SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-KSB
(Mark One)
  X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended      December 31, 1996
                          ---------------------------------

                                    - OR -

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from  __________________ to _____________________

Commission file number:   0-25342
                          -------

                              Wells Financial Corp.
-------------------------------------------------------------------------------
              (Exact name of small business issuer in its charter)

                Minnesota                                       48-1799504
--------------------------------------------              ---------------------
       (State or other jurisdiction of                       (I.R.S. employer
      of incorporation or organization)                     identification no.)

    53 First Street, S.W., Wells, Minnesota                      56097
--------------------------------------------              ---------------------
   (Address of principal executive offices)                    (Zip code)

Registrant's telephone number, including area code:              (507) 553-3151
                                                                 --------------
Securities registered pursuant to Section 12(b) of the Act:           None
                                                                 --------------
Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of class)

      Indicate  by check  mark  whether  registrant  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the preceding 12 months (or for such shorter period that  Registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes X No

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

      Registrant's  voting stock trades on the Nasdaq  National Market under the
symbol  "WEFC."  The  aggregate  market  value  of  the  voting  stock  held  by
non-affiliates  of registrant,  based upon the closing price of such stock as of
March 10, 1997 ($14.375 per share), was $26.7 million.

      As of March 10,  1997,  registrant  had  2,018,860  shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

1.   Part II -- Portions of Registrant's  Annual Report to Stockholders  for the
     fiscal year ended December 31, 1996.

2.   Part III -- Portions of registrant's  Proxy Statement for Annual Meeting of
     Stockholders to be held on April 16, 1997.


<PAGE>



                                    PART I

Item 1. Business
----------------

General

      Wells Financial Corp. ("Registrant" or the "Company") is a unitary savings
and loan holding  company that was  incorporated in December 1994 under the laws
of the State of  Minnesota  for the purpose of  acquiring  all of the issued and
outstanding  common  stock  of  Wells  Federal  Bank,  fsb  (the  "Bank").  This
acquisition occurred in April 1995 at the time the Bank simultaneously converted
from a mutual  to stock  institution,  and sold all of its  outstanding  capital
stock to the Company and the Company made its initial public  offering of common
stock (the "Conversion").  As of December 31, 1996, the Company had total assets
of $201.3 million, total deposits of $145.3 million, and stockholders' equity of
$28.2  million or 14.0% of total  assets  under  generally  accepted  accounting
principles ("GAAP"). The only subsidiary of the Company is the Bank.

      The  primary  activity  of the  Company  is  directing  and  planning  the
activities of the Bank, the Company's  primary asset.  At December 31, 1996, the
remainder of the assets of the Company were  maintained in the form of a loan to
the  Bank,  a loan  to an  employee  stock  ownership  plan  ("ESOP")  that  was
established  for the  benefit  of the Bank's  employees,  deposits  in  interest
bearing accounts with other financial institutions and selected investments. The
Company engages in no other significant activities.  As a result,  references to
the  Company or  Registrant  generally  refer to the Bank,  unless  the  context
otherwise indicates. In the discussion of regulation,  except for the discussion
of the regulation of the Company,  all regulations apply to the Bank rather than
the Company.

      The Bank is a federally  chartered  stock  savings bank  headquartered  in
Wells, Minnesota.  The Bank has seven full service offices located in Faribault,
Martin,  Blue Earth,  Nicollet  and Freeborn  Counties and one loan  origination
office  located in Steele  County,  Minnesota.  The Bank was founded in 1934 and
obtained  its current  name in 1991.  The Bank's  deposits  have been  federally
insured by the Savings Association  Insurance Fund ("SAIF") and its predecessor,
the Federal Savings and Loan Insurance  Corporation  ("FSLIC"),  since 1934, and
the Bank is a member of the Federal Home Loan Bank ("FHLB") System.  The Bank is
a  community  oriented,   full  service  retail  savings  institution   offering
traditional  mortgage  loan  products.  It is the  Bank's  intent  to  remain an
independent community savings bank serving the local banking needs of Faribault,
Martin, Blue Earth, Nicollet, Steele and Freeborn Counties, Minnesota.

      The Bank attracts  deposits from the general public and uses such deposits
primarily to invest in  residential  lending on owner occupied  properties.  The
Bank also makes consumer loans, commercial loans, and agricultural related loans
and purchases mortgage-backed and investment securities.

      The principal sources of funds for the Registrant's lending activities are
deposits,  advances  from the  Federal  Home  Loan  Bank  and the  amortization,
repayment,  and maturity of loans,  mortgage-backed  securities,  and investment
securities.  Principal  sources  of  income  are  interest  and  fees on  loans,
mortgage-backed  securities,  investment securities,  and deposits held in other
financial  institutions.  The Registrant's principal expense is interest paid on
deposits.

Market Area

     The  Company's  primary  market area consists of  Faribault,  Martin,  Blue
Earth, Nicollet, Steele and Freeborn Counties,  Minnesota.  Located southwest of
Minneapolis, this area is primarily rural and

                                      1

<PAGE>



contains  approximately  50 communities  ranging in population  size from 200 to
40,000.  The primary lending  concentration  is in the Mankato and North Mankato
area,  an area with a  relatively  large  population  base.  The Company has two
offices in the Mankato and North Mankato area. Historically,  the economy in the
Company's market area has been dependent on agriculture and agriculture  related
industries.  Economic growth in the Company's market area remains dependent upon
the local economy. In addition,  the deposit and loan activity of the Company is
significantly  affected by economic  conditions in its market area including the
agriculture industry.

      Lending Activities. The Company's loan portfolio predominantly consists of
mortgage loans secured by one to four-family residences.  The Company also makes
consumer  loans and  commercial  loans.  For its mortgage  loan  portfolio,  the
Company   originates  and  retains  adjustable  rate  loans  as  well  as  lower
loan-to-value  ratio fixed-rate loans with original  maturities that are greater
than fifteen  years.  The Company sells other  conventional  fixed rate mortgage
loans into the secondary market.  The Company's consumer loan portfolio consists
primarily of home equity or  improvement  loans  secured by second liens on real
estate on which the Company has the first lien. To a lesser extent, the consumer
loan  portfolio  includes  loans secured by vehicles and savings  accounts.  The
Company also originates  commercial and multi-family real estate loans, the vast
majority of which are secured by farm land. In addition to loans secured by farm
real estate, the Company makes commercial  business loans, the majority of which
are secured by farm operating equipment, livestock, crops on hand, growing crops
and farm real estate.

      The consumer,  commercial,  and  commercial  business loan  portfolios are
primarily composed of adjustable rate loans.

      The Company's adjustable rate loans reprice based on a cost of funds index
that is a lagging  market  index.  A lagging index does not adjust as rapidly as
market  interest  rates and may not adjust as rapidly  as would  other  indices.
During periods of increasing  interest rates,  use of a lagging index results in
adjustable rate loans repricing upward at a slower rate than if a leading market
index had been used.  During  periods of  decreasing  interest  rates,  use of a
lagging index results in adjustable  rate loans  repricing  downward at a slower
rate than if a leading market index had been used.


                                      2

<PAGE>



      Loan Portfolio  Composition.  The following  table sets forth  information
concerning the composition of the Company's loan portfolio in dollar amounts and
in  percentages  of the total loan  portfolio  (before  deductions  for loans in
process,  deferred loan origination fees and costs and allowances for losses) as
of the dates indicated.

