EXHIBIT 13

                                  [** LOGO **]

                                      WELLS
                                    FINANCIAL
                                      CORP.

                               1997 ANNUAL REPORT




<PAGE>




                              WELLS FINANCIAL CORP.
                                  ANNUAL REPORT
<TABLE>
<CAPTION>
WELLS SAVINGS BANK fsb                                            TABLE OF CONTENTS


<S>                                                        <C>                                                          <C>
MAIN OFFICE:                                               Profile and Stock Market Information. . . . . . . . . . . . .    1-2
Wells
53 First Street S.W.                                       Selected Consolidated Financial and Other Data. . . . . . . .      3
Wells, Minnesota 56097
                                                           Letter to Stockholders. . . . . . . . . . . . . . . . . . . .      4

BRANCH OFFICES:

Blue Earth                                                 Management's Discussion and Analysis of Financial
303 South Main Street                                        Condition and Results of Operations. . . . . . . . . . . . .  5-16
Blue Earth, Minnesota 56013

Mankato - Madison East                                     Independent Auditor's Report . . . . . . . . . . . . . . . . .    17
Madison East Center
1400 Madison Avenue                                        Consolidated Statements of Financial Condition . . . . . . . .    18
Mankato, Minnesota 56001
                                                           Consolidated Statements of Income  . . . . . . . . . . . . . .    19
Mankato - Riverfront
1300 South Riverfront Drive
Mankato, Minnesota  56002                                  Consolidated Statements of Stockholders' Equity  . . . . . . .    20

Fairmont                                                   Consolidated Statements of Cash Flows  . . . . . . . . . . . . 21-23
Five Lakes Centre
300 South State Street                                     Notes to Consolidated Financial Statements . . . . . . . . . . 24-47
Fairmont, Minnesota  56031
                                                           Office Location and Other Corporate Information  . . . . . . .    48
Albert Lea
Skyline Mall
1710 West Main Street
Albert Lea, Minnesota  56007

St. Peter
120 South Minnesota Avenue
St. Peter, Minnesota  56082

Owatonna
496 North Street
Owatonna, Minnesota  55060


</TABLE>


<PAGE>





Wells Financial Corp.

Profile

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

The Bank is a federally  chartered  stock savings bank  headquartered  in Wells,
Minnesota. The Bank has eight full service offices located in Faribault, Martin,
Blue Earth,  Nicollet,  Freeborn and Steele  Counties,  Minnesota.  The Bank was
founded in 1934 and its  deposits  have been  federally  insured by the  Savings
Association Insurance Fund ("SAIF") and its predecessor, the Federal Savings and
Loan Insurance  Corporation  ("FSLIC"),  since 1934. The Bank is a member of the
Federal Home Loan Bank ("FHLB") System. The Bank is a community  oriented,  full
service retail savings institution offering traditional mortgage loan products.

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,  commercial and agricultural real estate, agricultural
operating and multi-family loans and purchases investment securities.

Stock Market Information

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

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

  January 1, 1996 - March 31, 1996           $11.50            $10.125
  April 1, 1996 - June 30, 1996              $11.875           $ 9.875
  July 1, 1996 - September 30, 1996          $12.25            $11.375
  October 1, 1996 - December 31, 1996        $13.25            $12.50
  January 1, 1997 - March 31, 1997           $16.00            $12.875
  April 1, 1997 - June 30, 1997              $15.50            $14.00
  July 1, 1997 - September 30, 1997          $17.00            $15.00
  October 1, 1997 - December 31, 1997        $19.00            $16.50


The number of  stockholders  of record of common  stock as of the record date of
March 2,  1998,  was  approximately  576.  This does not  reflect  the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage firms. At February 13, 1998, there were 1,959,360 shares outstanding.

                                       1

<PAGE>


The Company paid  quarterly cash dividends of $0.12 per share on August 21, 1997
and November 12, 1997. No dividends were paid during 1995 or 1996.

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




                                       2
<PAGE>


WELLS FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
 Financial Condition
------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
 December 31,                                             1993        1994         1995         1996         1997
------------------------------------------------------ ----------- ------------ ------------ ------------ ------------

<S>                                                     <C>          <C>          <C>          <C>           <C>
Total assets                                            $ 165,188    $ 182,716    $ 195,158    $ 201,326     $201,436
Loans held for sale                                           775          114        1,944        1,791        2,012
Loans receivable, net                                     141,982      165,185      169,760      178,447      182,724
Mortgage-backed securities                                  1,023            -            -            -            -
Mortgage-backed securities available for sale                   -          961          867          428           86
Securities available for sale                                   -        5,951        6,753        7,100        2,640
Investment securities                                      14,759        5,991        4,199        2,049        3,198
Certificates of deposit                                       424          100          800          200        1,850
Cash and cash equivalents                                   3,480        1,480        8,192        8,301        5,971
Deposits                                                  153,769      146,412      146,686      145,010      145,378
Borrowed funds                                                  -       23,650       18,000       26,500       24,500
Equity                                                     10,181       11,506       28,852       28,202       29,641
</TABLE>

<TABLE>
<CAPTION>
Summary of Operations
------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
Years Ended December 31,                                  1993        1994         1995         1996         1997
------------------------------------------------------ ----------- ------------ ------------ ------------ ------------

<S>                                                     <C>          <C>          <C>          <C>            <C>
Interest income                                         $  11,164    $  11,573    $  13,489    $  14,669      $15,325
Interest expense                                            6,726        6,510        8,165        8,146        8,522
Net interest income                                         4,438        5,063        5,324        6,523        6,803
Provision for loan losses                                       -          113          166          180          180
Noninterest income                                            999          737          809        1,014        1,109
Noninterest expense (1)                                     3,356        3,574        3,855        5,245        3,987
Income before cumulative effect of change
   in accounting  principle                                 1,179        1,283        1,270        1,200        2,220
Net income                                                  1,248        1,283        1,270        1,200        2,220
</TABLE>

<TABLE>
<CAPTION>

Other Selected Data
------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
Years Ended December 31,                                  1993        1994         1995         1996         1997
------------------------------------------------------ ----------- ------------ ------------ ------------ ------------
<S>                                                      <C>          <C>          <C>          <C>          <C>
Return on average assets before cumulative effect           0.70%        0.74%        0.67%        0.61%        1.10%
Return on average assets after cumulative effect            0.74%        0.74%        0.67%        0.61%        1.10%
Return on average equity before cumulative effect          12.40%       11.66%        5.50%        4.24%        7.71%
Return on average equity after cumulative effect           13.12%       11.66%        5.50%        4.24%        7.71%
Average equity to average assets                            5.62%        6.31%       12.11%       14.40%       14.24%
Equity to assets                                            6.16%        6.30%       14.78%       14.01%       14.71%
Net interest rate spread (2)                                2.61%        2.80%        2.29%        2.72%        2.75%
Nonperforming assets to  total loans (3)                    0.56%        0.53%        0.17%        0.29%        0.26%
Allowance for loan losses to total loans                    0.28%        0.23%        0.30%        0.34%        0.41%
Allowance for loan losses to nonperforming loans (3)       52.37%       45.85%      171.24%      138.20%      172.62%
Basic earnings per share (4)                                  N/A          N/A       $0.50        $0.61         $1.18
Diluted earnings per share (4)                                N/A          N/A       $0.50        $0.61         $1.16
</TABLE>

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

                                       3
<PAGE>





                          [Wells Financial Letterhead]









To Our Stockholders:

We are pleased to present our third annual stockholder's report.

The first annual report covered operations from our conversion on April 11, 1995
to December 31, 1995. The 1996 annual report reflected the impact of the special
assessment on the industry to  recapitalize  the Savings  Association  Insurance
Fund (SAIF) and the  non-recurring  cost in connection with the  installation of
new data processing equipment and software. Absent the factors that affected the
1995 and 1996  annual  reports,  the  current  report  is more  reflective  of a
"normal" year of operation.

We hope you share our  satisfaction  in the  operating  results of 1997 with its
record net income of $2,220,000.  We are pleased to have begun the  distribution
of quarterly dividends in 1997.

The  conversion  from a loan  origination  office  to a full  service  branch in
Owatonna was completed with its move to a new office facility in September.  The
installation of new data processing  equipment and software  (completed in 1996)
not only  allowed us to improve our  customer  service,  it allows us to be more
competitive in the year 2000 and thereafter.

A new wholly owned subsidiary of Wells Federal Bank, Greater Minnesota Mortgage,
Inc., began operation in late 1997.  Greater Minnesota  Mortgage  specializes in
originating loans through  referrals from community  commercial banks as well as
developing other banking  relationships that will mutually benefit the community
banks and our Company.  We continue to work on enhancing the value of your stock
with stock buy backs when appropriate.

Your Board of  Directors,  the  management  team and the staff  look  forward to
providing  quality  service to our  customers  and  enhancing  the value of your
investment in Wells Financial Corp. Thank you for your continued  confidence and
support.

Best Regards,


/s/Lawrence H. Kruse

Lawrence H. Kruse
President and Chief Executive Officer


                                       4
<PAGE>


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

General

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

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

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

Asset/Liability Management

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

         An asset or liability is interest rate sensitive within a specific time
period if it will  mature or  reprice  within  that time  period.  If the Bank's
assets  mature  or  reprice  more  quickly  or  to a  greater  extent  than  its
liabilities,  the Bank's net portfolio  value and net interest income would tend
to increase  during periods of rising interest rates but decrease during periods
of falling interest rates. If the Bank's assets mature or reprice more slowly or
to a lesser extent than its liabilities,  the Bank's net portfolio value and net
interest  income would tend to decrease  during periods of rising interest rates
but increase  during periods of falling  interest  rates.  The Bank's policy has
been to mitigate the interest rate risk inherent in

                                       5
<PAGE>



(Dollars in Thousands)

the  historical  savings  institution  business of originating  long-term  loans
funded by  short-term  deposits  by  pursuing  certain  strategies  designed  to
decrease the  vulnerability of its earnings to material and prolonged changes in
interest  rates.  These  strategies  include  obtaining  longer  term fixed rate
borrowings at favorable rates and, due to the lower rates  currently  available,
the sale of all newly  originated  fixed rate  mortgage  loans to the  secondary
market.

