)
    Amortization of excess servicing fees                       --           16            7
    Amortization of securities premiums and discounts          158           27            1
    Loans originated for sale                             (211,650)    (151,422)    (123,439)
    Proceeds from the sale of loans held for sale          220,615      152,329      114,978
    Changes in assets and liabilities:
      Accrued interest receivable                              178          142          381
      Other assets                                              30           76          (76)
      Accrued expenses and other liabilities                  (310)         302         (100)
                                                         ------------------------------------
    Net cash provided by (used in)
        operating activities                                11,444        4,853       (4,779)
                                                         ------------------------------------
</TABLE>

                                  (Continued)



                                       24
<PAGE>


Wells Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands)

<TABLE>
<CAPTION>
                                                            2003       2002        2001
-------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>         <C>
Cash Flows From Investing Activities
  Net (increase) decrease in loans                        $(14,437)   $ 14,792    $ 30,492
  Certificates of deposit:
    Maturities                                                 200         200       1,500
    Purchases                                                 (200)       (200)     (1,500)
  Purchase of Federal Home Loan Bank Stock                     (16)         --          --
  Proceeds from sale of Federal Home Loan Bank Stock           588          --          --
  Purchase of securities available for sale                (27,465)    (18,286)     (8,944)
  Proceeds from maturities and calls of
    securities available for sale                           19,378      12,393       9,383
  Purchase of premises and equipment                          (967)     (1,418)       (205)
  Proceeds from the sale and redemption of
    foreclosed real estate                                     325         292          --
  Investment in foreclosed real estate                          (5)         (8)         (6)
                                                          --------------------------------
    Net cash provided by (used in) investing activities    (22,599)      7,765      30,720
                                                          --------------------------------

Cash Flows From Financing Activities
  Net increase (decrease) in deposits                          536     (11,873)     17,417
  Net increase (decrease) in advances from
    borrowers for taxes and insurance                          238         (24)        143
  Stock options exercised                                       33         396         204
  Dividends paid                                              (905)       (845)       (735)
  Repayments on borrowed funds                                  --          --     (10,500)
  Purchase of treasury stock                                    --      (1,771)     (2,006)
                                                          --------------------------------
    Net cash provided by (used in) financing activities        (98)    (14,117)      4,523
                                                          --------------------------------
    Net increase (decrease) in cash                        (11,253)     (1,499)     30,464

  Cash
    Beginning                                               36,571      38,070       7,606
                                                          --------------------------------
    Ending                                                $ 25,318    $ 36,571    $ 38,070
                                                          ================================
</TABLE>

                                  (Continued)


                                       25

<PAGE>



Wells Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands)

<TABLE>
<CAPTION>
                                                         2003       2002      2001
-----------------------------------------------------------------------------------
<S>                                                  <C>        <C>       <C>
Supplemental Disclosures of Cash Flow Information
  Cash payments for:
    Interest on deposits                               $ 3,366    $ 5,027   $ 7,281
    Interest on borrowed funds                           1,245      1,245     1,382
    Income taxes                                         1,980      1,942     2,100
                                                       ============================

Supplemental Schedule of Noncash Investing and
  Financing Activities:
  Other real estate acquired in settlement of loans    $    91    $   277   $   192
  Allocation of ESOP shares to participants                 29        126       135
  Net change in unrealized gain (loss) on securities
  available for sale                                      (221)         1        47
                                                       ============================
</TABLE>




See Notes to Consolidated Financial Statements.


                                       26

<PAGE>


Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 1.     Summary of Significant Accounting Policies

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., Greater Minnesota Mortgage, Inc. and Wells REIT Holding,
LLC. All significant  intercompany  transactions  and balances are eliminated in
consolidation.

Nature of operations:  Operations of Wells Financial Corp.  (Company)  primarily
consist of banking  services  through  Wells  Federal  Bank,  fsb (Bank).  Wells
Insurance Agency,  Inc., is a property and casualty  insurance  agency.  Greater
Minnesota  Mortgage,  Inc., is a mortgage  banking company that originates loans
through referrals from commercial banks. Wells REIT Holding,  LLC is the holding
company for the Wells Real Estate  Investment Trust which invests in real estate
loans  acquired  from the Bank.  The Company  serves its  customers  through the
Bank's nine  locations in South  Central  Minnesota and one location in Northern
Iowa.

Use of estimates: 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.  Two material estimates that are particularly
susceptible to significant  change in the near term relate to the  determination
of the allowance for loan losses and the valuation of mortgage servicing rights.

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.

Mortgage  servicing  rights are subject to change based  primarily on changes in
the mix of loans,  interest rates,  prepayment speeds, or default rates from the
estimates used in the valuation of the mortgage  servicing rights.  Such changes
may have a  material  effect  on the  amortization  and  valuation  of  mortgage
servicing  rights.  Although  management  believes that the assumptions  used to
evaluate the mortgage  servicing  rights for impairment are  reasonable,  future
adjustment may be necessary if future economic  conditions differ  substantially
from the  economic  assumptions  used to  determine  the  value of the  mortgage
servicing rights.

Comprehensive  income:  Comprehensive income is the total of reported net income
and all  other  revenues,  expenses,  gains and  losses  that  under  accounting
principles  generally  accepted in the United States of America bypass  reported
net income.  The Company  includes  unrealized  gains or losses,  net of tax, on
securities available for sale in other comprehensive income.

Segment disclosures: Operating segments are components of a business about which
separate financial  information is available and that are evaluated regularly by
the Company in deciding how to allocate  resources  and  assessing  performance.
Public  companies are required to report  certain  financial  information  about
operating  segments  in interim  and  annual  financial  statements.  Management
evaluates  the  operations of the Company as one  operating  segment,  community
banking,  due to the  materiality  of the  community  banking  operation  to the
Company's financial  condition and results of operations,  taken as a whole, and
as a result separate  segment  disclosures are not required.  The Company offers
the following products and services to customers:  deposits,  loans and mortgage
banking.  Revenues  for  each of  these  products  and  services  are  disclosed
separately in the Consolidated Statements of Income.

                                       27
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 1.     Summary of Significant Accounting Policies (Continued)

Cash and cash flows: For the purpose of reporting cash flows, cash includes cash
on hand  and  amounts  due from  banks  (including  cash  items  in  process  of
clearing). Cash flows from loans and deposits are reported net.

Federal  Home Loan Bank stock:  The Bank,  as a member of the Federal  Home Loan
Bank (FHLB)  system,  is required to maintain an  investment in capital stock of
the FHLB.  The FHLB stock  requirement  is related to the asset size of the Bank
and the amount of advances the Bank has with the FHLB.  No ready  market  exists
for the FHLB stock and it has no quoted market value.