<TABLE>
<CAPTION>

                                                                                At December 31,
                                         ------------------------------------------------------------------------------------------
                                               1992              1993                1994              1995               1996
                                         ----------------   ----------------   -----------------  ----------------   ---------------
                                         Amount   Percent   Amount   Percent   Amount    Percent  Amount   Percent   Amount  Percent
                                         ------   -------   ------   -------   ------    -------  ------   -------   ------  -------
                                                                   (Dollars in Thousands)
Real Estate Loans:
<S>                                     <C>      <C>       <C>       <C>      <C>        <C>     <C>       <C>      <C>      <C>   
  One- to four-family ................. $ 99,997  81.57%   $118,294   82.08%  $137,130    82.14% $136,022   79.38%  $141,067  78.20%
  Multi-family ........................    1,377   1.12       1,015    0.70        951     0.57       880    0.51      1,355   0.75
  Commercial ..........................    7,804   6.37       8,384    5.82      9,654     5.78    10,554    6.16     10,878   6.03
  Construction ........................    1,359   1.11       1,517    1.05      2,149     1.29     2,774    1.62      2,081   1.15
                                        -------- ------    --------  ------   --------   ------  --------  ------   -------- ------ 
      Total real estate loans .........  110,537  90.17     129,210   89.65    149,884    89.78   150,230   87.67    155,381  86.13
                                        -------- ------    --------  ------   --------   ------  --------  ------   -------- ------ 

Other Loans:
 Consumer Loans:
  Savings account .....................      784   0.64         531    0.37        471     0.28       436    0.25        443   0.25
  Vehicles ............................    1,168   0.95       2,308    1.60      2,573     1.54     3,353    1.96      4,619   2.56
  Home equity, home improvement and
   second mortgages ...................    6,566   5.36       8,135    5.65     10,392     6.23    12,875    7.51     15,197   8.42
  Other ...............................    2,393   1.95       2,973    2.06      2,811     1.68     3,279    1.91      3,588   1.99
                                        -------- ------    --------  ------   --------   ------  --------  ------   -------- ------ 
      Total consumer loans ............   10,911   8.90      13,947    9.68     16,247     9.73    19,943   11.63     23,847  13.22
Commercial business loans .............    1,135   0.93         957    0.67        810     0.49     1,191    0.70      1,171   0.65
                                        -------- ------    --------  ------   --------   ------  --------  ------   -------- ------ 
      Total other loans ...............   12,046   9.83      14,904   10.35     17,057    10.22    21,134   12.33     25,018  13.87
                                        -------- ------    --------  ------   --------   ------  --------  ------   -------- ------ 
      Total loans .....................  122,583 100.00%    144,114  100.00%   166,941   100.00%  171,364  100.00%   180,399 100.00%
                                                 ======              ======              ======            ======            ======
                                                                                          
Less:
  Loans in process ....................      503              1,190                685               493                 623
  Deferred loan origination fees
   and costs ..........................      362                544                695               689                 714
  Allowance for loan losses ...........      479                398                376               512                 615
                                         -------           --------           --------          --------            --------
      Total loans receivable, net...... $121,239           $141,982           $165,185          $169,670            $178,447
                                        ========           ========           ========           =======             =======
                                                                                                   
</TABLE>


                                            3

<PAGE>



      Origination,  Purchase,  and Repayment of Loans.  The following table sets
forth the Company's loan originations,  sales, and principal  repayments for the
periods  indicated.  The Company originates loans for retention in its portfolio
and did not purchase loans during the years indicated.

<TABLE>
<CAPTION>


                                                   Years Ended December 31,
                                     -----------------------------------------------------
                                      1992        1993       1994       1995       1996
                                      ----        ----       ----       ----       ----
                                                        (In Thousands)
Total gross loans receivable at
<S>                                  <C>        <C>        <C>        <C>        <C>     
   beginning of year .............   $134,291   $122,583   $144,114   $166,941   $171,364
                                     --------   --------   --------   --------   --------

Loans originated:
  One- to four-family residential      57,408     64,043     33,854     30,609     43,411
  Commercial and multi-family real
    estate .......................        296      1,042      1,623      1,366      1,759
  Construction loans .............      1,556      3,627      5,114      5,522      6,776
  Consumer loans .................      1,507      7,496      8,166     12,103     10,242
  Commercial business loans ......        670      1,257      1,760      1,567        610
                                     --------   --------   --------   --------   --------
Total loans originated ...........     61,437     77,465     50,517     51,167     62,798
                                     --------   --------   --------   --------   --------

Principal reductions:
  Loans sold .....................     39,613     24,552      2,971     13,584     19,209
  Loan principal repayments ......     33,532     31,382     24,719     33,160     34,554
                                     --------   --------   --------   --------   --------
Total principal reductions .......     73,145     55,934     27,690     46,744     53,763
                                     --------   --------   --------   --------   --------
Total gross loans receivable at
  end of year ....................   $122,583   $144,114   $166,941   $171,364   $180,399
                                     ========   ========   ========   ========   ========
</TABLE>


    Loan Sales.  During 1996,  the Company sold $19.2 million of mortgage  loans
into the secondary market. The Company sells the FHA and Veterans Administration
("VA") loans that it originates to another  financial  institution.  The Company
does not retain  the  servicing  on the FHA/VA  loans.  The  Company  also sells
conforming  fixed-rate  conventional loans with  loan-to-value  ratios of 90% or
higher to the Federal  Home Loan  Mortgage  Corporation  ("FHLMC").  The Company
retains the  servicing  rights on these  loans.  All loans sold to FHLMC  ($17.7
million)  were sold without  recourse to the Company,  except for  documentation
deficiencies  that may require the Company to  repurchase  these loans  within a
limited time period following the sale to FHLMC. To a lesser extent, the Company
has sold loans with high loan to value ratios to maintain its loan quality.


                                        4

<PAGE>



    Loan Maturity  Tables.  The  following  table sets forth the maturity of the
Company's  loan  portfolio  at  December  31,  1996.  The table does not include
prepayments, scheduled principal repayments or loans held for sale. All mortgage
loans are shown as maturing based on contractual maturities.

<TABLE>
<CAPTION>

                         1- to 4-       Other
                          Family     Residential                 Commercial
                        Real Estate      and                     Business and
                         Mortgage    Commercial    Construction   Consumer      Total
                         --------    ----------    ------------   --------      -----
                                                   (In Thousands)
Amounts Due:
<S>                      <C>           <C>          <C>         <C>         <C>     
  Within 1 year.......   $    439       $     2       $2,081      $ 2,706     $  5,228
  1 to 3 years........      1,281           513           --        3,609        5,403
  3 to 5 years........      1,689         1,283           --        5,298        8,270
  5 to 10 years.......      8,228           937           --       12,266       21,431
  Over 10 years.......    129,430         9,498           --        1,139      140,067
                          -------        ------        -----       ------      -------
Total amount due......   $141,067       $12,233       $2,081      $25,018      180,399
                          =======        ======        =====       ======      -------

Less:
Allowance for loan losses..................................................        615
Loans in process...........................................................        623
Deferred loan fees.........................................................        714
                                                                               -------
  Loans receivable, net....................................................   $178,447
                                                                               =======

</TABLE>


    The  following  table sets  forth the  dollar  amount of all loans due after
December  31,  1997  that have  pre-determined  interest  rates  and which  have
floating or adjustable  interest  rates.  This table does not include loans held
for sale.

<TABLE>
<CAPTION>

                                                        Floating or
                                         Fixed Rates  Adjustable Rates        Total
                                         -----------  ----------------        -----
                                                       (In Thousands)
<S>                                       <C>              <C>              <C>     
One- to four-family ...................   $ 49,203         $ 91,425         $140,628
Commercial and multi-family real estate      3,286            8,945           12,231
Construction ..........................          -                -                -
Commercial business and consumer ......      9,550           12,762           22,312
                                          --------         --------         --------
  Total ...............................   $ 62,039         $113,132         $175,171
                                          ========         ========         ========
                                                                   
</TABLE>


    One-  to  Four-Family  Residential  Loans.  The  Company's  primary  lending
activity consists of the origination of single family residential mortgage loans
secured by property  located in the Company's  primary  market area. The Company
generally  originates  one- to  four-family  residential  mortgage loans without
private  mortgage  insurance in amounts up to 80% of the lesser of the appraised
value or selling price of the mortgaged property. The Company will not originate
any loan which exceeds 95% of the lesser of the appraised value or selling price
and typically requires private mortgage insurance on any loans at 80% or more of
the  value  of  the  mortgaged  property.   Typically,  fixed  rate  loans  with
loan-to-value  ratios of 90% or higher will be sold into the  secondary  market.
The Company  originates  adjustable  rate  mortgage  loans for  retention in its
portfolio with  loan-to-value  ratios of up to 95% and requires private mortgage
insurance when the loan-to-value ratio exceeds 80%.


                                      5

<PAGE>



    For its adjustable  rate loans,  the Company may offer low initial  interest
rates ("teaser rates") but requires the borrower to qualify at the fully indexed
rate. The Company's adjustable rate loans provide for annual 1%-2% interest rate
adjustments  with a maximum  adjustment  over the term of the loan of between 5%
and 6%. The Company also  permits  adjustable  rate loans to be  converted  into
fixed-rate loans.

    Loan originations are generally obtained from existing customers, members of
the local  community,  and referrals from realtors within the Company's  lending
area. Mortgage loans originated and held by the Company in its portfolio include
due-on sale clauses which provide the Company with the contractual right to deem
the loan  immediately  due and payable in the event that the borrower  transfers
ownership of the property without the Company's consent.