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

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

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

                                       6
<PAGE>
(Dollars in Thousands)

Net Portfolio Value

         To encourage  associations  to reduce their interest rate risk, the OTS
adopted a rule  incorporating  an interest rate risk ("IRR")  component into the
risk-based capital rules. This rule in not yet in effect. The IRR component is a
dollar  amount  that will be  deducted  from total  capital  for the  purpose of
calculating an institution's  risk-based capital  requirement and is measured in
terms of the  sensitivity  of its net  portfolio  value  ("NPV")  to  changes in
interest rates. NPV is the difference  between incoming and outgoing  discounted
cash flows  from  assets,  liabilities,  and  off-balance  sheet  contracts.  An
institution's  IRR  is  measured  as the  change  to its  NPV as a  result  of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated  market value of its assets will require
the  institution to deduct from its capital 50% of that excess change.  The rule
provides  that the OTS  will  calculate  the IRR  component  quarterly  for each
institution.  The Bank,  based on asset size and  risk-based  capital,  has been
informed  by the  OTS  that it is  exempt  from  this  rule.  Nevertheless,  the
following  table  presents the Bank's NPV at December 31, 1997, as calculated by
the OTS, based on information provided to the OTS by the Bank.

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

<S>         <C>              <C>           <C>                    <C>           <C>                  <C>
           +400              $14,633       $(13,787)              (49)%           7.75%               -612 bp
           +300               18,723         (9,697)              (34)%           9.67%               -419 bp
           +200               22,566         (5,853)              (21)%          11.40%               -246 bp
           +100               25,832         (2,587)               (9)%          12.80%               -106 bp
             --               28,420                                             13.87%
           -100               30,179           1,760                 6%          14.56%                 69 bp
           -200               31,247           2,827                10%          14.95%                108 bp
           -300               32,513           4,093                14%          15.41%                155 bp
           -400               34,348           5,928                21%          16.09%                223 bp

</TABLE>


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


                                       7
<PAGE>

(Dollars in Thousands)
                                                                     At
                                                               December 31,
                                                                    1997
                                                             -----------------

              *** Risk Measures: 200 bp rate shock ***
              Pre-Shock NPV Ratio: NPV as % of PV of Assets           13.87%
              Exposure Measure: Post-Shock NPV Ratio                  11.40%
              Sensitivity Measure: Change in NPV Ratio                 (246) bp




         Although  the OTS has  informed  the Bank that it is not subject to the
IRR component  discussed  above, the Bank is still subject to interest rate risk
and, as can be seen above,  rising interest rates will reduce the Bank's NPV. If
the Bank were  subject to the IRR  component  at December  31, 1997, a deduction
from capital would have been required.

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


                                       8
<PAGE>


Average Balance Sheet (Dollars in Thousands)

         The  following  table sets forth  certain  information  relating to the
Bank's  average  balance  sheet and  reflects  the  average  yield on assets and
average cost of  liabilities  for the periods  indicated and the average  yields
earned and rates paid.  Such yields and costs are derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods presented. The yields for the periods presented include loan origination
fees that are considered adjustments to yield. Average balances are derived from
month-end  balances.  Management  does not  believe  that  the use of  month-end
balances instead of daily average balances has caused any material difference in
the information presented.
<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                               -----------------------------------------------------------------------------------------------------
                                             1995                                1996                             1997
                               -------------------------------- ---------------------------------- ---------------------------------
                                                         Average                          Average                          Average
                               Average                   Yield/     Average               Yield/       Average             Yield
                               Balance     Interest      Cost       Balance     Interest  Cost         Balance   Interest  Cost
                               ---------- ------------ -------- ------------ ------------ -------- ------------ ---------- --------
<S>                            <C>           <C>       <C>        <C>           <C>       <C>        <C>         <C>       <C>
Interest-earning assets:
   Loans receivable (1)          170,395       12,571    7.38%      173,383       13,617    7.85%      183,591     14,570    7.94%
   Mortgage-backed securities        949           55    5.80%          661           45    6.81%          250         18    7.20%
   Investments (2)                15,618          863    5.53%       18,281        1,007    5.51%       14,426        737    5.11%
                               ---------- ------------          ------------ -----------           ------------ ----------
      Total interest-
        earning assets           186,962       13,489    7.22%      192,325       14,669    7.63%      198,267     15,325    7.73%
                                          ------------                       ------------                       ----------
Noninterest earning assets         3,847                              4,163                              3,979
                               ----------                       ------------                      ------------
      Total assets               190,809                            196,488                        $   202,246
                               ==========                       ============                       ============

Interest bearing liabilities:
   Savings, NOW and money
      market accounts             36,553          937    2.56%       36,578          949    2.59%       37,010        966    2.61%
   Certificates of deposit       110,169        6,066    5.51%      110,139        6,111    5.55%      107,394      6,014    5.60%
   Borrowed funds                 18,938        1,162    6.14%       19,269        1,086    5.64%       26,808      1,542    5.75%
                               ---------- ------------          ------------ ------------          ------------ ----------
      Total interest bearing
        liabilities              165,660        8,165    4.93%      165,986        8,146    4.91%      171,212      8,522    4.98%
                                          ------------                       ------------                       ----------
Noninterest bearing
  liabilities                      2,050                              2,199                              2,232
                               ----------                       ------------                       ------------
      Total liabilities          167,710                            168,185                            173,444
Equity                            23,099                             28,303                             28,802
                               ----------                       ------------                       ------------
      Total liabilities
        and equity               190,809                            196,488                        $   202,246
                               ==========                       ============                       ============
Net interest income                             5,324                              6,523                            6,803
                                          ============                       ============                       ==========
Interest rate spread (3)                                 2.29%                              2.72%                            2.75%
Net yield on interest
  earning assets (4)                                     2.85%                              3.39%                            3.43%
Ratio of average
  interest earning assets
  to average interest
  bearing liabilities               1.13X                              1.16X                              1.16X
liabilities                    ==========                       ============                       ============
</TABLE>

(1)      Average balances include non-accrual loans and loans held for sale.
(2)      Includes interest-bearing deposits in other financial institutions.
(3)      Interest-rate  spread  represents  the  difference  between the average
         yield on  interest-earning  assets and the average  cost  of  interest-
         bearing liabilities.
(4)      Net yield on interest-earning assets represents net interest income  as
         a percentage of average interest-earning assets.


                                       9
<PAGE>


Rate/Volume Analysis  (Dollars in Thousands)

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

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                   ---------------------------------------- --- ---------------------------------------
                                                1996 vs. 1995                               1997 vs. 1996
                                   ----------------------------------------     ---------------------------------------
                                         Increase (Decrease) Due to                   Increase (Decrease) Due to
                                   ----------------------------------------     ---------------------------------------
                                                        Rate/                                        Rate/
                                    Volume    Rate     Volume       Net          Volume     Rate     Volume     Net
                                   --------- -------- ---------- ----------     --------- --------- --------- ---------
<S>                                <C>       <C>      <C>        <C>            <C>         <C>     <C>       <C>
Interest Income:
  Loans receivable                 $    220  $   811  $      15  $   1,046      $    801    $  156  $     (4) $    953
  Mortgage-backed securities            (17)      10        (15)       (22)          (28)        3        (2)      (27)
  Investments                           147       (3)        12        156          (212)      (73)        15     (270)
                                   --------- -------- ---------- ----------     --------- --------- --------- ---------
    Total interest-earning assets       350      818         12      1,180           561        86         9       656
                                   --------- -------- ---------- ----------     --------- --------- --------- ---------

Interest expense:
  Deposit accounts                        -       57          -         57          (141)       62        (1)      (80)
  Borrowed funds                         19      (94)        (1)       (76)          425        21        10       456
                                   --------- -------- ---------- ----------     --------- --------- --------- ---------
     Total interest-bearing
       liabilities                       19      (37)        (1)       (19)          284        83         9       376
                                   --------- -------- ---------- ----------     --------- --------- --------- ---------

Net change in interest income      $    331  $   855  $      13  $   1,199      $    277  $      3  $      -  $    280
                                   ========= ======== ========== ==========     ========= ========= ========= =========
</TABLE>



                                       10
<PAGE>



11


(Dollars in Thousands)

Financial Condition

         Total assets remained  relatively  constant for the year ended December
31,  1997 when  compared to the year ended  December  31,  1996.  An increase of
$4,277 in loans  receivable,  from  $178,447 at December 31, 1996 to $182,724 at
December 31, 1997, was offset by a decrease in securities available for sale and
mortgage backed securities  available for sale. The increase in loans receivable
primarily  resulted  from a $4,084  increase  in the Bank's  home equity line of
credit loan  portfolio at December 31, 1997 when  compared to December 31, 1996.
This  increase in the Bank's home equity line of credit loan  portfolio  was the
result of management's decision to aggressively originate and retain home equity
line of credit  loans due to the higher  interest  rates the home equity line of
credit loans generally produce.  The $4,460 decease in securities  available for
sale was due to the sale of  investments  in mutual  funds and Federal Home Loan
Mortgage Corp. stock.   Mortgage backed securities that are available  for  sale
decreased by $342 due to the repayment of principal.

         In accordance with the Bank's internal classification of assets policy,
management  evaluates  the loan  portfolio on a quarterly  basis to identify and
determine the adequacy of the allowance for loan losses. As of December 31, 1996
and  December  31,  1997 the  balance in the  allowance  for loan losses and the
allowance  for loan losses as a percentage  of total loans was $615 and $763 and
0.34% and 0.41%, respectively.

         Loans on which the accrual of interest has been  discontinued  amounted
to $298 and $237 at  December  31,  1996 and 1997,  respectively.  The effect of
nonaccrual  loans was not significant to the results of operations.  The Company
includes  all  loans  considered  impaired  under  FASB  Statement  No.  114  in
nonaccrual  loans. The amount of impaired loans was not material at December 31,
1996 and 1997.