Securities  available  for sale:  Securities  classified  as available  for sale
includes all equity  securities and those debt securities 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
accumulated other comprehensive  income.  Amortization of premiums and accretion
of discounts,  computed by the interest method over their contractual lives, are
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  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 the  Company  has the
intent  to sell in the  foreseeable  future.  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 after  allocating  cost to
servicing rights retained. All sales are made without recourse.

Loans receivable:  The Company generally  originates  single-family  residential
loans within its primary  lending area of South  Central  Minnesota and Northern
Iowa. These loans are secured by the underlying properties.  The Company is also
active  in  originating  agricultural  real  estate,   commercial  real  estate,
commercial  operating and secured consumer loans,  primarily automobile and home
equity loans.

Loans  receivable  that  management  has the intent and  ability to hold for the
foreseeable  future or until  maturity  or  pay-off  are stated at the amount of
unpaid  principal,  reduced by an  allowance  for loan  losses and net  deferred
origination fees. Interest is accrued daily on the outstanding balances.

Loan origination and commitment fees and certain direct loan  origination  costs
are deferred and the net amount amortized as an adjustment of the related loan's
yield.  The Company is generally  amortizing  these amounts over the contractual
life of the related  loans,  adjusted  for  estimated  prepayments  based on the
Company's historical prepayment experience.


                                       28
<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 1.     Summary of Significant Accounting Policies (Continued)

The Company  determines a loan to be delinquent when payments have not been made
according to contractual terms,  typically  evidenced by nonpayment of a monthly
installment by the due date.  Accrual of interest is discontinued  for all loans
at the time the loan is 120 days  delinquent for first mortgage loans or 90 days
delinquent for consumer/other  loans. All interest accrued but not collected for
loans that are placed on nonaccrual  status is reversed against interest income.
Accrual of interest is generally  resumed when the borrower has demonstrated the
ability to make all periodic interest and principal payments.


Allowance for loan losses: The allowance for loan losses is established  through
a provision for loan losses  charged to expense.  Loans are charged  against the
allowance for loan losses when management  believes that  collectibility  of the
principal  is  unlikely.  Subsequent  recoveries,  if any,  are  credited to the
allowance.

The allowance is an amount that  management  believes will be adequate to absorb
estimated losses relating to specifically  identified loans, as well as probable
credit  losses  inherent  in the  balance  of the  loan  portfolio,  based on an
evaluation of the  collectibility  of existing loans and prior loss  experience.
This  evaluation  also takes into  consideration  such factors as changes in the
nature and volume of the loan portfolio,  overall portfolio  quality,  review of
specific  problem loans,  and current  economic  conditions  that may affect the
borrower's  ability to pay.  This  evaluation  does not  include  the effects of
expected  losses on specific loans or groups of loans that are related to future
events or expected  changes in economic  conditions.  While  management uses the
best  information  available to make its evaluation,  future  adjustments to the
allowance  may be  necessary  if  there  are  significant  changes  in  economic
conditions.  In  addition,  regulatory  agencies,  as an integral  part of their
examination  process,  periodically  review the Bank's allowance for loan losses
and may  require  the Bank to make  additions  to the  allowance  based on their
judgment about information available to them at the time of their examinations.

The allowance  consists of specific,  general and  unallocated  components.  The
specific component relates to loans that are classified as doubtful, substandard
or special  mention.  For such loans that are also  classified  as impaired,  an
allowance is established  when the discounted cash flows (or collateral value or
observable  market price) of the impaired loan is lower than the carrying  value
of that loan. The general component covers  non-classified loans and is based on
historical loss  experience  adjusted for  qualitative  factors.  An unallocated
component is maintained to cover  uncertainties  that could affect  management's
estimate of probable losses. The unallocated component of the allowance reflects
the margin of  imprecision  inherent in the underlying  assumptions  used in the
methodologies for estimating specific and general losses in the portfolio.

A loan is impaired when it is probable, based on current information and events,
the Company  will be unable to collect all  contractual  principal  and interest
payments due in accordance with the terms of the loan agreement.  Impaired loans
are measured on an individual basis for commercial and construction  loans 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.  The amount of  impairment,  if any, and any  subsequent  changes are
included in the allowance for loan losses.

Large groups of smaller balance homogenous loans are collectively  evaluated for
impairment.  Accordingly,  the Company does not separately  identify  individual
consumer and residential loans for impairment disclosures.

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.


                                       29
<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 1.     Summary of Significant Accounting Policies (Continued)

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  based upon  estimated
prepayment  speeds,  ancillary  income  received  from  servicing  the loans and
current interest rates. 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
interest  rates and the 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 exceeds their fair value.

Foreclosed real estate:  Real estate properties acquired through, or in lieu of,
loan foreclosure are initially  recorded at the lower of cost or fair value less
estimated  costs  to  sell  at  the  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.

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 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, generally 7 to 10 years.

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.

Earnings per share:  Earnings per basic common share are computed based upon the
weighted average number of common shares outstanding during each year.  Dilutive
per share  amounts  assume  conversion,  exercise or  issuance of all  potential
common  stock  instruments  unless  the  effect is to reduce a loss or  increase
income per common share.

Employee Stock Plans:  The Company has three types of  stock-based  compensation
plans,  which are described in more detail in Note 13. The Company  accounts for
those plans under the recognition and measurement  principles of APB Opinion No.
25,  Accounting  for Stock  Issued to  Employees,  and related  interpretations.
Accordingly,  no stock-based employee compensation cost has been recognized,  as
all options  granted under those plans had an exercise price equal to the market
value of the underlying  common stock on the date of grant.  The following table
illustrates  the effect on net income and  earnings  per share had  compensation
cost for all of the stock-based  compensation plans been determined based on the
grant date fair values of awards (the method  described  in FASB  Statement  No.
123, Accounting for Stock-Based Compensation):


                                       30

<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 1.     Summary of Significant Accounting Policies (Continued)

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                    ------------------------------------
                                                        2003          2002         2001
----------------------------------------------------------------------------------------
<S>                                                 <C>          <C>          <C>
Net income:
  As reported                                         $   3,540    $   3,340    $   3,345
  Deduct total stock-based employee compensation
    expense determined under fair value based
    method for all awards, net of related tax effects      (153)         (28)         (42)
                                                      ------------------------------------
  Pro forma                                           $   3,387    $   3,312    $   3,303
                                                      ====================================

Basic earnings per share:
  As reported                                         $    3.12    $    2.84    $    2.91
  Pro forma                                                2.99         2.81         2.87

Diluted earnings per share:
  As reported                                         $    3.05    $    2.75    $    2.79
  Pro forma                                                2.92         2.74         2.78

</TABLE>


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 available for sale: Fair values for securities available for
     sale 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.