    The Company  primarily  originates  fixed and adjustable rate mortgage loans
with 15-30 year terms.  The Company offers various loan programs,  including low
documentation  loans for loans  with lower  loan-to-value  ratios and other loan
programs  using cost of funds or one-year U.S.  treasury  indices for adjustable
rate loan repricing.  Interest rates charged on mortgage loans are competitively
priced based on market  conditions and the Company's  cost of funds.  Throughout
the year,  origination fees for loans were generally 1% of the loan amount.  The
Company's standard underwriting  guideline for fixed-rate mortgage loans conform
to FHLMC guidelines and the loans may be sold in the secondary market to private
investors.  The Company customarily sells all Federal Housing Administration and
Veterans'  Administration  ("FHA/VA") loans as well as certain  conforming fixed
rate  mortgage  loans in the  secondary  market.  The  Company  also  originates
adjustable  rate  mortgages  ("ARMs") which adjust every year based upon various
indices.

    At December 31, 1996, the Company was servicing  approximately $66.1 million
of loans  for  others,  primarily  long term  fixed  rate  loans  sold to FHLMC.
Generally, the Company retains all servicing on loans sold to FHLMC and does not
retain servicing on FHA/VA loans sold. Except for document deficiencies that may
occur during origination that may require a repurchase by the Company, loans are
sold without recourse.

    Consumer  Loans.  The  Company  offers  second  mortgage  loans  on  one- to
four-family  residences  which are typically  offered as adjustable  rate loans.
Such loans are only made on  owner-occupied  one- to four-family  residences and
are  subject  to a 95%  combined  loan-to-value  ratio.  The  Company  holds the
majority of the  underlying  first  mortgages on these loans.  The  underwriting
standards  for second  mortgage  loans are  similar to the  Company's  standards
applicable to one- to four-family  residential  loans.  To a lesser extent,  the
Company  makes loans  secured by vehicles and by savings  accounts held with the
Company.  Loans secured by vehicles totalled $4.6 million, or 2.56%, of the loan
portfolio at December 31, 1996.

    Federal  regulations permit federally  chartered thrift institutions to make
secured and unsecured  consumer loans up to 35% of an institution's  assets.  In
addition,  a federal  thrift has lending  authority  above the 35%  category for
certain consumer loans, property improvement loans, and loans secured by savings
accounts. The Company originates consumer loans in order to provide a wide range
of  financial  services to its  customers  and  because  the  shorter  terms and
normally higher  interest rates on such loans help maintain a profitable  spread
between its average loan yield and its cost of funds.  Consumer loans,  however,
tend  to  have a  higher  risk  of  default  than  residential  mortgage  loans.
Typically,  based on the  Company's  experience,  a borrower  faced with  either
paying a mortgage loan to avoid foreclosure on the borrower's home or defaulting
on a consumer loan will continue paying the mortgage loan. At December 31, 1996,
the Company had  approximately  $75,000 in consumer loans that were more than 90
days delinquent.

                                      6

<PAGE>




    Commercial Real Estate Loans. In order to enhance yields on its assets,  the
Company  originates  loans  secured by  commercial  real  estate.  Approximately
three-quarters  of this  portfolio is secured by farm real  estate.  Most of the
remainder of the  portfolio  is secured by church real  estate.  At December 31,
1996,  loans  secured by farm real estate were  originated  in amounts up to the
lesser of 65% of the  appraised  value of the  property  or $1,000 per  tillable
acre.  These  loans are  evaluated  on a cash flow basis in addition to an asset
value basis.  Loans  secured by church real estate are  generally  originated in
amounts up to 70% of the appraised value of the property.  At December 31, 1996,
the  Company's  largest  commercial  real  estate loan  consisted  of a $525,000
performing loan secured by a multi-family building in North Mankato,  Minnesota.
All commercial  real estate loans,  excluding those secured by farm real estate,
require  prior  approval  by the  Bank's  Board  of  Directors.  As  part of its
underwriting,  the Company requires that borrowers qualify for a commercial loan
at the fully indexed interest rate rather than at the origination interest rate.

    Loans secured by commercial real estate  generally  involve a greater degree
of risk than  residential  mortgage loans and carry larger loan  balances.  This
increased   credit  risk  is  a  result  of  several   factors,   including  the
concentration  of  principal  in a limited  number of loans and  borrowers,  the
effects of general economic  conditions on income  producing  properties and the
increased  difficulty  of  evaluating  and  monitoring  these  types  of  loans.
Furthermore,  the  repayment  of loans  secured  by  commercial  real  estate is
typically  dependent  upon the  successful  operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. For loans secured by farm real estate, repayment
may be affected by weather  conditions  and  government  policies and  subsidies
concerning  farming.  For loans  secured by church  real  estate,  repayment  is
dependent upon the continuing financial support of the church's members.

    Commercial  Business Loans. The Company's  commercial business loans consist
of agricultural operating loans secured primarily by farm equipment,  livestock,
crops, and farm real estate.  These loans are generally originated in amounts up
to 70% of the  appraised  value  of the  property.  These  loans  typically  are
adjustable rate loans with quarterly  adjustments.  Agricultural operating loans
generally involve a greater degree of risk than residential mortgage loans. This
increased credit risk is a result of several  factors,  including the effects of
general  economic  conditions  on income  producing  property and the  increased
difficulty of evaluating and monitoring these types of loans.  Furthermore,  the
repayment  of  agricultural  operating  loans is  typically  dependent  upon the
successful operation of the related property. If the cash flow from the property
is reduced, the borrower's ability to repay the loan may be impaired.

    Construction Loans. Construction loans are made on single family residential
property to the  individuals who are the owners and occupants upon completion of
construction.  These loans are made on a long term basis and are  classified  as
construction  permanent  loans with no principal  payments  required  during the
first six  months,  after  which  the  payments  are set at an amount  that will
amortize over the term of the loan. The maximum  loan-to-value  ratio is 80% and
is made at a variable or fixed interest rate.

    The Company does not originate many speculative loans to builders and limits
the  loan-to-value  ratio to 70%  with a  maximum  loan  term of 18  months.  In
underwriting  such loans,  the Company  takes into  consideration  the number of
units that the builder has on a speculative basis that remain unsold.

    Construction  lending is generally  considered to involve a higher degree of
credit risk than long-term  financing of residential  properties.  The Company's
risk of loss on a  construction  loan is dependent  largely upon the accuracy of
the initial  estimate of the property's  value at completion of  construction or
development  and  the  estimated  cost  of  construction.  If  the  estimate  of
construction  cost and the  marketability of the property upon completion of the
project prove to be inaccurate, the Company may

                                      7

<PAGE>



be  compelled  to  advance   additional   funds  to  complete  the  development.
Furthermore,  if the estimate of value proves to be inaccurate,  the Company may
be confronted,  at or prior to the maturity of the loan,  with a property with a
value that is  insufficient  to assure full  repayment.  For the small number of
speculative  loans  originated  to builders,  the ability of the builder to sell
completed  dwelling units will depend,  among other things, on demand,  pricing,
and availability of comparable properties and economic conditions.

    Loan Approval  Authority  and  Underwriting.  All loans,  other than smaller
dollar value consumer loans, must be approved by the Company's Loan Committee. A
minimum  of two  committee  members  may  approve  loans on one- to  four-family
residential units,  non-owner occupied residential properties that do not exceed
eight units, farm real estate loans of $200,000 or less, farm operating loans of
$100,000 and less, and all consumer loans.  All commercial real estate loans and
other loans that exceed the above  limitations must be submitted to the Board of
Directors for prior approval.

    For all loans  originated by the Company,  upon receipt of a completed  loan
application from a prospective  borrower,  a credit report is generally ordered,
income and certain other  information is verified and, if necessary,  additional
financial  information is requested.  For real estate loans, an appraisal of the
real estate  intended to be used as security for the  proposed  loan is obtained
from an independent  appraiser designated and approved by the Board of Directors
of the Bank. In certain cases, an appropriate  valuation is completed by Company
staff as allowed by regulation. In addition, the relationship of the loan to the
value of the collateral is considered. The Company makes  construction/permanent
loans on individual properties. Funds advanced during the construction phase are
held in a  loan-in-process  account and disbursed  based upon various  stages of
completion  in  accordance  with the  results  of  inspection  reports  that are
obtained  through  physical  inspection of the  construction  by an  independent
contractor  hired by the  Company or in some cases by a loan  officer.  For real
estate  loans,  the Company  will  require  either  title  insurance  or a title
opinion.  Borrowers  must also obtain  hazard or flood  insurance  (for loans on
property  located in a flood zone,  flood  insurance is  required)  prior to the
closing of the loan.