         Deposits  increased  by $368 from  $145,010  at  December  31,  1996 to
$145,378 at December 31, 1997.  Borrowed  funds  decreased by $2,000 at year end
1997 when compared to year end 1996 as income from  operations and cash received
from the sale of securities available for sale were used to fund loan growth and
reduce borrowings.

         Equity increased by $1,439 from $28,202 at December 31, 1996 to $29,641
at December  31,  1997.  The increase in equity was the result of net income for
1997 of $2,209,  the allocation of $245 of employee stock ownership plan shares,
the  amortization  of $129 of unearned  compensation  and a $236 increase in the
unrealized appreciation on securities available for sale, being partially offset
by the payment of $470 in cash  dividends and by the repurchase of 64,500 shares
of treasury stock at a cost of $921.

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

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

                                       11
<PAGE>


(Dollars in Thousands)

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

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

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

         Provision  for Loan  Losses.  The  provision  for loan losses  remained
constant for 1997 when compared to 1996.  Management  monitors the allowance for
loan loss in relation to the size and quality of the loan  portfolio and adjusts
the provision for loan losses to adequately  provide for loan losses.  While the
Company maintains its allowance for loan losses at a level that is considered to
be adequate to provide for  potential  losses,  there can be no  assurance  that
further  additions  will not be made to the loss  allowance and that losses will
not exceed estimate amounts.

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

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

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

                                       12
<PAGE>

(Dollars in Thousands)

Comparison of Operating Results for the Years Ended December 31, 1996 and 1995

         General.  For the year ended  December  31, 1996,  net interest  income
increased by $1,199 when  compared to the same period in 1995.  This increase in
net interest income would normally result in an increase in income before income
taxes.  However, on September 30, 1996, a law was enacted which required savings
institutions  insured by the Savings Association  Insurance Fund (SAIF) to pay a
one time special  assessment to  recapitalize  the SAIF.  The Bank's  assessment
amounted to $1,085, which was recorded as an expense during the third quarter of
1996.  This special SAIF  assessment  was the primary  reason for income  before
income taxes for fiscal year 1996 being equal to income  before income taxes for
fiscal year 1995.  Income tax expense for the year ended  December  31, 1996 was
$70 higher than income tax for the year ended December 31, 1995 primarily due to
an increase in nondeductible expenses incurred by the Company, which resulted in
a  reduction  in net income of $70 from $1,270 for the year ended  December  31,
1995 to $1,200 for the year ended December 31, 1996.

         Interest Income.  The Company's interest income increased by $1,180 for
the year ended  December 31, 1996 when  compared to the year ended  December 31,
1995.  This is  primarily  the  result  of an  upward  repricing  of the  Bank's
adjustable rate loan portfolio and the increase in loans receivable. To a lesser
extent,  the  increase in  interest  income was the result of an increase in the
average balance of investment securities.

         Interest  Expense.  The average amount of deposits during 1996 remained
approximately  equal to the average amount of deposits  during 1995. An increase
in the interest rates paid on deposits  caused  interest  expense on deposits to
increase by $57, from $7,003 for the year ended  December 31, 1995 to $7,060 for
the year ended  December 31, 1996.  The average  amount of borrowed funds during
1996  increased  by $331 when  compared  to 1995.  This  increase in the average
amount of borrowed  funds was offset by a decrease in the interest rates paid on
borrowed  funds,  which  resulted in a decrease in interest  expense on borrowed
funds.  The decrease in the interest paid on borrowed  funds offset the increase
in interest paid on deposits and resulted in a $19 decrease in interest  expense
for fiscal year 1996 when compared to fiscal year 1995.

         Net Interest  Income.  Net interest income  increased by $1,199 for the
year ended  December 31, 1996 when compared to the year ended December 31, 1995.
Again,  this is primarily the result of the increase in loans receivable and the
result  of the  repricing  of the  Bank's  adjustable  rate  loan  portfolio  as
described above, and to a lesser extent,  the result of the decrease in interest
expense.

         Provision for Loan Losses.  The provision for loan losses  increased by
$14 for 1996 when compared to 1995.  Management  monitors the allowance for loan
loss in relation to the size and quality of the loan  portfolio  and adjusts the
provision  for loan  losses to  adequately  provide for loan  losses.  While the
Company maintains its allowance for loan losses at a level that is considered to
be adequate to provide for  potential  losses,  there can be no  assurance  that
further  additions  will not be made to the loss  allowance and that losses will
not exceed estimate amounts.






                                       13
<PAGE>

(Dollars in Thousands)

         Noninterest Income.  Noninterest income increased by $205 from $809 for
the year ended December 31, 1995 to $1,014 for the year ended December 31, 1996.
This  increase  is  primarily  due to  increases  in the  gain on sale of  loans
originated for sale and insurance  commissions.  The increase in the gain on the
sale of loans  originated  for sale  resulted  primarily  from the  recording of
mortgage  servicing  rights on loans sold during the year due to the adoption of
FASB Statement No. 122 during the period. The increase in insurance  commissions
was the result of the  acquisition  of additional  local  accounts by the Bank's
insurance subsidiary.

         Noninterest  Expense.  Noninterest  expense  increased  by $1,390  from
$3,855  for the year  ended  December  31,  1995 to  $5,245  for the year  ended
December 31, 1996. As described  above, the legislation that was signed into law
on September 30, 1996  resulted in a one time special  assessment to the Bank of
$1,085.  This  assessment is the primary  reason for the increase in noninterest
expense.  As a result of this  legislation,  the Bank's  annual  assessment  was
reduced from twenty  three basis points per dollar of deposits to  approximately
six  basis  points  per  dollar  of  deposits.  Also,  as part  of  management's
commitment to provide  competitive  products and excellent service to the Bank's
customers,  the Bank converted to a new data  processing  software system during
the second quarter of 1996. The decision to convert the data processing software
was based upon  management's  desire to improve marketing of the Bank's products
to current as well as potential customers. The software conversion resulted in a
non-recurring  expense of  approximately  $132 that was recorded during 1996. In
addition, approximately $498 in hardware and software costs were capitalized and
will be depreciated over their useful lives.

         Income Tax Expense.  While income  before income taxes was the same for
the years ended December 31, 1996 and 1995,  income tax expense increased during
1996  primarily  due to an increase in  nondeductible  expenses  incurred by the
Company. Income tax expense as a percentage of income before taxes for the years
ended December 31, 1996 and 1995 was 43.18% and 39.87%, respectively.

Liquidity and Capital Resources

         The Bank is required under applicable  federal  regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other  investments  having  maturities of five years or less.
Current OTS  regulations  require  that a savings  association  maintain  liquid
assets of not less than 5% of its  average  daily  balance  of net  withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. At December 31, 1997, the Bank's
liquidity,  as measured for  regulatory  purposes,  was 5.02%.  The Bank adjusts
liquidity as appropriate to meet its asset/liability objectives.

         The Bank's  primary  sources of funds are  deposits,  amortization  and
prepayment of loans, maturities of investment securities and funds provided from
operations.  While scheduled loan repayments are a relatively predictable source
of funds,  deposit flows and loan  prepayments are  significantly  influenced by
general  interest rates,  economic  conditions and competition.  If needed,  the
Bank's primary source of funds can be  supplemented  by wholesale funds obtained
through  additional  advances  from the Federal Home Loan Bank system.  The Bank
invests excess funds in overnight  deposits,  which not only serve as liquidity,
but also earn  interest as income until funds are needed to meet  required  loan
funding.

         The Bank's most liquid asset is cash including investments in  interest
bearing accounts at the FHLB of Des Moines that have no withdrawal restrictions.
The level of these assets are dependent on the Bank's  operating,  financing and
investing  activities  during any given period. At December 31, 1997, the Bank's
cash totaled  $5,902.  This  compares to the Bank's cash at December 31, 1996 of
$6,675.

                                       14
<PAGE>


(Dollars in Thousands)

         Also  available  to  the  Bank  to  meet  liquidity   requirements  are
borrowings  from the Federal Home Loan Bank. At December 31, 1997,  the Bank had
$24,500 in  outstanding  advances  from the FHLB of Des Moines,  which have been
used to fund loan  originations.  At December 31, 1997, the Bank had the ability
to borrow approximately 3.7 times its then outstanding advances.

         In 1996,  the Company  approved  stock buy back  programs in  which  up
to  317,188  shares of the  common  stock of the  Company  may be  acquired.  An
additional  126,813  shares may be  purchased in the future in  accordance  with
these programs.

         The Bank is  required  to maintain  specified  amounts of capital.  The
capital  standards  generally  require the  maintenance  of  regulatory  capital
sufficient to meet a tangible capital  requirement,  a core capital  requirement
and a risk-based capital requirement.  At December 31, 1997, the Bank's tangible
capital  totaled $22.8  million,  or 11.41% of adjusted  total assets,  and core
capital  totaled  $22.8  million,  or 11.41% of  adjusted  total  assets,  which
substantially  exceeded  the  respective  1.5%  tangible  capital  and 3.0% core
capital   requirements  at  that  date  by  $19.8  million  and  $16.8  million,
respectively,  or 9.91% and 8.41% of adjusted  total assets,  respectively.  The
Bank's risk-based capital totaled $23.5 million at December 31, 1997 or 20.0% of
risk-weighted  assets,  which  exceeded  the  current  requirements  of  8.0% of
risk-weighted assets by $14.1 million or 12.0% of risk-weighted assets.

Impact of Inflation and Changing Prices

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

Impact of New Accounting Standards

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

              Effective  January 1, 1997, the Company adopted FASB Statement No.
125,   Accounting   for  Transfers   and  Servicing  of  Financial   Assets  and
Extinguishments of Liabilities.  This Statement establishes the basic principles
that an entity should  recognize only assets it controls and  liabilities it has
incurred. Assets should be "derecognized" only when they have been extinguished,
and recognition of financial  assets and  liabilities  should not be affected by
the sequence of transactions unless the effect of the transactions is to

                                       15
<PAGE>

(Dollars in Thousands)

maintain effective control over a transferred financial asset. Statement No. 125
also continues the  recognition of mortgage  servicing  rights on loans sold and
supersedes Statement No. 122 for transactions after January 1, 1997.