     Federal Home Loan Bank stock:  The carrying amount approximates fair value.

     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.

     Mortgage servicing rights:  Fair values are estimated using discounted cash
     flows based on current market rates and conditions.


                                       31
<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  disclosed  for  demand
     deposits and savings  accounts are, by definition,  equal to 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 is
     estimated  by using a  discounted  cash  flow  analysis  based  on  current
     incremental borrowing rates for similar types of borrowing arrangements.

     Off-statement of financial condition instruments: Since the majority of the
     Company's  off-statement of financial condition  instruments consist of non
     fee-producing  commitments  to  originate  and sell loans,  the Company has
     determined they do not have a significant fair value.

Recent  accounting  pronouncements:  In January 2003,  the Financial  Accounting
Standards Board issued FASB  Interpretation  No. 46 (FIN 46),  Consolidation  of
Variable Interest  Entities,  an interpretation of Accounting  Research Bulletin
No.  51. It  establishes  accounting  guidance  for  consolidation  of  variable
interest  entities  (VIE) that function to support the activities of the primary
beneficiary.  Prior  to  the  implementation  of FIN  46,  VIEs  were  generally
consolidated  by an enterprise  when the enterprise had a controlling  financial
interest through  ownership of a majority of voting interest in the entity.  The
provisions of FIN 46 were effective  immediately  for all  arrangements  entered
into after January 31, 2003. In December 2003, the FASB issued a revision to FIN
46  (FIN46R)  which  clarified   certain   implementation   issues  and  revised
implementation  dates for VIE's created before  January 31, 2003.  Under the new
guidance, special effective date provisions apply to enterprises that have fully
or  partially  applied FIN 46 prior to  issuance of the revised  Interpretation.
Otherwise,  application  of FIN  46R  (or  FIN  46)  is  required  in  financial
statements of public  entities that have interests in  special-purpose  entities
for periods  ending  after  December  15,  2003.  The Company  adopted FIN 46 in
connection  with its  consolidated  financial  statements  for the  year  ending
December 31,  2003.  The adoption  had no  significant  impact on its  financial
condition.

In April 2003, the Financial  Accounting  Standards Board issued  Statement 149,
"Amendment of Statement 133 on Derivative  Instruments and Hedging  Activities."
SFAS No. 149 amends and clarifies  accounting  for  derivative  instruments  and
hedging  activities under Statement 133. In addition,  this Statement  clarifies
under what  circumstances  a contract with an initial net  investment  meets the
characteristic  of a  derivative  and when a  derivative  contains  a  financing
component that warrants special  reporting in the statement of cash flows.  This
statement is effective  for  contracts  entered into or modified  after June 30,
2003. The Company adopted the provisions of SFAS No. 149 effective July 1, 2003,
with  no  significant  effect  to the  consolidated  financial  statements.  The
Company's derivative instruments  outstanding during the year ended December 31,
2003 include commitments to fund loans originated for sale and forward loan sale
agreements.



                                       32

<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 1.     Summary of Significant Accounting Policies (Continued)

In accordance  with SFAS No. 133 and SFAS No. 149,  derivative  instruments  are
recognized  in the  balance  sheet at fair  value and  changes in the fair value
thereof are  recognized  in the  statement  of income.  The  Company  originates
single-family  residential loans for sale pursuant to programs with FHLMC. Under
the structure of the programs,  at the time the Company  initially issues a loan
commitment  in  connection  with such  programs,  it does not lock in a specific
interest  rate. At the time the interest rate is locked in by the borrower,  the
Company  concurrently  enters into a forward loan sale agreement with respect to
the sale of such loan at a set price in an effort to manage  the  interest  rate
risk inherent in the locked loan commitment.

The  forward  loan sale  agreement  also meets the  definition  of a  derivative
instrument  under  SFAS  No.  133.  Any  change  in the  fair  value of the loan
commitment after the borrower locks in the interest rate is substantially offset
by the corresponding change in the fair value of the forward loan sale agreement
related  to such  loan.  The  period  from the time  the  borrower  locks in the
interest  rate to the time the  Company  funds the loan and sells it to FHLMC is
generally  60 days.  The  fair  value of each  instrument  will  rise or fall in
response  to  changes  in  market  interest  rates  subsequent  to the dates the
interest  rate locks and forward loan sale  agreements  are entered into. In the
event that  interest  rates rise after the Company  enters into an interest rate
lock,  the fair value of the loan  commitment  will decline.  However,  the fair
value of the forward loan sale agreement  related to such loan commitment should
increase by substantially the same amount, effectively eliminating the Company's
interest rate and price risk.

At  December  31,  2003,  the  Company  had  $2.9  million  of loan  commitments
outstanding related to loans being originated for sale all of which were subject
to interest rate locks forward loan sale agreements as described above.

In May 2003,  the Financial  Accounting  Standards  Board issued  Statement 150,
"Accounting  for Certain  Financial  Instruments  with  Characteristics  of both
Liabilities and Equity".  This Statement establishes standards for how an issuer
classifies and measures certain financial  instruments with  characteristics  of
both  liabilities  and equity and requires that certain  freestanding  financial
instruments be reported as  liabilities  in the balance sheet.  For the Company,
the  Statement is effective  for the fiscal year  beginning  January 1, 2005 and
implementation is not expected to have a significant  impact on the consolidated
financial statements.


Note 2.     Certificates of Deposit

Certificates  of deposit with a carrying  value of $200 at December 31, 2003 and
2002,  had  weighted  average  yields  of  1.1%  and  1.6%,  respectively,   and
contractual maturities of less than one year.





                                       33




<PAGE>


Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 3.     Securities Available for Sale


<TABLE>
<CAPTION>
                                                         December 31, 2003
                                       -------------------------------------------------------
                                                       Gross          Gross
                                       Amortized     Unrealized     Unrealized
                                         Cost          Gains          Losses       Fair Value
---------------------------------------------------------------------------------------------
<S>                                  <C>           <C>            <C>            <C>
Mortgage backed securities             $ 19,121      $     43       $   (129)      $ 19,035
U.S. Government corporations and
  agencies                                5,549            37            (10)         5,576
Obligations of states and political
  subdivisions                            1,861             5             --          1,866
FHLMC stock                                  16           917             --            933
                                       ------------------------------------------------------
                                       $ 26,547      $  1,002       $   (139)      $ 27,410
                                       ======================================================
</TABLE>

<TABLE>
<CAPTION>
                                                         December 31, 2002
                                       -------------------------------------------------------
                                                       Gross          Gross
                                       Amortized     Unrealized     Unrealized
                                         Cost          Gains          Losses       Fair Value
---------------------------------------------------------------------------------------------
<S>                                  <C>           <C>            <C>            <C>
Mortgage backed securities             $  3,691      $     86       $     (4)      $  3,773
U.S. Government corporations and
  agencies                               14,497           203             --         14,700
Obligations of states and political
  subdivisions                              393            45             --            438
FHLMC stock                                  16           929             --            945
                                       ------------------------------------------------------
                                       $ 18,597      $  1,263       $     (4)      $ 19,856
                                       ======================================================
</TABLE>


Contractual  maturities:  The  amortized  cost  and  fair  value  of  securities
available  for sale as of December  31, 2003 by  contractual  maturity are shown
below.  Maturities  may differ from  contractual  maturities in  mortgage-backed
securities  because the mortgages  underlying  the  securities  may be called or
repaid  without  any  penalties.  In  addition,  FHLMC  stock  has no  maturity.
Therefore,  these securities are not included in the maturity  categories in the
following maturity summary.