    Loan  Commitments.   The  Company  issues  written   commitments  or  verbal
commitments  to  prospective  borrowers  on  all  real  estate  approved  loans.
Generally,  the  commitment  requires  acceptance  within 90 days of the date of
issuance.  Commitments  for consumer loans are given verbally and not in writing
and  generally  expire in a shorter  period of time.  At December 31, 1996,  the
Company had $11.9  million of  commitments  to cover  originations,  undisbursed
funds for loans in process and unused  lines of credit.  The  Company  estimates
that the majority of the Company's commitments are funded.

    Loans to One Borrower.  Loans-to-one borrower are limited in an amount equal
to 15% of unimpaired  capital and  unimpaired  surplus and an additional  amount
equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured
by readily marketable collateral  (generally,  financial  instruments,  not real
estate) or $500,000,  whichever is higher.  The  Company's  maximum  loan-to-one
borrower limit was approximately $3.1 million as of December 31, 1996.

    At December 31, 1996, the Company's  largest amount of loans to one borrower
was $900,000,  consisting of performing loans secured by multi-family  buildings
and real estate for  approximately  19 dwelling units and a personal  residence,
all of which are located in the Company's market area.

    Loan Delinquencies.  The Company's collection procedures provide that when a
mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is
still  delinquent  after 30 days  past due the  customer  will  receive a letter
and/or  telephone  call and may  receive a visit  from a  representative  of the
Company.  If the delinquency  continues,  similar subsequent efforts are made to
eliminate the

                                      8

<PAGE>



delinquency.  If the loan continues in a delinquent  status for 60 days past due
and no repayment plan is in effect,  a notice of right to cure default is mailed
to the customer  giving 30 additional  days to bring the account  current before
foreclosure is commenced.  The loan committee  meets regularly to determine when
foreclosure  proceedings  should be initiated  and the customer is notified when
foreclosure has been commenced.

    Loans  are  reviewed  on a  monthly  basis  and are  generally  placed  on a
non-accrual status when a mortgage loan or a non-mortgage loan becomes 120 or 90
days delinquent, respectively, and, in the opinion of management, the collection
of additional  interest is doubtful.  Interest  accrued and unpaid at the time a
loan is placed  on  non-accrual  status  is  charged  against  interest  income.
Subsequent  interest  payments,  if any, are either  applied to the  outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.

    Non-accrual  loans fluctuate over time due to a variety of factors.  For the
Company,  non-accrual loans may be affected by the payments on one large loan or
a delay in the  harvesting  of crops due to weather  conditions.  The  Company's
experience has been that these  fluctuations are normal and are not dependant on
any one factor over time.

                                      9

<PAGE>



    The following table sets forth information regarding non-accrual loans, real
estate owned,  and certain  other  repossessed  assets and loans.  On January 1,
1995, the Company adopted Statement of Financial  Accounting  Standards ("SFAS")
No. 114,  as amended by SFAS No. 118.  The  adoption  of this  statement  had no
effect on the consolidated financial statements of the Company.

<TABLE>
<CAPTION>
                                                                                                At December 31,
                                                                              ---------------------------------------------------
                                                                                 1992       1993      1994    1995      1996
                                                                                 ----       ----      ----    ----      ----
                                                                                            (Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S>                                                                           <C>        <C>          <C>    <C>     <C>       
  Construction loans ...........................................              $     --   $       --   $ --   $  --   $       --
  Permanent loans secured by 1- to 4-family
    residences .................................................                   942          614    556     265          164
  All other mortgage loans .....................................                    20           75    168      --           59
Non-mortgage loans:
  Commercial ...................................................                     7           --      5       7           --
  Consumer .....................................................                    70           71     88      26           75
                                                                              --------   ----------   ----    ----   ----------
Total ..........................................................              $  1,039   $      760   $817    $298   $      298
                                                                              ========   ==========   ====    ====   ==========

Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
  Construction loans ...........................................              $     --   $       --   $ --     $--    $      --
  Permanent loans secured by 1- to 4-family
    residences .................................................                    --           --     --      --          147
  All other mortgage loans .....................................                    --           --     --      --           --
Non-mortgage loans:
  Commercial ...................................................                    --           --     --      --           --
  Consumer .....................................................                    --           --     --       1           --
                                                                              --------   ----------   ----    ----   ----------
Total ..........................................................              $     --   $       --   $ --    $  1   $      147
                                                                              ========   ==========   ====    ====   ==========
Total non-accrual and accruing loans
  past due 90 days or more .....................................              $  1,039   $      760   $817    $299   $      445
                                                                              ========   ==========   ====    ====   ==========
Foreclosed real estate .........................................              $    136   $      160   $151    $ 29   $       78
                                                                              ========   ==========   ====    ====   ==========
Other nonperforming assets .....................................              $     --   $       --   $ --    $ --   $       --
                                                                              ========   ==========   ====    ====   ==========
Total nonperforming assets .....................................              $  1,175   $      920   $968    $328   $      523
                                                                              ========   ==========   ====    ====   ==========
Total non-accrual and accruing loans past
  due 90 days or more to net loans .............................                  0.86%        0.53%  0.50%   0.18%        0.25%
                                                                              ========   ==========   ====    ====   ==========
Total non-accrual and accruing loans past
  due 90 days or more to total assets...........................                  0.59%        0.46%  0.45%   0.15%        0.22%
                                                                              ========   ==========   ====    ====   ==========
Total nonperforming assets to total assets......................                  0.67%        0.56%  0.53%   0.17%        0.26%
                                                                              ========   ==========   ====    ====   ==========
</TABLE>



    Interest  income that would have been  recorded on loans  accounted for on a
non-accrual  basis under the original terms of such loans was immaterial for the
year ended December 31, 1996.  Amounts included in the Company's interest income
on  non-accrual  loans  for the  year  ended  December  31,  1996  was  likewise
immaterial.

    Classified Assets.  Office of Thrift Supervision ("OTS") regulations provide
for a  classification  system for problem assets of insured  institutions  which
covers all problem assets. Under this classification  system,  problem assets of
insured institutions are classified as "substandard,"  "doubtful," or "loss." An
asset is considered  substandard if it is inadequately  protected by the current
net worth and paying  capacity of the obligor or of the collateral  pledged,  if
any. Substandard assets include those

                                      10

<PAGE>



characterized by the "distinct  possibility"  that the insured  institution will
sustain "some loss" if the deficiencies are not corrected.  Assets classified as
doubtful have all of the weaknesses  inherent in those  classified  substandard,
with the added  characteristic  that the weaknesses  present make "collection or
liquidation in full," on the basis of currently  existing facts,  conditions and
values,  "highly  questionable  and improbable."  Assets  classified as loss are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weakness that do
not currently warrant classification in one of the aforementioned categories.

    When an insured institution  classifies problem assets as either substandard
or doubtful,  it may establish  general  allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities,  but which, unlike specific  allowances,  have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as loss,  it is required  either to  establish a specific  allowance  for losses
equal to 100% of that portion of the asset so  classified  or to charge off such
amount.  An institution's  determination as to the  classification of its assets
and the  amount of its  valuation  allowances  is  subject to review by the OTS,
which may  order the  establishment  of  additional  general  or  specific  loss
allowances.  A portion of general loss allowances  established to cover possible
losses  related to assets  classified as substandard or doubtful may be included
in determining an institution's  regulatory  capital,  while specific  valuation
allowances for loan losses generally do not qualify as regulatory capital.

    The following table provides further information about the Company's problem
assets as of December 31, 1996.

                                    (In Thousands)
Special Mention...............         $  497
Substandard...................            496
Doubtful assets...............             --
Loss assets...................             29

General loss allowance........            615


    Foreclosed  Real Estate.  Real estate acquired by the Company as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold.  When  property is acquired it is recorded at the lower of the
loan balance or the fair value at the date of foreclosure  less estimated  costs
of  disposition.  There  may be  significant  other  expenses  incurred  such as
attorney and other  extraordinary  servicing  costs involved with  foreclosures.
Foreclosed real estate, net of allowance for losses, totaled $78,000 at December
31, 1996.