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

              In June  1997,  the  FASB  issued  Statement  No.  130,  Reporting
Comprehensive  Income.  This Statement requires an entity to include a statement
of comprehensive income in its full set of general-purpose financial statements.
Comprehensive  income  consists  of the net income or loss of the entity plus or
minus the change in equity of the entity  during the period  from  transactions,
other events, and circumstances  resulting from nonowner sources.  Statement No.
130 is effective for years  beginning  after  December 15, 1997 and will require
financial  statements  of earlier  periods that are  presented  for  comparative
purposes to be reclassified.

Year 2000 Issue

              The Company is aware of the issues associated with the programming
code in existing  computer systems as the year 2000 approaches.  The "year 2000"
problem will affect  virtually  every computer  operation by the rollover of the
two digit year value to 00. The issue is whether computer systems will recognize
date sensitive  information  when the year changes to 2000.  Systems that do not
properly  recognize such  information  could generate  erroneous data or cause a
system to fail.

              The Company is utilizing  both internal and external  resources to
identify,  correct  or  reprogram,  and  test  the  systems  for the  year  2000
compliance. To date, confirmations have been received from the Company's primary
processing  vendors  that plans are being  developed  to address  processing  of
transactions  in the year 2000.  Management  has not yet  assessed the year 2000
compliance expense and related potential effect on the Company's earnings.

                                       16
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT



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

We have audited the accompanying  consolidated statements of financial condition
of Wells  Financial  Corp.  and Subsidiary as of December 31, 1997 and 1996, and
the related  consolidated  statements of income,  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Wells  Financial
Corp.  and Subsidiary as of December 31, 1997 and 1996, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.










Rochester, Minnesota
February 9, 1998



<PAGE>




WELLS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS                                                                            1997             1996
-------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>
Cash, including interest-bearing accounts
   1997 $4,838; 1996 $7,560                                                $          5,971 $          8,301
Certificates of deposit (Note 2)                                                      1,850              200
Securities available for sale (Notes 3 and 10)                                        2,640            7,100
Securities held to maturity (Note 4)                                                  3,198            2,049
Mortgage-backed securities available for sale (Note 3)                                   86              428
Loans held for sale, net of unrealized losses  (Note 5)                               2,012            1,791
Loans receivable, net (Notes 5, 10, 16 and 17)                                      182,724          178,447
Accrued interest receivable                                                           1,106            1,060
Premises and equipment (Note 8)                                                       1,425            1,519
Foreclosed real estate (Note 7)                                                          35               78
Other assets (Note 6)                                                                   389              353
                                                                           ----------------------------------
              Total assets                                                 $        201,436 $        201,326
                                                                           ----------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------
Liabilities
   Deposits (Note 9)                                                       $        145,378 $        145,010
   Borrowed funds (Note 10)                                                          24,500           26,500
   Advances from borrowers for taxes and insurance                                    1,080            1,020
   Income taxes (Note 11):
      Current                                                                           111
      Deferred                                                                          474              358
   Accrued interest payable                                                             139              126
   Accrued expenses and other liabilities                                               113              110
                                                                           ----------------------------------
              Total liabilities                                                     171,795          173,124
                                                                           ----------------------------------

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

Stockholders'  Equity  (Notes 12, 13, 14 and 19)
   Common  stock,  $.10 par value; 7,000,000 shares
      authorized; 2,187,500 shares issued                                               219              219
   Additional paid-in capital                                                        16,694           16,588
   Retained earnings, substantially restricted                                       15,736           13,986
   Unrealized appreciation on securities
      available for sale, net of related taxes                                          584              348
   Unearned Employee Stock Option Plan shares                                          (757)            (896)
   Unearned compensation-restricted stock awards                                       (151)            (280)
   Less cost of treasury stock, 1997 228,140 shares;
      1996 163,640 shares                                                            (2,684)          (1,763)
                                                                           ----------------------------------
              Total stockholders' equity                                             29,641           28,202
                                                                           ----------------------------------
              Total liabilities and stockholders' equity                   $        201,436 $        201,326
                                                                           ----------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


WELLS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                 1997            1996             1995
------------------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>             <C>

Interest and Dividend Income
   Loans receivable
      First mortgage loans                                $         12,112 $        11,558 $         10,854
      Consumer and other loans                                       2,458           2,059            1,717
   Investment securities and other interest-
      bearing deposits                                                 755           1,052              918
                                                          --------------------------------------------------
              Total interest income                                 15,325          14,669           13,489
                                                          --------------------------------------------------
Interest Expense
   Deposits                                                          6,980           7,060            7,003
   Borrowed funds                                                    1,542           1,086            1,162
                                                          --------------------------------------------------
              Total interest expense                                 8,522           8,146            8,165
                                                          --------------------------------------------------
              Net interest income                                    6,803           6,523            5,324
Provision for loan losses (Note 5)                                     180             180              166
                                                          --------------------------------------------------
              Net interest income after
                  provision for loan losses                          6,623           6,343            5,158
                                                          --------------------------------------------------
Noninterest Income
   Gain on sale of loans                                                81             102               31
   Loan origination and commitment fees                                174              81               60
   Loan servicing fees                                                 198             202              186
   Insurance commissions                                               313             318              247
   Fees and service charges                                            296             246              225
   Other                                                                47              65               60
                                                          --------------------------------------------------
              Total noninterest income                               1,109           1,014              809
                                                          --------------------------------------------------
Noninterest Expenses
   Compensation and benefits (Note 14)                               2,037           1,911            1,890
   Occupancy and equipment (Note 15)                                   681             644              535
   Federal insurance premiums and
      assessment (Note 9)                                               94           1,406              336
   Data processing                                                     245             359              263
   Advertising                                                         175             150              144
   Other                                                               755             775              687
                                                          --------------------------------------------------
              Total noninterest expenses                             3,987           5,245            3,855
                                                          --------------------------------------------------
              Income before income taxes                             3,745           2,112            2,112
Income tax expense (Note 11)                                         1,525             912              842
                                                          --------------------------------------------------
              Net income                                  $          2,220 $         1,200 $          1,270
                                                          --------------------------------------------------

Earnings per share (Note 13):
   Basic earnings per share                               $           1.18 $          0.61 $           0.50
                                                          --------------------------------------------------
   Diluted earnings per share                             $           1.16 $          0.61 $           0.50
                                                          --------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>




WELLS FINANCIAL CORP. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Years Ended December 31,
1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                  Unrealized   Unearned
                                                                  Appreciation
                                                                 (Depreciation)Employee    Unearned
                                                                      on         Stock    Compensation-
                                           Additional             Securities   Ownership  Restricted               Total
                                 Common     Paid-In     Retained   Available     Plan       Stock      Treasury  Stockholders'
                                  Stock     Capital     Earnings   for Sale,    Shares      Awards       Stock      Equity
                                                                      net
------------------------------------------------------------------------------------------------------------------------------

<S>                           <C>           <C>        <C>         <C>          <C>         <C>        <C>          <C>
Balances, December 31, 1994   $             $          $   11,516  $       (10) $           $          $            $   11,506
   Proceeds from sale of
      2,187,500 shares,
      net of offering costs
      of $775 (Note 19)                219     16,506                              (1,120)                             15,605
   Net income                                               1,270                                                       1,270
   Net changes in unrealized
      appreciation on
      securities available
      for sale, net of
      related taxes                                                       328                                             328
   Allocated ESOP shares                           31                                 112                                 143
                              ------------------------------------------------------------------------------------------------
Balances, December 31, 1995            219     16,537      12,786         318      (1,008)                             28,852
   Net income                                               1,200                                                       1,200
   Net changes in
      unrealized appreciation
      on securities
      available for sale,
      net of related taxes                                                 30                                              30
   Treasury stock purchases,
      163,640 shares (Notes                                                                                (1,763)     (1,763)
      12 & 14)
   Purchase of common stock
      for restricted stock
      awards (Note 14)                                                                          (539)                    (539)
   Amortization of unearned
      compensation                                                                               259                      259
   Allocated ESOP shares                           51                                 112                                 163
                              ------------------------------------------------------------------------------------------------
Balances, December 31, 1996            219     16,588      13,986         348        (896)      (280)      (1,763)     28,202
   Net income                                               2,220                                                       2,220
   Net changes in
      unrealized appreciation
      on securities
      available for sale,
      net of related taxes                                                236                                             236
   Treasury stock purchases,
      64,500 shares (Note 12)                                                                                (921)       (921)
   Cash dividends declared
      ($.24 per share)                                       (470)                                                       (470)
   Amortization of unearned
      compensation                                                                               129                      129
   Allocated ESOP shares                          106                                 139                                 245
                              ------------------------------------------------------------------------------------------------
Balances, December 31, 1997   $        219  $  16,694  $   15,736  $      584   $    (757)  $   (151)  $   (2,684)  $  29,641
                              ------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>