                                         Amortized Cost        Fair Value
----------------------------------------------------------------------------
Due in one year or less                    $    365            $    365
Due in one to five years                      5,686               5,724
Due in over five years                        1,359               1,353
                                         -----------------------------------
                                              7,410               7,442
Equity securities                                16                 933
Mortgage backed securities                   19,121              19,035
                                         -----------------------------------
                                           $ 26,547            $ 27,410
                                         ===================================






                                       34

<PAGE>



Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 3.     Securities Available for Sale (Continued)

Changes in other comprehensive income - unrealized gains on securities available
for sale:

                                                   Years Ended December 31,
                                                 ----------------------------
                                                  2003       2002       2001
-----------------------------------------------------------------------------
Balance, beginning                               $ 746      $ 745      $ 698
  Unrealized gains (losses) during the year       (375)         2         78
  Deferred tax effect relating to unrealized
    appreciation                                   154         (1)       (31)
                                                 ----------------------------
Balance, ending                                  $ 525      $ 746      $ 745
                                                 ===========================

Unrealized  losses are deemed to be temporary  and have been in a loss  position
for less than twelve  months.  Most of these  underlying  securities  consist of
mortgage-backed securities.  Market fluctuations are caused primarily by changes
in interest rates and prepayments of underlying  mortgages.  Because  management
has the ability to hold these  securities  to  maturity,  unrealized  losses are
deemed to be a temporary impairment.

Securities  with a carrying  value of $1,524 and $2,016 at December 31, 2003 and
2002,  respectively,  were  pledged  to  secure  public  deposits  and for other
purposes as required or permitted by law.


Note 4.     Loans Receivable and Loans Held for Sale

Composition of loans receivable:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                    -------------------------
                                                                       2003           2002
---------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>
First mortgage loans (principally conventional):
  Secured primarily by one-to-four family residences                $  40,870      $  50,765
  Secured by other properties, primarily agricultural real estate      65,509         52,397
  Construction                                                          9,697          4,830
                                                                    -------------------------
    Total first mortgage loans                                        116,076        107,992
                                                                    -------------------------
Consumer and other loans:
  Home equity, home improvement and second mortgages                   21,755         22,826
  Agricultural and commercial operating and term loans                  9,421          5,917
  Vehicle loans                                                         6,146          5,687
  Other                                                                 7,711          4,292
                                                                    -------------------------
    Total consumer and other loans                                     45,033         38,722
                                                                    -------------------------
    Total loans                                                       161,109        146,714

Less:
  Net deferred loan origination fees                                     (156)          (220)
  Allowance for loan losses                                              (904)          (908)
                                                                    -------------------------
    Loan receivable, net                                            $ 160,049      $ 145,586
                                                                    =========================
</TABLE>










                                       35
<PAGE>


Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 4.     Loans Receivable and Loans Held for Sale  (Continued)

Allowance for loan losses:

                                        Years Ended December 31,
                                      ----------------------------
                                       2003       2002       2001
------------------------------------------------------------------
Balance, beginning                    $ 908      $ 952      $ 833
  Provision for loan losses              --         23        180
  Loans charged off                     (23)       (86)       (89)
  Recoveries                             19         19         28
                                      ----------------------------
Balance, ending                       $ 904      $ 908      $ 952
                                      ============================

Nonaccrual and impaired  loans:  Loans on which the accrual of interest has been
discontinued  totaled $829,  $428, and $408 at December 31, 2003, 2002 and 2001,
respectively.  The effect of nonaccrual loans was not significant to the results
of operations.

Information  about impaired and  delinquent  loans as of and for the years ended
December 31, 2003 and 2002 is as follows:


                                                                    2003    2002
--------------------------------------------------------------------------------
Total impaired loans                                                $791    $149
                                                                    ============

Related allowance for loan losses                                   $179    $ 75
                                                                    ============

Loans past due ninety days or more still accruing interest          $172    $250
                                                                    ============

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, 2003 and 2002 were $448 and $367,  respectively.  During 2003,  new
loans to such related parties were $268 and repayments were $187.

Loans held for sale: As of December 31, 2003 and 2002, the Company's  loans held
for sale were $1,997 and $9,695,  respectively,  and  consisted  of  one-to-four
family residential real estate loans.

Note 5.     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,  2003 and 2002  were  $380,445  and  $307,324,
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
$1,409 and $1,054 at December 31, 2003 and 2002, respectively.


                                       36

<PAGE>



Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 5.     Loan Servicing (Continued)

Mortgage  servicing  rights,  net of  valuation  allowance,  are  summarized  as
follows:

                                                    2003               2002
----------------------------------------------------------------------------
Balance at beginning of year, net                 $ 2,179            $ 1,850
Mortgage servicing rights capitalized               1,573              1,782
Amortization expense and valuation adjustments     (1,071)            (1,453)
                                                  --------------------------
Balance at end of year, net                       $ 2,681            $ 2,179
                                                  ==========================

The estimated fair value of mortgage  servicing  rights was $2,921 and $2,179 at
December 31, 2003 and 2002,  respectively.  For 2003, the fair value of mortgage
servicing  rights was determined  using a prepayment  speed assigned at the loan
level.  The weighted  average  prepayment  speed on the loan  portfolio was 279,
which converts to a constant  prepayment rate (CPR) of approximately  16.7%. The
average life of the portfolio was 4.6 years and the discount rate used was 9% on
15 and 30-year  mortgages  and 9.75% on  mortgages  with a balloon  payment upon
maturity.  For 2002, the fair value of mortgage  servicing rights was determined
using a CPR of 19.6%,  an average life of 4.6 years and a discount  rate of 8.0%
on the entire portfolio.