    Allowance  for Loan and Real Estate  Losses.  It is  management's  policy to
provide for losses on  unidentified  loans in its loan  portfolio and foreclosed
real  estate.  A  provision  for loan losses is charged to  operations  based on
management's  evaluation  of the  potential  losses  that may be incurred in the
Company's loan portfolio. Such evaluation,  which includes a review of all loans
of which full  collectibility  of interest and  principal  may not be reasonably
assured,  considers the Company's past loan loss experience,  known and inherent
risks in the  portfolio,  adverse  situations  that may  affect  the  borrower's
ability to repay,  estimated  value of any  underlying  collateral  and  current
economic conditions.



                                      11

<PAGE>



    Management  will  continue to review the entire loan  portfolio to determine
the extent,  if any, to which further  additional  loss provisions may be deemed
necessary.  There can be no  assurance  that the  allowance  for losses  will be
adequate  to cover  losses  which may in fact be realized in the future and that
additional provisions for losses will not be required.



                                      12

<PAGE>



     Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the  Company's  allowance for loan losses by loan category and the
percent  of loans in each  category  to total  loans  receivable,  at the  dates
indicated.  The  portion  of the loan  loss  allowance  allocated  to each  loan
category  does not  represent  the total  available  for future losses which may
occur  within  the loan  category  since the  total  loan  loss  allowance  is a
valuation reserve applicable to the entire loan portfolio. The allocation of the
allowance  for loan losses is based on  management's  evaluation of the loans in
the respective portfolios; the Company does not attempt to manage the percentage
of the allocation between loan categories.  As part of management's  evaluation,
for each loan category,  the allowance is determined after  examination of prior
period  experience  but is adjusted for various  factors such as  delinquencies,
expected  charge-offs,  recoveries,  amount  of  classified  assets,  amount  of
non-accrual  loans  and any  known  local  economic  trends.  As a  result,  the
allocation  of the  allowance  does not  reflect  relative  levels  of  historic
charge-offs between loan categories.

<TABLE>
<CAPTION>

                                                                     At December 31,
                             -----------------------------------------------------------------------------------------------------
                                  1992                 1993                1994                1995                  1996
                             ------------------- ------------------  -------------------- ------------------   -------------------
                                     Percent of          Percent of            Percent of          Percent of            Percent of
                                   Loans in Each        Loans in Each        Loans in Each        Loans in Each        Loans in Each
                                    Category to          Category to           Category to         Category to          Category to
                             Amount Total Loans  Amount  Total Loans  Amount  Total Loans  Amount  Total Loans  Amount  Total Loans
                             ------ -----------  ------  -----------  ------  -----------  ------  -----------  ------  -----------
                                                                   (Dollars in Thousands)
At end of year allocated to:
<S>                          <C>       <C>        <C>      <C>        <C>       <C>        <C>      <C>         <C>        <C>   
Mortgage................     $379       90.17%    $272      89.65%    $251       89.78%    $394      87.67%     $484       86.13%
Consumer and non-mortgage     100        9.83      126      10.35      125       10.22      118      12.33       131       13.87
                              ---      ------      ---     ------      ---      ------      ---      -----       ---      ------
 Total allowance........     $479      100.00%    $398     100.00%    $376      100.00%    $512     100.00%     $615      100.00%
                              ===      ======      ===     ======      ===      ======      ===     ======       ===      ======

</TABLE>



                                            13

<PAGE>



    Analysis of the  Allowance for Loan Losses.  The following  table sets forth
information  with  respect to the  Company's  allowance  for loan losses for the
years indicated:

<TABLE>
<CAPTION>

                                                     At December 31,
                                --------------------------------------------------------
                                   1992       1993         1994        1995       1996
                                   ----       ----         ----        ----       ----
                                                 (Dollars in Thousands)

<S>                              <C>        <C>          <C>         <C>        <C>     
Total loans outstanding.......   $122,583   $144,114     $166,941    $171,364   $180,399
                                  =======    =======      =======     =======    =======
Average loans outstanding.....   $129,260   $130,026     $153,477    $170,395   $173,383
                                  =======    =======      =======     =======    =======

Beginning allowance balances..   $    515   $    479     $    398    $    376   $    512
Provision:
  One- to four-family.........         72         --           32         166        180
  Commercial and multi-family
    real estate...............         --         --           --          --         --
  Consumer....................        100         --           81          --         --
Charge-offs:
  One- to four-family.........         64         61           53          23         21
  Commercial and multi-family
    real estate...............         80         --           --          --         --
  Consumer....................         93         59           91          18         67
Recoveries:
  One- to four-family.........          4         19           --          --         --
  Commercial and multi-family
    real estate...............         --         --           --          --         --
  Consumer....................         25          4            9          11         11

Other.........................         --         16           --          --         --
                                  -------    -------      -------     -------    -------

Ending allowance balance......   $    479    $   398     $    376    $    512   $    615
                                  =======    =======      =======     =======    =======

Allowance for loan losses as a 
  percent of total loans 
  outstanding.................       0.39%      0.28%        0.23%       0.30%      0.34%
Net loans charged off as a 
  percent of average loans 
  outstanding.................       0.16%      0.07%        0.09%       0.02%      0.04%


</TABLE>


                                      14

<PAGE>



    Analysis of the Allowance for Foreclosed  Real Estate.  The following  table
sets forth  information  with respect to the  Company's  allowance for losses on
foreclosed real estate at the dates indicated.

<TABLE>
<CAPTION>

                                                                 At December 31,
                                                --------------------------------------------
                                                  1992      1993     1994     1995     1996
                                                  ----      ----     ----     ----     ----
                                                  (Dollars in Thousands)
Total foreclosed real estate and real estate
<S>                                             <C>       <C>       <C>      <C>       <C> 
  in judgment, net ............................ $  136    $   160   $  151   $    29   $ 78
                                                 =====    =======   ======   =======   ====
Allowance balances - beginning ................     34         16       --        --     --
Provision .....................................     --         --       --        --     --

Charge-offs ...................................     18         --       --        --     --
Recoveries ....................................     --         --       --        --     --
Other .........................................     --        (16)      --        --     --
                                                  ----    -------   ------   -------   ----
Allowance balances - ending ................... $   16    $    --  $    --   $    --   $ --
                                                 =====    =======   ======   =======   ====
Allowance for losses on foreclosed real estate
  in judgment to net foreclosed real estate and
  real estate in judgment .....................  11.76%        --%      --%      --%     --%
                                                 =====    =======   ======   =======   ====
</TABLE>


Mortgage-Backed Securities

    To  supplement  lending  activities,  the  Company  invests  in  residential
mortgage-backed  securities.  Mortgage-backed securities can serve as collateral
for  borrowings  (although  the Company has not used them as such) and,  through
repayments, as a source of liquidity.

    At December 31, 1996, the  mortgage-backed  securities  portfolio had a fair
value of $428,000 and an amortized  cost of $427,000.  Because the  portfolio is
classified as available for sale (the Company had no mortgage-backed  securities
held to maturity at December 31,  1996),  the portfolio is recorded at $428,000.
The mortgage-backed  securities  portfolio at December 31, 1996 consisted solely
of real estate mortgage investment conduits ("REMICs"), a form of collateralized
mortgage obligations ("CMOs"). The Company receives monthly interest payments on
the securities in this portfolio based on fixed coupon rates.  These  securities
are  guaranteed  as to principal by the Federal  National  Mortgage  Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") and management does
not believe that there is a material  credit risk  associated with the repayment
of principal.

    To assess price volatility,  the Federal Financial Institutions  Examination
Council ("FFIEC") and OTS have adopted a policy that requires an annual "stress"
test of mortgage  derivative  securities.  This policy  requires  the Company to
annually  test its CMOs  and  other  mortgage-related  securities  to  determine
whether they are high-risk or  non-high-risk  securities.  At December 31, 1996,
the Company's CMOs met the criteria  established by the policy for non-high-risk
securities.  If interest rates remain stable,  the weighted  average life of the
FNMA CMO is 0.66 years.  According  to stress  tests  mandated by the  Company's
regulators,  a 300 basis point  upward  shift in interest  rates  increases  the
weighted average life of this security to 1.12 years.  This same 300 basis point
upward shift would result in a 2.72% decrease in price. Currently,  the weighted
average  life of the FHLMC CMO is 0.17 years.  A 300 basis point upward shift in
interest rates increases the weighted  average life to 0.27 years and results in
a 0.75%  decrease  in the  price.  The  carrying  value of these  securities  is
adjusted on a quarterly basis to reflect current market value.