WELLS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                   1997             1996             1995
---------------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>              <C>
Cash Flows From Operating Activities
   Net income                                               $          2,220 $          1,200 $          1,270
   Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
      Provision for loan losses                                          180              180              166
      Gain on sale of loans                                              (81)            (102)             (31)
      Amortization of mortgage servicing rights                           30               17
      FHLB stock dividends                                                                                 (32)
      Compensation on allocation of ESOP shares                          218              163              143
      Amortization of unearned compensation                              129              228
      Write-down of foreclosed real estate                                12                8               18
      Gain on sale of foreclosed real estate                             (12)             (17)             (16)
      Unrealized loss (gain) on loans held for sale                      (16)              30
      Loss on disposal of equipment                                                         7
      Deferred income taxes                                              (48)              (8)              34
      Depreciation and amortization on premises
        and equipment                                                    273              264              192
      Amortization of deferred loan origination fees                    (151)            (145)            (136)
      Amortization of excess servicing fees                               13               14               14
      Amortization of securities premiums and discounts                                    (2)               1
      Loans originated for sale                                      (14,914)         (19,057)         (15,414)
      Proceeds from the sale of loans held for sale                   14,709           19,207           13,615
      Changes in assets and liabilities:
        Accrued interest receivable                                      (46)              60             (208)
        Other assets                                                     (52)              67               52
        Income taxes payable, current                                    111              (54)             119
        Accrued expenses and other liabilities                            16             (276)             158
                                                            ---------------------------------------------------
              Net cash provided by (used in)
                  operating activities                                 2,591            1,784              (55)
                                                            ---------------------------------------------------
</TABLE>

                        (Continued)
<PAGE>

WELLS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 YEARS ENDED DECEMBER 31, 1997 , 1996   A ND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                   1997             1996             1995
---------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>             <C>
Cash Flows From Investing Activities
   Net increase in loans                                    $         (4,252) $        (8,999)  $       (4,624)
   Certificates of deposit:
      Maturities                                                         200              800              100
      Purchases                                                       (1,850)            (200)            (800)
   Purchase of securities available for sale                            (171)            (287)            (280)
   Proceeds from sales of securities available for sale                5,033
   Securities held to maturity:
      Maturities and calls                                             3,649            5,900            3,795
      Purchases                                                       (4,798)          (3,749)          (1,994)
   Proceeds from principal repayments of
      mortgage-backed securities available for sale                      340              436              138
   Purchase of premises and equipment                                   (179)            (552)             (36)
   Proceeds from the sale and redemption of
      foreclosed real estate                                             102              117              229
   Investment in foreclosed real estate                                  (32)
                                                            ---------------------------------------------------
        Net cash used in investing activities                         (1,958)          (6,534)          (3,472)
                                                            ---------------------------------------------------

Cash Flows From Financing Activities
   Net increase (decrease) in deposits                                   368           (1,337)             274
   Net increase (decrease) from advances from
      borrowers for taxes and insurance                                   60               (2)              10
   Proceeds from borrowed funds                                       13,500           35,000           18,000
   Repayments on borrowed funds                                      (15,500)         (26,500)         (23,650)
   Proceeds from issuance of common stock                                                               15,605
   Purchase of treasury stock                                           (921)          (1,763)
   Purchase of common stock for
      restricted stock awards                                                            (539)
   Dividends paid                                                       (470)
                                                            ---------------------------------------------------
        Net cash provided by (used in)
           financing activities                                       (2,963)           4,859           10,239
                                                            ---------------------------------------------------
        Net increase (decrease) in cash                               (2,330)             109            6,712

Cash
   Beginning                                                           8,301            8,192            1,480
                                                            ---------------------------------------------------
   Ending                                                   $          5,971  $         8,301  $         8,192
                                                            ---------------------------------------------------
</TABLE>

                        (Continued)
<PAGE>

WELLS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 YEARS ENDED DECEMBER 31, 1997 , 1996   A ND 1995
( DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                   1997             1996             1995
---------------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>              <C>
Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest on deposits                                  $          6,982 $          7,164 $          6,901
      Interest on borrowed funds                                       1,527            1,076            1,172
      Income taxes                                                     1,450              981              723
                                                            ---------------------------------------------------

Supplemental Schedule of Noncash Investing and
   Financing Activities
   Transfers from loans to foreclosed real estate           $             27 $            157 $            109
   Issuance of shares to ESOP in conjunction with
      conversion from mutual to stock form                                --               --            1,120
   Allocation of ESOP shares to participants                             139              112              112
   Net change in unrealized appreciation
      on securities available for sale                                   236               30              328
                                                            ---------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>


WELLS FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------



Note 1.   Summary of Significant Accounting Policies

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

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

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

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

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

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

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

Securities  available for sale are reported at fair value with unrealized  gains
or losses reported as a separate  component of stockholder's  equity, net of the
related  deferred  tax  effect.   Amortization  of  premiums  and  accretion  of
discounts,  computed by the interest  method over their  contractual  lives,  is
recognized in interest income.


<PAGE>



Note 1.    Summary of Significant Accounting Policies (Continued)

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

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

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

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

The allowance  for loan losses is increased by provisions  charged to income and
reduced by charge-offs (net of recoveries).  Management's periodic evaluation of
the  adequacy  of the  allowance  is  based  on the  Company's  past  loan  loss
experience,  known and inherent risks in the portfolio,  adverse situations that
may affect the borrower's  ability to repay,  estimated  value of any underlying
collateral,  and current  economic  conditions.  While  management uses its best
information available to make its evaluation, it is possible that adjustments to
the  allowance  may be  necessary if there are  significant  changes in economic
conditions.

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

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

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


<PAGE>



Note 1.     Summary of Significant Accounting Policies (Continued)

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

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

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

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

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

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

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

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


<PAGE>



Note 1.    Summary of Significant Accounting Policies (Continued)

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

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

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

     Mortgage  servicing  rights:  The fair value of mortgage  servicing  rights
     approximates  its  carrying  value  as  the  interest  rate  and  repayment
     assumptions  used in the calculation of mortgage  servicing rights have not
     changed significantly.

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

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

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

Emerging accounting standards:  In June 1997, the Financial Accounting Standards
Board issued Statement No. 130, Reporting  Comprehensive  Income. This Statement
requires an entity to include a statement  of  comprehensive  income in its full
set of general-purpose  financial  statements.  Comprehensive income consists of
the net income or loss of the  entity  plus or minus the change in equity of the
entity  during the period from  transactions,  other events,  and  circumstances
resulting  from  nonowner  sources.  Statement  No. 130 is  effective  for years
beginning  after  December 15, 1997 and will  require  financial  statements  of
earlier periods that are presented for comparative purposes to be reclassified.


<PAGE>



            Note 2.  Certificates of Deposit

Certificates of deposit with a carrying value of $1,850 and $200 at December 31,
1997 and 1996,  respectively,  had weighted  average  yields of 5.68% and 5.75%,
respectively, and contractual maturities of less than one year.


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

      Securities Available for Sale (Continued)
<TABLE>
<CAPTION>
                                                                           December 31, 1996
                                                     -----------------------------------------------------------

                                                                        Gross          Gross
                                                       Amortized      Unrealized     Unrealized
                                                          Cost          Gains          Losses       Fair Value
----------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                <C>             <C>         <C>
Mutual Funds:
   Short term U.S. government securities fund       $        2,396     $       --      $    (76)    $     2,320
   U.S. Government mortgage securities fund                  1,251             --           (80)          1,171
   Intermediate mortgage securities fund                     1,209             --           (60)          1,149
Stock in Federal Home Loan Bank                              1,633             --            --           1,633
FHLMC stock                                                     29            798            --             827
                                                    ------------------------------------------------------------
                                                             6,518            798          (216)          7,100
Mortgage-backed securities                                     427              1            --             428
                                                    ------------------------------------------------------------
                                                    $        6,945     $      799      $   (216)    $     7,528
                                                    ------------------------------------------------------------
</TABLE>

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

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


<PAGE>



Note 3.    Securities Available for Sale (Continued)

Changes in unrealized  appreciation  (depreciation) on securities  available for
sale:
<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                            ---------------------------------------------------
                                                                   1997             1996             1995
---------------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>              <C>
Balance, beginning                                          $            348 $            318 $            (10)
   Unrealized appreciation (depreciation) during
      the year                                                           399               56              531
   Deferred tax effect relating to unrealized
      appreciation (depreciation)                                       (163)             (26)            (203)
                                                            ---------------------------------------------------
Balance, ending                                             $            584 $            348 $            318
                                                            ---------------------------------------------------
</TABLE>

Securities with a carrying value of $500 and $-0- at December 31, 1997 and 1996,
respectively,  were pledged to secure public  deposits and for other purposes as
required or permitted by law.


            Note 4.  Securities Held to Maturity
<TABLE>
<CAPTION>

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

<TABLE>
<CAPTION>
                                                                          December 31, 1997
                                                     ------------------------------------------------------------
                                                                         Gross          Gross
                                                        Amortized      Unrealized     Unrealized
                                                           Cost          Gains          Losses       Fair Value
-----------------------------------------------------------------------------------------------------------------
Debt securities:
<S>                                                  <C>            <C>            <C>            <C>
   U.S. Government corporations and agencies         $        2,049 $         --   $          (5) $        2,044
                                                     ------------------------------------------------------------
</TABLE>

Contractual maturities:  The scheduled maturities of securities held to maturity
at December 31, 1997 were as follows:
<TABLE>
<CAPTION>

                                                                                Amortized           Fair
                                                                                   Cost            Value
--------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>
Due in one year or less                                                     $            800 $            799
Due from one to five years                                                             2,398            2,402
                                                                            ----------------------------------
                                                                            $          3,198 $          3,201
                                                                            ----------------------------------
</TABLE>



<PAGE>



            Note 5.  Loans Receivable and Loans Held for Sale

Composition of loans receivable:
<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                           ----------------------------------
                                                                                  1997             1996
-------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>
First mortgage loans (principally conventional):
   Principal balances:
      Secured primarily by one-to-four family residences                   $        141,346 $        140,444
      Secured by other properties, primarily agricultural real estate                12,012           12,233
      Construction                                                                    1,943            2,081
      Less net deferred loan origination fees                                          (642)            (714)
                                                                           ----------------------------------
              Total first mortgage loans                                            154,659          154,044
                                                                           ----------------------------------
Consumer and other loans:
   Principal balances:
      Home equity, home improvement and second mortgages                             18,781           15,197
      Agricultural operating loans                                                    1,299            1,171
      Vehicle loans                                                                   4,988            4,619
      Other                                                                           3,760            4,031
                                                                           ----------------------------------
              Total consumer and other loans                                         28,828           25,018
                                                                           ----------------------------------
              Total loans                                                           183,487          179,062
Less allowance for loan losses                                                         (763)            (615)
                                                                           ----------------------------------
              Loan receivable, net                                         $        182,724 $        178,447
                                                                           ----------------------------------
</TABLE>


Allowance for loan losses:
<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                         --------------------------------------------------
                                                                1997             1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                      <C>              <C>              <C>
Balance, beginning                                       $            615 $            512 $           376
   Provision for loan losses                                          180              180             166
   Loans charged off                                                  (66)             (88)            (41)
   Recoveries                                                          34               11              11
                                                         --------------------------------------------------
Balance, ending                                          $            763 $            615 $           512
                                                         --------------------------------------------------
</TABLE>

Nonaccrual  loans:  Loans on which the accrual of interest has been discontinued
totaled  to  $237,   $298  and  $298  at  December  31,  1997,  1996  and  1995,
respectively.  The effect of nonaccrual loans was not significant to the results
of operations.