Changes in the Company's  valuation allowance for servicing assets for the years
ended December 31 are as follows:


                                                   2003                2002
----------------------------------------------------------------------------
Balance at beginning of year                      $   660            $    --
Provisions for impairment                              --                660
Less:  Recoveries                                    (445)                --
                                                  --------------------------
Balance at end of year                            $   215            $   660
                                                  ==========================


The amortized cost of mortgage servicing rights was $2,896 at December 31, 2003.
The following  table  indicates the estimated  future  amortization  expense for
mortgage  servicing  rights.  The  estimated  amortization  expense  is based on
existing  asset  balances.  Actual  amortization  expense  recognized  in future
periods may differ significantly  depending upon economic  conditions,  mortgage
interest rates, and other matters.

Years ending December 31,
----------------------------------------------------------------------------
2004                                                                 $   922
2005                                                                     695
2006                                                                     518
2007                                                                     380
2008                                                                     275
Thereafter                                                               106
                                                                     -------
                                                                     $ 2,896
                                                                     =======







                                       37



<PAGE>


Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 6.      Foreclosed Real Estate

The Company had  investments  in real estate  acquired  through  foreclosure  or
deeded to the Company in lieu of foreclosure of $-0- and $209 as of December 31,
2003 and 2002, respectively.  No allowances for losses on foreclosed real estate
were required at these dates.  The amount of foreclosed  real estate is included
in other assets in the consolidated statements of financial condition.

Note 7.     Premises and Equipment

Premises and equipment are summarized as follows:

                                                             December 31,
                                                      -----------------------
                                                        2003           2002
-----------------------------------------------------------------------------
Land                                                  $   244        $   244
Buildings and improvements                              3,279          2,868
Leasehold improvements                                    111            111
Furniture, fixtures and equipment                       2,228          1,671
                                                      -----------------------
                                                        5,862          4,894
Less accumulated depreciation and amortization          2,277          1,919
                                                      -----------------------
                                                      $ 3,585        $ 2,975
                                                      =======================


Note 8.     Deposits

Composition of deposits:

                                                             December 31,
                                                      -----------------------
                                                        2003           2002
-----------------------------------------------------------------------------
Demand deposits, noninterest bearing                  $   5,969     $   4,319
NOW and money market accounts                            40,619        34,744
Savings accounts                                         30,014        22,355
Certificates of deposit                                  93,060       107,708
                                                      -----------------------
                                                      $ 169,662     $ 169,126
                                                      =======================



The aggregate  amount of certificates of deposit over $100 was $7,892 and $9,564
at December 31, 2003 and 2002, respectively.

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

Years Ending December 31,
-----------------------------------------------------------------------------
2004                                                                   64,108
2005                                                                   15,167
2006                                                                    9,557
2007                                                                    4,228
                                                                    ---------
                                                                    $  93,060
                                                                    =========





                                       38

<PAGE>



Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 9.     Borrowed Funds

Maturities of advances from the Federal Home Loan Bank (FHLB) at December 31 are
as follows:

                                                  2003             2002
--------------------------------------------------------------------------
Fixed-rate advances (with rates ranging
 from 4.77% to 5.71%)
  Due from one to five years                   $   5,000        $      --
  Due from five to ten years                      18,000           23,000
                                               ---------------------------
                                               $  23,000        $  23,000
                                               ===========================

All advances are subject to various prepayment, call, and conversion provisions.

The  advances are  collateralized  by FHLB stock and first  mortgage  loans with
balances exceeding 120% of the amount of the advances.

Note 10.     Income Tax Matters

The Company and its subsidiary file consolidated federal income tax returns. The
Company is allowed bad debt deductions based on actual charge-offs.

The components of income tax expense are as follows:

                                                Years Ended December 31,
                                             -----------------------------------
                                                2003         2002        2001
--------------------------------------------------------------------------------
Federal:
  Current                                     $ 1,641      $ 1,659      $ 1,530
  Deferred                                        167          115          256
                                             -----------------------------------
                                                1,808        1,774        1,786
                                             -----------------------------------
State:
  Current                                         355          553          489
  Deferred                                         67           36           82
                                             -----------------------------------
                                                  422          589          571
                                             -----------------------------------
    Total                                     $ 2,230      $ 2,363      $ 2,357
                                             ===================================

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:

                                                Years Ended December 31,
                                             -----------------------------------
                                                2003         2002        2001
--------------------------------------------------------------------------------
Computed "expected" tax expense               $ 2,020      $ 1,996      $ 1,996
State income taxes, net of federal benefit        373          369          368
Effect of graduated rates                         (58)         (57)         (57)
Other                                            (105)          55           50
                                             -----------------------------------
  Income tax expense                          $ 2,230      $ 2,363      $ 2,357
                                             ===================================

                                       39


<PAGE>



Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 10.     Income Tax Matters (Continued)

The net deferred  tax  liability  included in  liabilities  in the  accompanying
consolidated statements of financial condition includes the following amounts of
deferred tax assets and liabilities:

                                             December 31,
                                       -----------------------
                                         2003           2002
--------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses            $   366        $   367
  Management stock bonus plan               65             46
  Accrued compensation                      14             16
  Other                                     22             23
                                       -----------------------
                                           467            452
  Less valuation allowance                  --             --
                                       -----------------------
    Total deferred tax assets              467            452
                                       -----------------------

Deferred tax liabilities:
  Premises and equipment                   210            149
  Securities available for sale            359            513
  FHLB stock dividends                     189            189
  Mortgage servicing rights              1,085            882
  Deferred loan origination fees            39             49
  Other                                     41             46
                                       -----------------------
    Total deferred tax liabilities       1,923          1,828
                                       -----------------------
    Net deferred tax liability         $(1,456)       $(1,376)
                                       =======================

Retained  earnings at December  31, 2003 and 2002 include  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. If the Bank no longer
qualifies as a bank or in the event of a liquidation  of the Bank,  income would
be created 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, 2003 and 2002.


Note 11.     Stockholders' Equity, Regulatory Capital and Dividend Restrictions

The Company has initiated several stock buy back programs.  Shares totaling -0-,
88,860,  and 116,140 were  purchased  during the years ended  December 31, 2003,
2002 and 2001, respectively.

On January 20, 2004,  the Company  declared a dividend of $0.22 per common share
payable on February 16, 2004 to  stockholders  of record as of February 2, 2004.
The scheduled dividend is approximately $254.


                                       40

<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 11.     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  (set forth in the
following  table) 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, 2003, that the Bank
meets all capital adequacy requirements to which it is subject.