                                      15

<PAGE>



Investment Activities

     The Company is required  under  federal  regulations  to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments.  The Company has maintained a liquidity portfolio
in excess of  regulatory  requirements.  Liquidity  levels may be  increased  or
decreased  depending  upon  the  yields  on  investment  alternatives  and  upon
management's  judgment as to the  attractiveness of the yields then available in
relation to other  opportunities  and its expectation of future yield levels, as
well as  management's  projections as to the  short-term  demand for funds to be
used in the Company's loan  origination  and other  activities.  At December 31,
1996,  the Company had an investment  portfolio of  approximately  $9.8 million,
consisting  primarily of U.S. Treasury securities and U.S. government  corporate
and agency  obligations.  To a lesser extent, the portfolio also includes mutual
funds, FHLMC stock, mortgage-backed securities, certificates of deposit and FHLB
stock,  as  permitted  by  the  OTS  regulations.  The  Company  classifies  its
investments, including debt and equity securities, as either held to maturity or
available for sale,  in  accordance  with SFAS 115. The Company will continue to
seek high quality investments. The primary and secondary goals of the investment
portfolio are safety of principal and rate of return, respectively.

    Investment  Portfolio.  The following table sets forth the carrying value of
the Company's  investments,  including short-term  investments,  FHLB stock, and
mortgage-backed  securities,  at the dates indicated.  At December 31, 1996, the
Company's  securities  that  were  classified  as  available  for  sale  had  an
unrealized net gain of $583,000.  The Company's  securities that were classified
as held to maturity had a net unrealized loss of $5,000. This unrealized loss is
not  reflected  in the table  below  because  these  securities  are  carried at
amortized  cost in  accordance  with SFAS 115. At December 31, 1996,  the market
value for the interest bearing deposits shown below approximated their cost.

                                                  At December 31,
                                         ---------------------------------
                                          1994         1995         1996
                                         -------      ------      --------
                                                  (In Thousands)

Securities available for sale:
  Equity securities................      $ 5,951      $ 6,753     $ 7,100
Securities held to maturity:
 U.S. government securities........        1,793          800          --
 U.S. agency securities............        4,198        3,399       2,049
                                          ------       ------       -----
   Total investment securities.....       11,942       10,952       9,149
Interest-bearing deposits..........          100          800         200
Mortgage-backed securities available
   for sale........................          961          867         428
                                          ------       ------      ------
   Total investments...............      $13,003      $12,619     $ 9,777
                                          ======       ======      ======



                                      16

<PAGE>



    Investment  Portfolio  Maturities.  The  following  table sets forth certain
information   regarding  the  carrying  values,   weighted  average  yields  and
maturities of the Company's investment securities portfolio.

<TABLE>
<CAPTION>

                                                                 At December 31, 1996
                           --------------------------------------------------------------------------------------------------------
                                                                                                                    Total
                           One Year or Less    One to Five Years   Five to Ten Years  More than Ten Years    Investment Securities
                           ------------------  -----------------  ------------------- -------------------  -------------------------
                           Carrying   Average  Carrying  Average  Carrying    Average Carrying    Average   Carrying Average Market
                             Value     Yield    Value     Yield    Value      Yield    Value      Yield      Value   Yield    Value
                           --------   -------  -------   -------  -------    -------  -------     -------   -------  ------  ------
                                                                       (Dollars in Thsands)

<S>                         <C>       <C>    <C>       <C>     <C>           <C>       <C>         <C>      <C>      <C>     <C>   
Mortgage-backed Securities  $  428    6.81%  $   --      --%   $    --       --  %     $   --      --  %    $  428   6.81%   $  428
U.S. Government Obligations     --      --       --      --         --       --            --      --           --     --        --
U. S. Agency Obligations ..     --      --    2,049    6.44         --       --            --      --        2,049   6.44     2,044
FHLB Stock ................     --      --       --      --         --       --            --      --        1,633     --     1,633
Equity Securities(1) ......     --      --       --      --         --       --            --      --        5,467     --     5,467
Interest Bearing Deposits .    200    5.75       --      --         --       --            --      --          200   5.75       200
                             -----            -----              -----                  -----                -----            -----
  Total ................... $  628    6.47   $2,049    6.44    $    --       --            --      --       $9,777           $9,772
                            ======            ======             =====                  =====                =====            =====

</TABLE>

------------------------
(1)  Includes funds held by the Asset Management Fund for Financial Institutions
     for the Company in the following  portfolios:  $2,320,000 in the Short U.S.
     Government Securities Portfolio, $1,171,000 in the U.S. Government Mortgage
     Portfolio and $1,149,000 in the Intermediate Mortgage Securities Portfolio.


                                       17

<PAGE>



Sources of Funds

    General.  Deposits are the major external  source of the Company's funds for
lending  and  other  investment   purposes.   The  Company  derives  funds  from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment  securities,  borrowings  and  operations.  Scheduled  loan principal
repayments are a relatively  stable source of funds,  while deposit  inflows and
outflows and loan prepayments are  significantly  influenced by general interest
rates and market  conditions.  The  Company may also borrow from the FHLB of Des
Moines as a source of funds.

    Deposits.  Consumer and commercial  deposits are attracted  principally from
within the  Company's  primary  market  area  through  the  offering  of a broad
selection  of  deposit  instruments  including  regular  savings  accounts,  NOW
accounts,  and term certificate accounts.  The Company also offers IRA and KEOGH
accounts.  Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit and the  interest  rate,  among
other factors.

    Jumbo Certificate Accounts.  The following table indicates,  at December 31,
1996, the amount of the Company's certificates of deposit of $100,000 or more by
time remaining until maturity.


Maturity Period
                                          (In Thousands)
Within three months..................          $2,767
Three through six months.............           1,710
Six through twelve months............           1,147
Over twelve months...................           3,823
                                               ------
                                               $9,447
                                               ======



    Borrowings.  Deposits  are the  primary  source  of funds  of the  Company's
lending and investment activities and for its general business purposes. Through
the  Bank,  the  Company  may  obtain  advances  from the FHLB of Des  Moines to
supplement  its supply of lendable  funds.  Advances from the FHLB of Des Moines
are typically  secured by a pledge of the Bank's stock in the FHLB of Des Moines
and a portion of the Company's  first  mortgage  loans and certain other assets.
The Bank, if the need arises,  may also access the Federal Reserve Bank discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  At December 31, 1996,  the Company had $26.5  million in advances
outstanding  from the FHLB of Des Moines of which $12.5 million have fixed rates
and $11.0 million and $3.0 million have variable rates that reprice  monthly and
daily,  respectively.  Most of these advances provide for a prepayment  penalty.
See Note 12 of the Notes to Consolidated  Financial Statements.  At December 31,
1996,  the Bank had $4.0 million in borrowings  (in the form of a loan) from the
Company.  The interest rate on this loan adjusts quarterly.  The Company expects
that the use of borrowings will continue and may increase after the Company uses
available liquid assets to fund loan  originations.  During recent periods,  the
Company has found that obtaining  wholesale  funds through FHLB advances is less
expensive than increasing the interest rates on deposit accounts to increase the
amount of deposits. If, in the future,  increased deposits become less expensive
than FHLB advances, the Company will likely rely more on increased deposits than
on FHLB  advances.  At December 31, 1996,  the Company had the ability to borrow
approximately 3.4 times its then outstanding advances.


                                      18

<PAGE>



    The following  table sets forth certain  information  as to FHLB advances at
the dates indicated.


                                     As of and for the Years Ended December 31,
                                     ------------------------------------------
                                        1994            1995            1996
                                        ----            ----            ----
                                            (Dollars in Thousands)
FHLB advances...................     $  23,650      $  18,000        $ 26,500
Weighted average interest rate
  of FHLB advances..............          5.64%          5.72%           5.74%
Maximum amount of advances......     $  23,650      $  23,650        $ 28,500
Average amount of advances......        12,610         18,938          19,269
Weighted average interest rate
  of average amount of advances.          4.96%          6.14%           5.64%


Subsidiary Activity

    The  Company has one wholly  owned  subsidiary,  the Bank.  The Bank has one
wholly owned subsidiary, known as Wells Insurance Agency, Inc. (the "WIA").

    The Bank is permitted to invest up to 2% of its assets in the capital  stock
of,  or  secured  or  unsecured  loans  to,  subsidiary  corporations,  with  an
additional  investment  of 1% of  assets  when  such  additional  investment  is
utilized primarily for community development purposes.  Under the 2% limitation,
as of December 31, 1996, the Bank was  authorized to invest up to  approximately
$4.0 million in the stock of, or loans to, service corporations.