The Company includes all loans considered  impaired under FASB Statement No. 114
in nonaccrual  loans.  The amount of impaired loans was not material at December
31, 1997 and 1996.

Related  party  loans:  The  Company  has  entered  into  transactions  with its
executive officers,  directors,  significant shareholders,  and their affiliates
(related  parties).  The aggregate  amounts of loans to such related  parties at
December 31, 1997 and 1996 were $452 and $380,  respectively.  During 1997,  new
loans to such related parties were $243 and repayments were $171.
<PAGE>

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

Loans held for sale: As of December 31, 1997 and 1996, the Company's  loans held
for sale were  $2,012 and $1,791,  respectively,  and  consisted  of one to four
family  residential real estate loans.  Loans held for sale have been reduced by
estimated unrealized market losses of $14 and $30 at December 31, 1997 and 1996,
respectively.  Outstanding  commitments  to sell loans at December 31, 1997 were
$847.


            Note 6.  Loan Servicing

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated statements of financial condition. The unpaid principal balances of
these  loans as of  December  31,  1997  and  1996  were  $72,192  and  $66,125,
respectively,  and consist of one-to-four  family residential real estate loans.
These  loans  are  serviced   primarily  for  the  Federal  Home  Loan  Mortgage
Corporation.

Custodial  escrow  balances  maintained  in connection  with the foregoing  loan
servicing, and included in advances from borrowers for taxes and insurance, were
$387 and $339 at December 31, 1997 and 1996, respectively.

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

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

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


<PAGE>



            Note 7.  Foreclosed Real Estate

The Company had investment in real estate acquired through foreclosure or deeded
to the Company in lieu of foreclosure of $35 and $78 as of December 31, 1997 and
1996,  respectively.  No allowances  for losses on  foreclosed  real estate were
required at these dates.


            Note 8.  Premises and Equipment

Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                           ----------------------------------
                                                                                  1997             1996
-------------------------------------------------------------------------------------------------------------
Cost:
<S>                                                                        <C>              <C>
   Land                                                                    $             71 $             71
   Buildings and improvements                                                         1,075            1,075
   Leasehold improvements                                                               537              537
   Furniture, fixtures and equipment                                                  1,861            1,682
                                                                           ----------------------------------
                                                                                      3,544            3,365
   Less accumulated depreciation and amortization                                     2,119            1,846
                                                                           ----------------------------------
                                                                           $          1,425 $          1,519
                                                                           ----------------------------------
</TABLE>


            Note 9.  Deposits

Composition of deposits:
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                           ----------------------------------
                                                                                  1997             1996
-------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>
Demand and NOW accounts                                                    $         20,940 $         21,299
Savings accounts                                                                     16,117           16,312
Certificates of deposit                                                             108,321          107,399
                                                                           ----------------------------------
                                                                           $        145,378 $        145,010
                                                                           ----------------------------------
</TABLE>

The aggregate amount of certificates of deposit over $100 was $15,473 and $9,447
at December 31, 1997 and 1996, respectively.

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

Years Ending December 31,
------------------------------------------------------------------------------
1998                                                         $         78,869
1999                                                                   18,802
2000                                                                    8,385
2001                                                                    2,127
2002                                                                      138
                                                             -----------------
                                                             $        108,321
                                                             ================
<PAGE>

Note 9.    Deposits (Continued)

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


            Note 10.  Borrowed Funds

Borrowed  funds  consisted of advances  from  Federal Home Loan Bank (FHLB),  as
follows:
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                         ----------------------------------
                                                                                1997             1996
-----------------------------------------------------------------------------------------------------------
         Due Date               Interest Rate
--------------------------------------------------
<S>      <C>                        <C>                                  <C>              <C>
         06/05/97                   5.67%                                $                $          7,500
         06/05/97                   5.91%                                                            5,000
         06/27/97                   6.35%                                                            3,000
         04/08/98                   6.13%                                           3,000
         05/04/98                   5.46%                                           5,000            5,000
         05/26/98                   5.61%                                           6,000            6,000
         06/23/98                   5.86%                                          10,500
                                                                         ----------------------------------
                                                                         $         24,500 $         26,500
                                                                         ----------------------------------
</TABLE>

The Company has a $5,000  open line of credit with the FHLB which  expires  June
26, 1998. There were no advances  outstanding on this line of credit at December
31, 1997.

The advances due on April 8, 1998 and June 23, 1998 have fixed  interest  rates.
The advances due on May 4, 1998 and May 26, 1998 have variable  interest  rates.
At December 31, 1997 the current rates were as stated above.
Prepayment of the advances will result in prepayment penalties.

The  advances  are  collateralized  by FHLB  stock and first  mortgage  loans of
$44,250 at December 31, 1997.

On January 16, 1998,  the Company  entered  into an  agreement  with the FHLB to
borrow  an  additional  $5  million.  Terms  of the  agreement  call for a fixed
interest  rate of 5.34% with the entire  balance  due on  January  16,  2008 but
callable on January 16, 2003.


<PAGE>



            Note 11.  Income Tax Matters

The Company and its subsidiary file consolidated federal income tax returns. For
the year ended  December 31, 1995, if certain  conditions are met in determining
taxable income,  the Company was allowed a special bad debt deduction based on a
percentage of taxable  income (8 percent) or on specified  experience  formulas.
The Company used the taxable income method in 1995.

Effective for the year ended December 31, 1996,  federal income tax laws changed
to eliminate the  percentage of taxable  income formula for the Company and will
only  allow bad debt  deductions  based on actual  charge-offs.  The  Company is
required to recapture  into income the excess of its December 31, 1995 loan loss
reserves for "qualifying" and  "nonqualifying"  loans over its December 31, 1987
loan loss reserves for  "qualifying"  and  "nonqualifying"  loans.  This excess,
which is $177, is required to be recaptured  ratably over a six year period. The
onset of  recapture  can be  delayed  for up to two years if the  Company  meets
residential  loan  origination  requirements.  At December 31, 1997, the Company
recorded a deferred  tax  liability  of $48 to provide for the  recapture of the
loan loss reserves and it is netted against the deferred tax asset.

The components of income tax expense are as follows:
<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                         --------------------------------------------------
                                                                1997             1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                      <C>              <C>              <C>
Federal:
   Current                                               $          1,186 $            690 $           612
   Deferred (credit)                                                  (36)              (6)             24
                                                         --------------------------------------------------
                                                                    1,150              684             636
                                                         --------------------------------------------------

State:
   Current                                                            387              230             196
   Deferred (credit)                                                  (12)              (2)             10
                                                         --------------------------------------------------
                                                                      375              228             206
                                                         --------------------------------------------------
              Total                                      $          1,525 $            912 $           842
                                                         --------------------------------------------------
</TABLE>

Total  income tax expense  differed  from the amounts  computed by applying  the
statutory  U.S.  Federal  income tax rates to income  before  income  taxes as a
result of the following:
<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                           ------------------------------------------------
                                                                  1997            1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>             <C>
Statutory rate applied to income before income taxes taxes $         1,311 $           739 $           739
State income taxes, net of federal benefit                             242             137             137
Effect of graduated rates                                              (37)            (21)            (21)
Other                                                                    9              57             (13)
                                                           ------------------------------------------------
              Income tax expense                           $         1,525 $           912 $           842
                                                           ------------------------------------------------
</TABLE>



<PAGE>



Note 11.    Income Tax Matters (Continued)

The net deferred  tax  liability  included in  liabilities  in the  accompanying
statements of financial condition includes the following amounts of deferred tax
assets and liabilities:
<TABLE>
<CAPTION>
                                                           December 31,
                                                 ----------------------------------
                                                        1997             1996
-------------------------------------------------------------------------------
<S>                                          <C>               <C>
Deferred tax assets:
   Allowance for loan losses                 $            261  $           189
   Deferred loan origination fees                          10               40
   Other                                                   36               35
                                             ----------------------------------
                                                          307              264
   Less valuation allowance
                                             ----------------------------------
                                                          307              264
                                             ----------------------------------

Deferred tax liabilities:
   Premises and equipment                                 165              169
   Securities available for sale                          399              236
   FHLB stock dividends                                   217              217
                                             ----------------------------------
                                                          781              622
                                             ----------------------------------
                                             $           (474)  $         (358)
                                             ----------------------------------
</TABLE>

Retained earnings at December 31, 1997 includes  approximately $1,839 related to
the pre-1987  allowance for loan losses for which no deferred federal income tax
liability has been recognized. This amount represents an allocation of income to
bad debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debts or  adjustments  arising from carryback of net
operating  losses would  create  income for tax  purposes  only,  which would be
subject to the then current  corporate income tax rate. The unrecorded  deferred
income tax  liability on the above amount for financial  statement  purposes was
approximately $736 at December 31, 1997.


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

The Company  has  received  approval  from the Office of Thrift  Supervision  to
buy-back up to 14.5%  (317,188  shares) of its common  stock.  This  approval is
effective  through  April 11, 1998.  As of December  31,  1997,  the Company had
purchased 190,375 shares of treasury stock.