As of December 31, 2003, the most recent  notification from the Office of Thrift
Supervision  categorized  the Bank as "well  capitalized"  under the  regulatory
framework for Prompt  Corrective  Action. To be categorized as well 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>
                                                                                                 Minimum
                                                                    Minimum              To Be Well Capitalized
                                                                   For Capital           Under Prompt Corrective
                                           Actual               Adequacy Purposes           Action Provisions
                                   -----------------------------------------------------------------------------
                                     Amount     Percent        Amount      Percent        Amount       Percent
                                   -----------------------------------------------------------------------------
<S>                              <C>            <C>         <C>            <C>          <C>            <C>
As of December 31, 2003:
  Tier 1  (core) capital (to
    adjusted total assets)         $ 19,516       9.01%       $ 8,666        4.00%        $ 10,833       5.00%
  Risk-based capital (to risk-
    weighted assets)                 20,420      12.86         12,700        8.00           15,875      10.00
  Tangible (capital  to
    tangible assets)                 19,516       9.01          3,250        1.50              N/A        N/A
  Tier 1 (core) capital (to
    risk-weighted assets)            19,516      12.29            N/A         N/A            9,525       6.00

As of December 31, 2002:
  Tier 1 (core) capital (to
    adjusted total assets)         $ 19,245       8.92%       $ 8,629        4.00%        $ 10,786       5.00%
  Risk-based capital (to risk-
    weighted assets)                 20,153      14.72         10,956        8.00           13,696      10.00
  Tangible capital (to
    tangible assets)                 19,245       8.92          3,236        1.50              N/A        N/A
  Tier 1 (core) capital (to
    risk-weighted assets)            19,245      14.05            N/A         N/A            8,217       6.00

</TABLE>


                                       41
<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 11.     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),
after a 30 day notice the Bank may make capital  distributions without the prior
consent of the  Office of Thrift  Supervision  in any  calendar  year.  However,
without consent,  capital  distributions  during a calendar year must not exceed
the net income of the Bank during the calendar year plus retained net income for
the preceding two years. The Bank declared dividends of $3,009 and $2,020 to the
Company during the years ended December 31, 2003 and 2002, respectively.


Note 12.     Earnings Per Share (dollars in thousands, except per share data)

A  reconciliation  of the income  and common  stock  share  amounts  used in the
calculation of basic and diluted earnings per share follows:

                                          For the Year Ended December 31, 2003
                                          ------------------------------------
                                                                     Per Share
                                           Income      Shares          Amount
------------------------------------------------------------------------------
Basic EPS
Net income                                $ 3,540     1,133,320       $ 3.12
                                                                    ==========
Effect of Dilutive Securities
Stock options                                  --        27,623
                                          ---------------------
Diluted EPS
Net income plus assumed conversions       $ 3,540     1,160,943       $ 3.05
                                          ====================================

                                          For the Year Ended December 31, 2002
                                          ------------------------------------
                                                                     Per Share
                                           Income      Shares          Amount
------------------------------------------------------------------------------
Basic EPS
Net income                                $ 3,340     1,177,027       $  2.84
                                                                    ==========
Effect of Dilutive Securities
Stock options                                  --        36,099
                                          ---------------------
Diluted EPS
Net income plus assumed conversions       $ 3,340     1,213,126       $  2.75
                                          ====================================

                                          For the Year Ended December 31, 2001
                                          ------------------------------------
                                                                     Per Share
                                           Income      Shares          Amount
------------------------------------------------------------------------------
Basic EPS
Net income                                $ 3,345     1,150,640       $  2.91
                                                                    ==========
Effect of Dilutive Securities
Stock options                                  --        47,766
                                          ---------------------
Diluted EPS
Net income plus assumed conversions       $ 3,345     1,198,406       $  2.79
                                          ====================================



                                       42

<PAGE>


Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 13.     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  and  other  contributions  to the plan.
Discretionary  matching  contributions  of $45 (up to 3% of  participant  annual
compensation)  were made for the year-ended 2003. No contributions  were made by
the Bank for the years ended December 31, 2002 and 2001.

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  based on
the proportion of debt service paid in the year and allocated to employees.  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. In 2003, the remaining ESOP's debt was retired
and an additional 1,600 shares were purchased and allocated to ESOP participants
at a cost of approximately $48, which was charged to compensation expense.

Compensation  expense  for the ESOP was $127,  $297 and $267 for the years ended
December 31, 2003, 2002 and 2001, respectively.

Shares of Company  stock held by the ESOP at  December  31, 2003 and 2002 are as
follows:


                                                    2003               2002
--------------------------------------------------------------------------------
Shares released for allocation                       110,948            118,610
Unreleased (unearned) shares                              --              3,575
                                               ---------------------------------
                                                     110,948            122,185
                                               =================================

Fair value of unreleased (unearned) shares          $     --           $     75
                                               =================================



                                       43


<PAGE>



Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 13.     Employee Benefit Plans (Continued)

Stock Option Plans: The Company,  effective  November 15, 1995,  adopted a stock
option plan (1995 Plan).  Pursuant to the 1995 Plan,  stock  options for 218,750
common  shares may be granted to  directors,  officers and key  employees of the
Bank.  The options have a maximum  term of 10 years,  at the market price on the
grant date. Awarded options vest at the rate of 20% per year.

Effective November 18, 2003, the Company approved the Wells Financial Corp. 2003
Stock  Option Plan (2003  Plan).  Pursuant to the 2003 Plan,  stock  options for
120,000 common shares may be granted to officers, directors, employees and other
persons  providing  services to the  Company.  Upon  approval  of the Plan,  the
Company reduced the share reserve under the 1995 Plan by 41,375 shares,  thereby
eliminating  any future awards under the 1995 plan. The 2003 Plan options have a
maximum  term of 10 years,  at the  market  price on the grant  date.  Awards to
non-employee  directors are  exercisable on the grant date.  Awards to employees
are generally exercisable on the grant date subject to employment conditions. On
November 18, 2003, 36,000 shares were awarded to non-employee directors.

Options granted under either Plan may be 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.