     WIA was incorporated  under the laws of the State of Minnesota in 1976. WIA
offers life,  health,  casualty,  and business insurance on behalf of others and
also offers fixed-rate annuities. The Bank's investment in WIA totalled $436,000
at December 31, 1996.

Personnel

    As of  December  31,  1996,  the  Bank  had  50  full-time  and 6  part-time
employees.  None  of  the  Bank's  employees  are  represented  by a  collective
bargaining  group. The Company,  with no employees of its own, utilizes those of
the Bank.

Competition

    The  competition  for deposit  products  includes banks ranging in size from
larger,  Minneapolis- based regional banks with branches in the Company's market
area to local independent  community banks.  Deposit competition also includes a
number of insurance  products sold by local agents and investment  products sold
by local and regional sales people.

    Loan competition varies depending upon market  conditions.  Loan competition
includes  branches  of large  Minneapolis-based  commercial  banks and  thrifts,
credit  unions,  mortgage  bankers with local sales staff and local  banks.  The
Company  believes  that it is one of the few area lenders that has  consistently
offered a variety of loans throughout all types of economic conditions.

    The Company has traditionally  maintained a leadership  position in mortgage
loan volume and market share  throughout its service area by virtue of its local
presence.  The Company believes that it has been able to effectively  market its
larger variety of loan and other financial products and services

                                       19

<PAGE>



when  compared  to other  local-based  institutions  and its  superior  customer
service when  compared to branches of larger  institutions  based outside of the
Company's market area.

Regulation

    Set forth below is a brief  description  of certain  laws that relate to the
regulation of the Company and the Bank. The  description  does not purport to be
complete and is qualified  in its entirety by reference to  applicable  laws and
regulations.

Regulation of the Company

    General.  The Company is a unitary  savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation  and  examination  by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries,  should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary  savings  association.  This  regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.

    Qualified Thrift Lender Test. As a unitary savings and loan holding company,
the Company generally is not subject to activity restrictions, provided the Bank
satisfies the  Qualified  Thrift  Lender  ("QTL") test. If the Company  acquires
control of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding  company,  and the activities of the Company
and any of its  subsidiaries  (other  than  the Bank or any  other  SAIF-insured
savings  association)  would become subject to  restrictions  applicable to bank
holding companies unless such other  associations each also qualify as a QTL and
were acquired in a supervisory  acquisition.  See "--  Regulation of the Bank --
Qualified Thrift Lender Test."

Regulation of the Bank

    General. As a federally chartered,  SAIF-insured  savings  association,  the
Bank is subject  to  extensive  regulation  by the OTS and the  Federal  Deposit
Insurance  Corporation  ("FDIC").  Lending activities and other investments must
comply with various federal statutory and regulatory  requirements.  The Bank is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board.

    The OTS,  in  conjunction  with the FDIC,  regularly  examines  the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law,  especially in such matters as the ownership of savings  accounts
and the form and content of the Bank's mortgage documents.

    The  Bank  must  file  reports  with  the OTS and the  FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the protection of the SAIF and depositors.
The  regulatory  structure  also  gives  the  regulatory  authorities  extensive
discretion in connection with their  supervisory and enforcement  activities and
examination  policies,  including policies with respect to the classification of
assets and the  establishment  of adequate  loan loss  reserves  for  regulatory
purposes. Any change in such regulations, whether by the OTS, the

                                      20

<PAGE>



FDIC, or the Congress could have a material  adverse impact on the Company,  the
Bank, and their operations.

    Insurance of Deposit  Accounts.  The Bank's deposit  accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation).  Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations, or has violated any applicable law,
regulation,  rule, order or condition  imposed by the FDIC or the  institution's
primary regulator.  The FDIC may also prohibit an insured depository institution
from engaging in any activity the FDIC  determines  to pose a serious  threat to
the SAIF.

    The FDIC charges an annual assessment for the insurance of deposits based on
the risk a particular institution poses to its deposit insurance fund, depending
upon the institution's risk classification. This risk classification is based on
an institution's capital group and supervisory subgroup assignment. In addition,
the FDIC is  authorized  to increase  deposit  insurance  rates on a semi-annual
basis if it determines that such action is necessary to cause the balance in the
SAIF to reach the  designated  reserve ratio of 1.25% of  SAIF-insured  deposits
within a reasonable  period of time. The FDIC may impose special  assessments on
SAIF members to repay amounts  borrowed from the U.S.  Treasury or for any other
reason  deemed  necessary  by the FDIC.  Prior to September  30,  1996,  savings
associations  paid within a range of .23% to .31% of domestic  deposits  and the
SAIF was substantially underfunded. By comparison,  prior to September 30, 1996,
members of the Bank Insurance Fund ("BIF"), predominantly commercial banks, were
required to pay substantially  lower, or virtually no, federal deposit insurance
premiums.

    Effective  September 30, 1996, federal law was revised to mandate a one-time
special  assessment on SAIF members such as the Bank of  approximately  .657% of
deposits held on March 31, 1995. The Bank recorded a $1,085,000  pre-tax expense
for this assessment at September 30, 1996.  Beginning  January 1, 1997,  deposit
insurance assessments for SAIF members will be reduced to approximately .064% of
deposits on an annual  basis;  this rate may  continue  through the end of 1999.
During  this same  period,  BIF members  are  expected  to be annually  assessed
approximately  .013%  of  deposits.  Thereafter,  assessments  for BIF and  SAIF
members  should be the same and the SAIF and BIF may be merged.  It is  expected
that these continuing  assessments for both SAIF and BIF members will be used to
repay outstanding Financing  Corporation bond obligations.  As a result of these
changes,  beginning January 1, 1997, the rate of deposit insurance  assessed the
Bank is expected to substantially decline.

    Regulatory Capital  Requirements.  OTS capital  regulations  require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets,  (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based  capital  requirement equal to
8.0% of total risk-weighted assets. The Bank exceeded these minimum standards at
December 31,  1996.  The Bank's  capital  ratios are set forth in Note 15 to the
Consolidated  Financial  Statements  referenced  in Items 7 and 13 to this  Form
10-K.

    Savings  associations  with a greater than  "normal"  level of interest rate
exposure may, in the future, be subject to a deduction for an interest rate risk
("IRR")  component  may be  from  capital  for  purposes  of  calculating  their
risk-based capital requirement.

    Dividend and Other Capital Distribution Limitations. OTS regulations require
the Bank to give the OTS 30 days advance  notice of any proposed  declaration of
dividends to the Company,  and the OTS has the authority  under its  supervisory
powers to prohibit the payment of dividends  to the  Company.  In addition,  the
Bank may not declare or pay a cash  dividend on its capital  stock if the effect
thereof

                                       21

<PAGE>



would be to reduce the regulatory  capital of the Bank below the amount required
for the liquidation account established in connection with the Conversion.

    OTS regulations impose limitations upon all capital distributions by savings
institutions,  such as cash  dividends,  payments  to  repurchase  or  otherwise
acquire  its  shares,  payments  to  shareholders  of another  institution  in a
cash-out  merger  and other  distributions  charged  against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" (the excess  capital
over its fully phased-in capital  requirements) at the beginning of the calendar
year,  or (ii) 75% of its net income over the most recent four  quarter  period.
Any additional  capital  distributions  require prior  regulatory  approval.  At
December 31, 1996,  the Bank was a Tier 1  institution.  In the event the Bank's
capital fell below its fully  phased-in  requirement or the OTS notified it that
it was in need of more than  normal  supervision,  the  Bank's  ability  to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed  capital  distribution  by any  institution,  which would  otherwise be
permitted by the regulation,  if the OTS determines that such distribution would
constitute an unsafe or unsound practice.

    Finally,  a  savings   association  is  prohibited  from  making  a  capital
distribution if, after making the distribution, the savings association would be
undercapitalized   (not  meet  any  one  of  its  minimum   regulatory   capital
requirements).

    Qualified Thrift Lender Test. Savings  institutions must meet a QTL test. If
the  Bank  maintains  an  appropriate  level  of  Qualified  Thrift  Investments
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-related  securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full  borrowing  privileges  from the FHLB of Des Moines.  The
required  percentage of QTIs is 65% of portfolio  assets  (defined as all assets
minus  intangible  assets,  property used by the  institution  in conducting its
business and liquid  assets equal to 20% of total  assets).  Certain  assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying  QTIs. As of December 31, 1996,  the Bank was in compliance  with its
QTL requirement with 91.37% of its assets invested in QTIs.