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

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require  the Bank to  maintain  minimum  amounts  and ratios of total and Tier I
capital (as defined in the  regulations) to  risk-weighted  assets (as defined),
and of Tier I capital (as defined) to average  assets (as  defined).  Management
believes,  as of December  31,  1997,  that the Bank meets all capital  adequacy
requirements to which it is subject.

The most recent examination by the Office of Thrift  Supervision,  as of May 20,
1996,  categorized the Bank as "well capitalized" under the regulatory framework
for Prompt Corrective Action. To be categorized as adequately  capitalized,  the
Bank must maintain  minimum  total  risk-based,  Tier I  risk-based,  and Tier I
leverage ratios.  There are no conditions or events since that notification that
management believes have changed the Bank's category.

The following table summarizes the Bank's compliance with its regulatory capital
requirements at December 31, 1997:
<TABLE>
<CAPTION>
                                   Bank's      Bank's      Required      Required      Excess
                                  Capital     Capital      Capital       Capital       Capital
                               -----------------------------------------------------------------------------
                                   Amount   Percent        Amount        Percent       Amount      Percent
------------------------------------------------------------------------------------------------------------
<S>                            <C>            <C>         <C>             <C>       <C>            <C>
Tier 1 (leverage) capital      $     22,790   11.41 %     $     5,990     3.00 %    $    16,800     8.41 %
Risk-based capital                   23,544   20.00 %           9,417     8.00 %         14,127    12.00 %
</TABLE>

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


<PAGE>



            Note 13.  Earnings Per Share

Effective  December  31,  1997,  the Company  adopted  FASB  Statement  No. 128,
Earnings per Share.  The  Statement  requires the  presentation  of earnings per
share (EPS) by all entities  that have common stock or potential  common  stock,
such as options, warrants and convertible securities,  outstanding that trade in
a public  market.  Those  entities that have only common stock  outstanding  are
required to present basic  earnings  per-share  amounts.  All other entities are
required  to present  basic and  diluted  earnings  per-share  amounts.  Diluted
per-share  amounts assume the conversion,  exercise or issuance of all potential
common stock  instruments  unless the effect is to reduce a loss or increase the
income per common share from continuing operations.

A  reconciliation  of the numerators and  denominators  of the basic and diluted
earnings per-share computations follows:
<TABLE>
<CAPTION>
                                                               For the Year Ended December 31, 1997
                                                          ---------------------------------------------------
                                                                Income          Shares          Per-Share
                                                             (Numerator)    (Denominator)        Amount
-------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                     <C>       <C>
Basic EPS
   Net income                                             $          2,220        1,873,499 $           1.18
                                                                                            -----------------
Effect of Dilutive Securities
   Stock options                                                        --           37,016
                                                          ----------------------------------
Diluted EPS
   Net income plus assumed conversions                    $          2,220        1,910,515 $           1.16
                                                          ---------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                             For the Year Ended December 31, 1996
                                                         ----------------------------------------------------
                                                                Income          Shares          Per-Share
                                                             (Numerator)    (Denominator)        Amount
-------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                     <C>       <C>
Basic EPS
   Net income                                             $          1,200        1,960,731 $           0.61
                                                                                            -----------------
Effect of Dilutive Securities
   Stock options                                                        --            6,454
                                                          ----------------------------------
Diluted EPS
   Net income plus assumed conversions                    $          1,200        1,967,185 $           0.61
                                                          ---------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                 For the Period Ended December 31, 1995
                                                          ---------------------------------------------------
                                                                Income          Shares          Per-Share
                                                             (Numerator)    (Denominator)        Amount
-------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                     <C>       <C>
Basic EPS
   Net income                                             $          1,031        2,063,166 $           0.50
                                                                                            -----------------
Effect of Dilutive Securities
   Stock options                                                        --           10,450
                                                          ----------------------------------
Diluted EPS
   Net income plus assumed conversions                    $          1,031        2,073,616 $           0.50
                                                          ---------------------------------------------------
</TABLE>



<PAGE>



Note 13.   Earnings Per Share (Continued)

The earnings  per-share  calculation  for 1995 includes  earnings from April 11,
1995, the date of conversion, to December 31, 1995.

Basic and diluted earnings per-share, as calculated under FAS Statement No. 128,
are not materially  different than primary and fully-diluted  earnings per-share
as previously reported for all prior periods.


            Note 14.  Employee Benefit Plans

Defined Benefit Plan: The Bank had a qualified,  noncontributory defined-benefit
retirement plan covering  substantially all of its employees.  The benefits were
based on each employee's  years of service and average monthly  compensation and
reduced by a percentage of the employee's  social security  benefit.  It was the
policy of the Bank to fund the maximum amount that could be deducted for federal
income tax purposes.

Effective  December 31, 1995, the plan was amended such that no further benefits
will be  earned  for  employee  service.  In  conjunction  therewith,  the  Bank
recognized a curtailment  gain of $75 for the year ended  December 31, 1995. The
plan was terminated on November 1, 1996 and all obligations were settled on that
date by payments to the  participants in cash or by payments to their individual
accounts in the Bank's 401(k) plan (see below).

In connection with this plan, the Company  recorded net pension expense of $-0-,
$6 and $46 for the years ended December 31, 1997, 1996 and 1995, respectively.

Defined  Contribution  401(k) Plan: The Bank provides a 401(k) plan which covers
substantially  all of the Bank's employees who are eligible as to age and length
of service. A participant may elect to make contributions of up to 15 percent of
the  participant's  annual  compensation.  At the  discretion  of the  Board  of
Directors,  the Bank may make matching  contributions of up to 4 percent of each
participant's contribution. There were no contributions made by the Bank for the
years ended December 31, 1997, 1996 and 1995.

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


<PAGE>


Note 14.     Employee Benefit Plans (Continued)

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

Compensation  expense  for the ESOP was $218,  $163 and $143 for the years ended
December 31, 1997, 1996 and 1995, respectively.

Shares of the  Company  held by the ESOP at  December  31,  1997 and 1996 are as
follows:

                                                       1997          1996
-------------------------------------------------------------------------------
Shares released for allocation                           45,360         28,000
Unreleased (unearned) shares                             94,640        112,000
                                                  -----------------------------
                                                        140,000        140,000
                                                  -----------------------------

Fair value of unreleased (unearned) shares        $       1,692 $        1,470
                                                  -----------------------------

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

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


<PAGE>



Note 14.    Employee Benefit Plans (Continued)

Grants under the Plan are accounted for following APB Opinion No. 25 and related
Interpretations. Accordingly, no compensation cost has been recognized, as noted
above, for this Plan. Had  compensation  cost for the Plan been determined based
on the grant date fair values of awards (the method  described in FASB Statement
No. 123),  additional  compensation cost charged to income would have been $100,
$176 and $23 for the years ended December 31, 1997, 1996 and 1995, respectively.
Reported net income and earnings per common share would have been reduced to the
pro forma amounts shown below:
<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                         --------------------------------------------------
                                                                1997             1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                      <C>              <C>              <C>
Net income:
   As reported                                           $          2,220 $          1,200 $         1,270
   Pro forma                                                        2,161            1,095           1,256

Basic earnings per share:
   As reported                                           $           1.18 $           0.61            0.50
   Pro forma                                                         1.15             0.56            0.49

Diluted earnings per share:
   As reported                                           $           1.16 $           0.61            0.50
   Pro forma                                                         1.14             0.56            0.49
</TABLE>

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

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

The status of the Company's  fixed stock option plan as of December 31, 1997 and
1996, and changes during the years ended on those dates are presented below:
<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                       -------------------------------------------------------------------
                                           1997                              1996
                                       -------------------------------------------------------------------
                                                    Weighted-Average                   Weighted-Average
Fixed Options                             Shares    Exercise                Shares     Exercise
                                                    Price                              Price
----------------------------------------------------------------------------------------------------------
<S>                                         <C>       <C>                      <C>       <C>
Outstanding at beginning of year            125,405   $              11        125,405   $             11
Granted                                          --                  --             --                 --
Exercised                                        --                  --             --                 --
Forfeited                                        --                  --             --                 --
                                       -------------------------------------------------------------------
Outstanding at end of year                  125,405   $              11        125,405   $             11
                                       -------------------------------------------------------------------

</TABLE>


<PAGE>



Note 14.    Employee Benefit Plan (Continued)

As of December 31, 1997, there were 125,405 options outstanding, all options had
an exercise price of $11 per share, and their remaining contractual life was 7.8
years. As of December 31, 1997 and 1996, 50,162 and 25,081 shares, respectively,
were exercisable.

Management  Stock Bonus Plan:  The Bank  adopted a  Management  Stock Bonus Plan
(Plan) which was approved by the  Company's  stockholders  on November 15, 1995.
Restricted  stock awards covering  shares  representing an aggregate of up to 4%
(87,500 shares) of the common stock issued by the Company in the mutual to stock
conversion  may be granted to directors and employees of the Bank.  These awards
vest at the rate of 20% per year of continuous service with the Bank. The status
of shares  awarded as of December  31, 1997 and 1996 and the changes  during the
years ended on those dates is presented below:

                                                 Years Ended December 31,
                                             -------------------------------
                                                   1997             1996
----------------------------------------------------------------------------
Outstanding at beginning of year                    38,380           49,735
Granted                                                 --               --
Vested and distributed                              (9,595)          (9,595)
Forfeited                                               --           (1,760)
                                             -------------------------------
Outstanding at end of year                          28,785           38,380
                                             -------------------------------

The Bank  recorded  expense  of $129  relating  to this Plan for the year  ended
December 31, 1997 and $228 for the year ended December 31, 1996.

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


            Note 15.  Lease Commitments

The Company leases certain branch facilities under operating leases. Some leases
require the Company to pay related insurance,  maintenance and repairs, and real
estate taxes.  Future minimum rental  commitments  under operating  leases as of
December 31, 1997 are as follows:

Years Ending
--------------------------------------------------------------------------
1998                                                      $           151
1999                                                                   92
2000                                                                   88
2001                                                                   88
2002                                                                   77
                                                          ----------------
                                                          $           496
                                                          ----------------

<PAGE>

Note 15.    Lease Commitments (Continued)

Total rental expense related to operating  leases was  approximately  $174, $162
and $163 for the years ended December 31, 1997, 1996 and 1995, respectively.