The following is a summary of grants made under the plans:

<TABLE>
<CAPTION>
                                                                       Black-Scholes Assumptions
                                                           -------------------------------------------------
                                               Estimated                           Risk-Free
                                  Exercise   Fair Value on  Dividend     Price     Interest     Estimated
Grant Date               Award     Price      Grant Date      Rate    Volatility     rate     Life (years)
------------------------------------------------------------------------------------------------------------
<S>                   <C>         <C>         <C>          <C>         <C>         <C>            <C>
1995 Plan
  November 15, 1995     125,405     11.00       $ 408        0.00%       10.0%       5.65%          6
  September 7, 2000      32,805     12.88       $ 134        4.97%       43.6%       5.58%         10
  September 19, 2000     12,780     13.38       $  40        4.79%       18.3%       5.97%         10
  July 23, 2002          10,935     20.90       $  35        3.45%       17.4%       3.56%         10

2003 Plan
  November 18, 2003      36,000     30.15       $ 221        2.70%       15.3%       4.50%         10
</TABLE>


The status of the Company's fixed stock option plans as of December 31, 2003 and
2002, and changes during the years ended on those dates, are presented below:

<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                        -------------------------------------------------------------------
                                                    2003                                2002
                                        -------------------------------------------------------------------
                                                        Weighted-Average                   Weighted-Average
Fixed Options                              Shares        Exercise Price       Shares        Exercise Price
-----------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                <C>               <C>
Outstanding at beginning of year           81,116          $ 13.18            128,258           $ 11.70
Granted                                    36,000            30.15             10,935             20.90
Exercised                                 (19,569)           12.19            (54,367)            11.31
Forfeited                                      --               --             (3,710)            11.00
                                        -------------------------------------------------------------------
Outstanding at end of year                 97,547          $ 19.78             81,116           $ 13.18
                                        ===================================================================
</TABLE>



                                       44

<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 13.     Employee Benefit Plans (Continued)

The status of the 97,547  options  outstanding at December 31, 2003 is presented
below:

                                                    Contractual        Number
Date of award              Shares       Price          Life         Exercisable
-------------------------------------------------------------------------------
November 15, 1995          16,119      $ 11.00         1.9            16,119
September 7, 2000          28,431        12.88         6.7            17,059
September 19, 2000          7,305        13.38         6.7             5,635
July 23, 2002               9,692        20.90         8.5               944
November 18, 2003          36,000        30.15         10                 --


Management  Stock Bonus Plan:  The Bank  adopted a  Management  Stock Bonus Plan
(1995 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 Bank adopted the Wells Federal Bank 2003 Stock Bonus Plan (2003 Plan), which
was approved by the  Company's  stockholders  on November 18, 2003.  The Company
authorized restricted stock awards of up to 50,000 shares to directors, officers
and  employees  of the Bank.  Approval  of the 2003 Plan  reduced  the 1995 Plan
reserve by 11,473 shares,  thereby  eliminating any future awards under the 1995
plan.  These awards vest at the rate of 25% per year of continuous  service with
the Bank.

The status of shares  awarded as of  December  31, 2003 and 2002 and the changes
during the years ended on those dates is presented below:

                                            Years Ended December 31,
                                           ---------------------------
                                             2003               2002
----------------------------------------------------------------------
Outstanding at beginning of year            18,450             18,815
Granted                                     17,500              4,375
Vested                                      (5,615)            (4,740)
                                           ---------------------------
Outstanding at end of year                  30,335             18,450
                                           ===========================


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.  The Bank recorded  expense of $105,
$81 and $109 relating to this Plan for the years ended  December 31, 2003,  2002
and 2001, respectively.




                                       45

<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 14.     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. The Company also has an agreement with its data processor  whereby
the processor agrees to provide certain data processing services. This agreement
expires in 2006.  The  agreement  automatically  renews in  five-year  intervals
unless  terminated by either party.  Future minimum  rental and data  processing
commitments under these agreements as of December 31, 2003 are as follows:

Years Ending                    Rental           Data Processing
----------------------------------------------------------------
2004                             $ 210              $ 408
2005                               165                408
2006                               160                136
2007                               160                  -
2008                               146                  -
                             -----------------------------------
                                 $ 841              $ 952
                             ===================================



Total rental expense related to operating  leases was  approximately  $222, $229
and $221 for the years ended  December  31, 2003,  2002 and 2001,  respectively.
Total data  processing  expense  related to operating  leases was  approximately
$471,  $446 and $403 for the  years  ended  December  31,  2003,  2002 and 2001,
respectively.


Note 15.    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 $39,440 and $53,717
at December  31, 2003 and 2002,  respectively.  The  portion of  commitments  to
extend  credit  that  related to fixed rate loans is $32,432  and  $48,539 as of
December 31, 2003 and 2002, 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.


                                       46


<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 16.     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: The nature of the Company's business requires that
it maintain amounts due from banks which, at times, may exceed federally insured
limits.  The  Company  has not  experienced  any losses in such  amounts.  As of
December 31, 2003 and 2002, the Company had $7,409 and $33,304, respectively, on
deposit  with the FHLB of Des Moines.  At  December  31,  2003,  the Company had
$17,977 on deposit with United Bankers Bank.







                                       47

<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 17.     Fair Values of Financial Instruments and Interest Rate Risk

The estimated fair values of the Company's financial instruments are as follows:


                                                December 31,
                                  -----------------------------------------
                                          2003                 2002
---------------------------------------------------------------------------
                                  Carrying     Fair     Carrying     Fair
                                   Amount      Value     Amount      Value
                                  -----------------------------------------
Financial assets
  Cash                            $ 25,318   $ 25,318   $ 36,571   $ 36,571
  Certificates of deposit              200        200        200        200
  Securities available for sale     27,410     27,410     19,856     19,856
  Federal Home Loan Bank stock       1,303      1,303      1,875      1,875
  Loans held for sale                1,997      1,997      9,695      9,695
  Loans receivable, net            160,049    162,896    145,586    147,685
  Accrued interest receivable        1,209      1,209      1,387      1,387
  Mortgage servicing rights          2,681      2,921      2,179      2,179

Financial liabilities
  Deposits                         169,662    170,425    169,126    169,824
  Borrowed funds                    23,000     25,496     23,000     26,081
  Advances from borrowers for
    taxes and insurance              1,585      1,585      1,347      1,347
  Accrued interest payable              34         34         50         50
                                  =========================================



Interest  rate  risk:  The  Company  assumes  interest  rate risk (the risk that
general interest rate levels will change) as a result of its normal  operations.
As a result, the fair values of the Company's financial  instruments will change
when interest  rate levels  change,  and that change may be either  favorable of
unfavorable to the Company.  Management  attempts to match  maturities of assets
and liabilities to the extent  believed  necessary to manage interest rate risk.
However,  borrowers with  fixed-rate  obligations are more likely to prepay in a
falling-rate environment and less likely to prepay in a rising-rate environment.
Conversely, depositors who are receiving fixed rates are more likely to withdraw
funds before maturity in a rising-rate environment and less likely to do so in a
falling-rate environment. Management monitors rates and maturities of assets and
liabilities  and attempts to minimize  interest rate risk by adjusting  terms of
new loans and deposits and by investing in  securities  with terms that mitigate
the Company's overall interest rate risk.