    Loans-to-One Borrower.  See "Business -- Loans-to-One Borrower."

    Federal  Home  Loan  Bank  System.  The Bank is a member  of the FHLB of Des
Moines,  which is one of 12 regional FHLBs that  administers  the home financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.

    As a member, the Bank is required to purchase and maintain stock in the FHLB
of Des  Moines  in an  amount  equal  to at  least  1% of its  aggregate  unpaid
residential  mortgage loans, home purchase contracts,  or similar obligations at
the beginning of each year.

    Federal  Reserve  System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances

                                       22

<PAGE>



maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy the liquidity requirements that are imposed by the OTS.

    Recent and Proposed Legislation. Bills have been introduced to congressional
committees that would  consolidate the OTS with the Office of the Comptroller of
the  Currency  ("OCC").  The  resulting  agency  would  regulate  all  federally
chartered commercial banks and thrift institutions. In the event that the OTS is
consolidated  with the OCC,  it is  possible  that the thrift  charter  could be
eliminated  and  thrifts  could  be  forced  to  convert  to  commercial  banks.
Legislation  passed in 1996 required the recapture  (for income tax purposes) of
the Bank's post 1987 additions to bad debt reserves; however, this recapture did
not have a material  effect on the  earnings of the Bank or the Company  because
the Bank had previously provided deferred taxes on its bad debt reserves.  Under
current law and regulations, a unitary savings and loan holding company, such as
the  Company,  which  has only  one  thrift  subsidiary  such as the  Bank,  has
essentially unlimited investment  authority.  Legislation has also been proposed
which, if enacted, would limit the non-banking related activities of savings and
loan holding companies to those activities permitted for bank holding companies.

Item 2. Description of Properties
---------------------------------

     The Company does not own any real  property but utilizes the offices of the
Bank. The Bank operates from its main office  located at 53 First Street,  S.W.,
Wells,  Minnesota with six full service branch offices and one loan  origination
office.  The Bank owns the offices in Wells and one branch facility, and  leases
the remaining locations. The physical condition of each of the offices is good.

Item 3. Legal Proceedings
-------------------------

    There are various  claims and lawsuits in which  Registrant is  periodically
involved,  such  as  claims  to  enforce  liens,   condemnation  proceedings  on
properties in which  Registrant holds security  interests,  claims involving the
making and  servicing  of real  property  loans,  and other  issues  incident to
Registrant's  business.  In the  opinion  of  management,  no  material  loss is
expected from any of such pending claims or lawsuits.

Item  4.  Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------

    Not Applicable.

                                     PART II

Item  5.  Market for Common Equity and Related Stockholder Matters
-------------------------------------------------------------------

    The  information   contained  under  the  section  captioned  "Stock  Market
Information" on pages 1 and 2 of the Company's Annual Report to Stockholders for
the fiscal year ended December 31, 1996 (the "Annual  Report"),  is incorporated
herein by reference.

Item  6.  Management's Discussion and Analysis or Plan of Operation
-------------------------------------------------------------------

    The information contained in the section captioned "Management's  Discussion
and Analysis of Financial  Condition  and Results of  Operations"  in the Annual
Report is incorporated herein by reference.


                                      23

<PAGE>



Item  7.  Financial Statements
------------------------------

    The Registrant's  consolidated financial statements listed under Item 13 are
incorporated herein by reference.

Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure
          ----------------------------------------------------------------------

    Not applicable.

                                   PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance With Section 16(a) of the Exchange Act
         -------------------------------------------------------------

    The information  contained under the section captioned "I.  Information with
Respect  to  Nominees  for  Director  and  Directors  Continuing  in  Office" in
Registrant's  definitive  proxy  statement for  Registrant's  Annual  Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.

Item 10.  Executive Compensation
--------------------------------

    The  information   contained  under  the  section  captioned  "Director  and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

      (a)   Security Ownership of Certain Beneficial Owners

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the section captioned "Voting  Securities and Principal
            Holders Thereof" in the Proxy Statement.

      (b)   Security Ownership of Management

            Information   required  by  this  item  is  incorporated  herein  by
            reference to the section captioned "Voting  Securities and Principal
            Holders  Thereof" and to the first table under "I.  Information with
            Respect to Nominees for Director and Directors Continuing in Office"
            in the Proxy Statement.

      (c)   Management of  Registrant  knows of no  arrangements,  including any
            pledge by any person of securities of  Registrant,  the operation of
            which may at a  subsequent  date  result in a change in  control  of
            Registrant.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

      The information  required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.


                                      24

<PAGE>



                                    PART IV

Item 13. Exhibits, List, and Reports on Form 8-K
------------------------------------------------

      (a)   The following documents are filed as a part of this report:

            1. The following financial  statements and the report of independent
accountants of Registrant included in Registrant's Annual Report to Stockholders
are incorporated herein by reference and also in Item 7 hereof.

      Independent Auditor's Report.

      Consolidated Statements of Financial Condition as of December 31, 1996 and
1995.

      Consolidated  Statements of Income for the Years Ended  December 31, 1996,
1995, and 1994.

      Consolidated  Statements  of  Stockholders'  Equity  for the  Years  Ended
      December 31, 1996, 1995, and 1994.

      Consolidated  Statements  of Cash Flows for the Years Ended  December  31,
1996, 1995 and 1994.

      Notes to Consolidated Financial Statements.

          2.  Except  for   Exhibits  11  and  27  below,  Financial  Statement
Schedules for which provision is made in the applicable  accounting  regulations
of the SEC are not required under the related  instructions or are  inapplicable
and therefore have been omitted.

          3.   The   following   exhibits  are  included  in  this  Report  or
               incorporated herein by reference:

          (a)   List of Exhibits:

           3(i) Articles of Incorporation of Wells Financial Corp.*

           3(ii)Bylaws of Wells Financial Corp.*

          10.1  1995 Stock Option Plan of Wells Financial Corp.**

          10.2  Management Stock Bonus Plan and Trust Agreements**

          10.3  Change in Control Severance Agreement with James D. Moll***

          10.4  Change in Control Severance Agreement with Gerald D. Bastian***

          11    Statement Regarding Computation of Earnings per Share

          13    Annual Report to Stockholders for the fiscal year ended December
                31, 1996

          21    Subsidiaries of Registrant***


                                      25

<PAGE>




            23    Consent of McGladrey & Pullen, LLP

            27    Financial Data Schedule

      (b)   No  reports on Form 8-K were  filed  during the last  quarter of the
            period covered by this report.

---------------------
*    Incorporated by reference to the  registration  statement on Form S-1 (File
     No. 33-87922) declared effective by the SEC on February 13, 1995.
**   Incorporated  by reference to the proxy  statement for a special meeting of
     stockholders held on November 15, 1995 and filed with the SEC on October 2,
     1995 (File No. 0-25342).
***  Incorporated by reference to the Registrant's  Form 10-K for the year ended
     December 31, 1995.










                                       26

<PAGE>



                                  SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 27, 1997.

                                           WELLS FINANCIAL CORP.


                                           By: /s/ Lawrence H. Kruse
                                               --------------------------------
                                               Lawrence H. Kruse
                                               President and Chief Executive 
                                                 Officer
                                               (Duly Authorized Representative)

       Pursuant to the requirement of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated as of March 27, 1997.



/s/ Lawrence H. Kruse                          /s/ James D. Moll
------------------------------------------     --------------------------------
Lawrence H. Kruse                              James D. Moll
President, Chief Executive Officer             Treasurer and Principal Financial
and Director (Principal Executive Officer)       and Account Officer
                                               (Principal Financial and 
                                                 Accounting Officer)

Date:  March 27, 1997                          Date:  March 27, 1997



/s/ Wallace J. Butson                          /s/ Gerald D. Bastion
-----------------------------------------      ---------------------------------
Dr. Wallace J. Butson                          Gerald D. Bastion
Secretary and Director                         Vice President and Director

Date:  March 27, 1997                          Date:  March 27, 1997



/s/ Joseph R. Gadola                           /s/ Richard A. Mueller
------------------------------------------     ---------------------------------
Joseph R. Gadola                               Richard A. Mueller
Director                                       Director

Date:  March 27, 1997                          Date:  March 27, 1997