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

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

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

Commitments to extend credit on loans totaled  approximately $12,512 and $11,850
at December  31, 1997 and 1996,  respectively.  The  portion of  commitments  to
extend credit that related to fixed rate loans is $3,201 and $676 as of December
31, 1997 and 1996, respectively.

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


            Note 17.  Concentrations

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

Note 17.    Concentrations (Continued)

Concentration by institution:  As of December 31, 1997 the Company had $6,656 on
deposit with the FHLB of Des Moines.


            Note 18.  Fair Values of Financial Instruments

The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                          -------------------------------------------------------------------
                                                 1997                             1996
-------------------------------------------------------------------------------------------------------------
                                               Carrying          Fair           Carrying           Fair
                                                Amount           Value           Amount           Value
                                          -------------------------------------------------------------------
<S>                                       <C>              <C>              <C>             <C>
Financial assets
   Cash                                   $          5,971 $          5,971 $         8,301 $          8,301
   Certificates of deposit                           1,850            1,850             200              200
   Securities and mortgage backed
      securities available for sale                  2,726            2,726           7,528            7,528
   Securities held to maturity                       3,198            3,201           2,049            2,044
   Loans receivable, net                           182,724          184,336         178,447          179,721
   Loans held for sale                               2,012            2,012           1,791            1,791
   Mortgage servicing rights                           166              166              88               88
   Accrued interest receivable                       1,106            1,106           1,060            1,060

Financial liabilities
   Deposits                                        145,378          145,443         145,010          145,702
   Borrowed funds                                   24,500           24,496          26,500           26,502
   Advances from borrowers for
      taxes and insurance                            1,080            1,080           1,020            1,020
   Accrued interest payable                            139              139             126              126
                                          -------------------------------------------------------------------

</TABLE>

            Note 20.  Conversion to Stock Form Ownership

On  October  19,  1994,  the Board of  Directors  of the Bank  adopted a Plan of
Conversion  (the  "Conversion").  The  OTS  approved  this  transaction  and the
registration  statement  was  declared  effective  by the SEC as of February 13,
1995. The institution  converted from a federal mutual savings bank to a federal
stock savings bank with the concurrent  formation of a holding  company on April
11, 1995.

As part of the Conversion,  the Company issued  2,187,500 shares of common stock
(140,000  shares  of which  were  acquired  by the  ESOP)  at $8 per  share in a
community offering resulting in gross proceeds of $17,500.  Expenses relating to
the Conversion totaled $775. One-half of the net proceeds,  excluding the common
stock acquired by the ESOP, or $8,362,  were used by the Company to acquire 100%
of the common stock of the Bank.


<PAGE>



Note 19.    Conversion to Stock Form Ownership (Continued)

At the time of the Conversion,  the Bank established a liquidation account in an
amount equal to its retained  earnings as of the date of the latest statement of
financial condition  appearing in the final prospectus.  The liquidation account
is  maintained  for the benefit of eligible and  supplemental  eligible  account
holders  who  continue  to  maintain  their  accounts  at  the  Bank  after  the
Conversion.  The liquidation account will be reduced annually to the extent that
eligible and supplemental eligible account holders have reduced their qualifying
deposits.  Subsequent  increases  will not restore an eligible and  supplemental
eligible account holder's interest in the liquidation account. In the event of a
complete  liquidation,  each eligible and  supplemental  eligible account holder
will be entitled to receive a distribution  from the  liquidation  account in an
amount  proportionate to the current adjusted  qualifying  balances for accounts
then held.


           Note 20. Financial Information of Wells Financial Corp. (Parent Only)

The Company's  condensed  statements  of financial  condition as of December 31,
1997 and 1996 and related condensed statements of income and cash flows for each
of the years in the three year period ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition                                       1997              1996

--------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>               <C>
Assets
   Cash, including deposits with Wells Federal
      Bank, fsb 1997 $318; 1996 $203                                      $             387 $           1,829
   Certificates of deposit                                                              350               200
   Securities held to maturity                                                          750               499
   Investment in Wells Federal Bank, fsb                                             24,148            21,731
   Loan to Wells Federal Bank, fsb                                                    4,000             4,000
   Accrued interest receivable                                                           12                15
                                                                          ------------------------------------
              Total assets                                                $          29,647 $          28,274
                                                                          ------------------------------------

Liabilities and Stockholders' Equity
   Liabilities                                                            $               6 $              72
   Stockholders' equity                                                              29,641            28,202
                                                                          ------------------------------------
              Total liabilities and stockholders' equity                  $          29,647 $          28,274
                                                                          ------------------------------------
</TABLE>



<PAGE>



Note  20.  Financial   Information  of  Wells  Financial  Corp.   (Parent  Only)
           (Continued)
<TABLE>
<CAPTION>

Condensed Statements of Income                                   1997            1996            1995
------------------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>             <C>
Interest income                                           $            402 $           466 $            326
Other expense                                                           52              73               87
                                                          --------------------------------------------------
              Income before income taxes                               350             393              239
Income tax expense                                                      87             169               97
                                                          --------------------------------------------------
              Net income before equity in net
                  income of subsidiary                                 263             224              142
Equity in net income of subsidiary                                   1,957             976              889
                                                          --------------------------------------------------
              Net income                                             2,220 $         1,200 $          1,031
                                                          --------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Condensed Statements of Cash Flows                                1997            1996             1995
-------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S>                                                        <C>              <C>             <C>
   Net income                                              $          2,220 $         1,200 $          1,031
   Adjustment to reconcile net income to net cash
      provided by operating activities:
      Equity in undistributed net income of subsidiary               (1,957)           (976)            (889)
      Increase in accrued interest receivable                             3              (5)             (10)
      Increase in other liabilities                                     (55)             59               13
                                                           --------------------------------------------------
              Net cash provided by
                    operating activities                                211             278              145
                                                           --------------------------------------------------
Cash Flows From Investing Activities
   Purchase of certificates of deposit                                 (350)           (200)            (800)
   Purchase of securities held to maturity                           (1,750)         (1,999)            (800)
   Proceeds from the maturities of
      certificates of deposit                                           200             800               --
   Proceeds from maturity of securities
      held to maturity                                                1,499           1,700              600
   Investment in Wells Federal Bank                                      --              --           (8,362)
   Decrease in loan to Wells Federal Bank, fsb                           --           1,000           (5,000)
                                                           --------------------------------------------------
              Net cash provided by (used in)
                    investing activities                               (401)          1,301          (14,362)
                                                           --------------------------------------------------
Cash Flows From Financing Activities
   Net proceeds from sale of common stock                                                             15,605
   Payments relating to ESOP stock                                      139             112              112
   Purchase of treasury stock                                          (921)         (1,362)              --
   Dividends paid                                                      (470)             --               --
                                                           --------------------------------------------------
              Net cash (used in) financing activities                (1,252)         (1,250)          15,717
                                                           --------------------------------------------------
              Net increase in cash                                   (1,442)            329            1,500
Cash:
   Beginning of period                                                1,829           1,500               --
                                                           --------------------------------------------------
   End of period                                           $            387 $         1,829 $          1,500
                                                           --------------------------------------------------
</TABLE>
<PAGE>

            Note 21.  Selected Quarterly Financial Data (Unaudited)
                      (dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                   Year Ended December 31, 1997
-------------------------------------------------------------------------------------------------------------
                                                First           Second           Third            Fourth
                                          -------------------------------------------------------------------
<S>                                       <C>              <C>              <C>             <C>
Interest income                           $          3,756 $          3,817 $         3,862 $          3,890
Net interest income                                  1,716            1,701           1,689            1,697
Provision for loan losses                               45               45              45               45
Net income                                             560              539             561              560
Earnings per share
   Basic                                              0.29             0.29            0.30             0.30
   Diluted                                            0.29             0.28            0.30             0.29
</TABLE>

<TABLE>
<CAPTION>
                                                                   Year Ended December 31, 1996
-------------------------------------------------------------------------------------------------------------
                                                First           Second           Third            Fourth
                                          -------------------------------------------------------------------
<S>                                       <C>              <C>              <C>             <C>
Interest income                           $          3,578 $          3,583 $         3,715 $          3,793
Net interest income                                  1,552            1,577           1,686            1,708
Provision for loan losses                               45               45              45               45
Net income (loss)                                      500              363            (144)             481
Earnings per share
   Basic                                              0.24             0.19           (0.07)            0.25
   Diluted                                            0.24             0.19           (0.07)            0.24

</TABLE>



<PAGE>



                 OFFICE LOCATION AND OTHER CORPORATE INFORMATION

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


                   Board of Directors of Wells Financial Corp.

                                  Lawrence H. Kruse
                            President, Wells Federal Bank
Gerald D. Bastian                            Joseph R. Gadola
Branch Manager, Wells Federal Bank           Attorney, Gadola Law Office

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


                     Executive Officers of Wells Financial Corp.

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

Gerald D. Bastian                            Wallace J. Butson
   Vice President                              Secretary


Corporate Counsel:                             Auditors:
Joseph R. Gadola, Esq.                        McGladrey & Pullen, LLP
  28 South Broadway                             Suite 400
  Wells, Minnesota  56097                       102 South Broadway
                                                Rochester, Minnesota  55904

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


     The  Company's  Annual Report for the Year Ended  December 31, 1997,  filed
     with the  Securities  and Exchange  Commission  on Form 10-KSB is available
     without charge upon written  request.  For a copy of the Form 10-KSB or any
     other investor  information,  please write the Secretary of the Company, at
     the Company's corporate office in Wells,  Minnesota.  The annual meeting of
     stockholders  will be held on April 15, 1998 at 4:00 p.m. at the  Corporate
     Office, Wells, Minnesota.