                                       48

<PAGE>
Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 18.     Financial Information of Wells Financial Corp. (Parent Only)

The Company's  condensed  statements  of financial  condition as of December 31,
2003 and 2002 and related condensed statements of income and cash flows for each
of the years in the three year period ended December 31, 2003 are as follows:

Condensed Statements of Financial Condition          2003         2002
------------------------------------------------------------------------

Assets
  Cash, including deposits with Wells Federal
    Bank, fsb 2003 $867; 2002 $6                   $ 5,112       $ 1,980
  Dividend receivable                                   --           630
  Investment in Wells Federal Bank, fsb             22,722        22,202
  Accrued interest receivable and other assets          34           411
                                                   ---------------------
    Total assets                                   $27,868       $25,223
                                                   =====================

Liabilities and Stockholders' Equity
  Liabilities                                      $    --       $    --
  Stockholders' equity                              27,868        25,223
                                                   ---------------------
    Total liabilities and stockholders' equity     $27,868       $25,223
                                                   =====================


Condensed Statements of Income                     2003       2002        2001
--------------------------------------------------------------------------------

Interest income                                 $    22     $    47     $    85
Other expenses                                     (131)       (104)       (348)
                                                --------------------------------
    (Loss) before income taxes                     (109)        (57)       (263)
Income tax expense (benefit)                        (52)        (23)       (107)
                                                --------------------------------
    Net (loss) before dividends
      and equity in undistributed income            (57)        (34)       (156)
      of subsidiary
Dividends received from subsidiary                3,009       2,020       2,186
Equity in undistributed income of subsidiary        588       1,354       1,315
                                                --------------------------------
    Net income                                  $ 3,540     $ 3,340     $ 3,345
                                                ================================





                                       49

<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 18.          Financial Information of Wells Corp. (Parent Only) (Continued)

<TABLE>
<CAPTION>
Condensed Statements of Cash Flows                     2003         2002         2001
---------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S>                                                <C>          <C>          <C>
  Net income                                         $ 3,540      $ 3,340      $ 3,345
  Adjustment to reconcile net income to net cash
    provided by operating activities:
    Equity in undistributed net income
      of subsidiary                                     (588)      (1,354)      (1,315)
    Tax benefit from exercised options                    14          152           --
    (Increase) decrease in
      receivables and other assets                     1,009         (132)        (218)
                                                     ----------------------------------
    Net cash provided by
      operating activities                             3,975        2,006        1,812
                                                     ----------------------------------
Cash Flows From Investing Activities
  Proceeds from sales, maturities and calls
    of securities available for sale                      --           --        1,887
                                                     ----------------------------------
    Net cash provided by
      investing activities                                --           --        1,887
                                                     ----------------------------------
Cash Flows From Financing Activities
  Payments relating to ESOP stock                         29          126          135
  Exercise of stock options                               33          396          204
  Purchase of treasury stock                              --       (1,771)      (2,006)
  Dividends paid                                        (905)        (845)        (735)
                                                     ----------------------------------
    Net cash (used in) financing activities             (843)      (2,094)      (2,402)
                                                     ----------------------------------
    Net increase (decrease) increase in cash           3,132          (88)       1,297
Cash:
  Beginning of year                                    1,980        2,068          771
                                                     ----------------------------------
  End of year                                        $ 5,112      $ 1,980      $ 2,068
                                                     ==================================
</TABLE>





                                       50
<PAGE>

Wells Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements
(dollars in thousands)
--------------------------------------------------------------------------------

Note 19.     Selected Quarterly Financial Data (Unaudited) (dollars in
             thousands, except per share data)


                                          Year Ended December 31, 2003
                                 ---------------------------------------------
                                   First      Second       Third       Fourth
                                 ---------------------------------------------
Interest income                  $ 3,000     $ 2,901      $ 2,647     $ 2,966
Net interest income                1,707       1,694        1,570       1,948
Provision for loan losses             --          --           --          --
Net income                           888       1,004        1,135         513
Earnings per share
  Basic                             0.79        0.89         1.00        0.44
  Diluted                           0.77        0.87         0.98        0.43

                                          Year Ended December 31, 2002
                                 ---------------------------------------------
                                   First      Second       Third       Fourth
                                 ---------------------------------------------
Interest income                  $ 3,552     $ 3,523      $ 3,469     $ 3,321
Net interest income                1,856       1,923        1,944       1,895
Provision for loan losses             23          --           --          --
Net income                           853         684          846         957
Earnings per share
  Basic                             0.73        0.58         0.72        0.81
  Diluted                           0.71        0.56         0.70        0.78



                                       51

<PAGE>

                              Wells Financial Corp.

                                Corporate Office
                               53 First Street SW
                                 Wells, MN 56097
                                 (507) 553-3151


                               Wells Federal Bank
                                Office Locations

        Wells, MN Office                             Blue Earth, MN Office
       53 First Street SW                            303 South Main Street
        Wells, MN 56097                              Blue Earth, MN 56013
         (507) 553-3151                                  (507) 526-2163

       Mankato, MN Office                            Fairmont, MN Office
       1601 Adams Street                             300 South State Street
     Mankato, MN 56002-4068                          Fairmont, MN 56031
         (507) 345-4558                                  (507) 238-4479

     North Mankato, MN Office                        Albert Lea, MN Office
       1800 Commerce Drive                           1710 West Main Street
     North Mankato, MN 56003                         Albert Lea, MN 56007
         (507) 625-1300                                  (507) 373-7227

     St. Peter, MN Office                            Owatonna,  MN Office
  1618 South Minnesota Avenue                          496 North Street
      St. Peter, MN 56082                             Owatonna, MN 55060
         (507) 931-6100                                  (507) 444-0010

    Farmington, MN Office                             Mason City, IA Office
    115 Elm Street Suite I                          4700 4th Street SW Suite F
     Farmington, MN 55024                              Mason City, IA 50401
         (651) 463-4883                                  (641) 424-6691

                                       52
<PAGE>

                           Other Corporate Information


                   Board of Directors of Wells Financial Corp.

Randel I. Bichler, Chairman of the Board     David Buesing


Lonnie R. Trasamar                           Gerald D. Bastian

Dale E. Stallkamp                            Richard Mueller



                   Executive Officers of Wells Financial Corp.

Lonnie R. Trasamar                           James D. Moll, CPA
  President and Chief                          Treasurer and Principal Financial
   Executive Officer                             and Accounting Officer

Gerald D. Bastian                            Richard Mueller
   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 & Fisch, PC                    Registrar and Transfer Company
1100 New York Avenue, N.W.                   10 Commerce Drive
Suite 340 West                               Cranford, New Jersey  07016
Washington, D.C.  20005


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

The Company's  Annual  Report on Form 10-KSB for the fiscal year ended  December
31, 2003, as filed with the  Securities  and Exchange  Commission,  is available
without charge upon written request.  For a copy of the Form 10-KSB or any other
investor  information,  please write to 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, 2004 at 4:00 p.m. at the Wells Community
Center, 189 2nd Street SE, Wells, Minnesota.


                                       53