U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                         Commission File No.: 000-24715

                       MERRILL MERCHANTS BANCSHARES, INC.
                 (Name of Small Business Issuer in its charter)

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           Maine                                       01-0471507
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)
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                      201 Main Street, Bangor, Maine 04401
                    (Address of principal executive offices)
                                 (207) 942-4800
                (Issuer's Telephone Number, Including Area Code)

     Securities registered pursuant to section 12(g) of the Exchange Act:

                     Common Stock, par value $1.00 per share
                                (Title of Class)

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10- KSB. [  ]

     The revenues for the issuer's fiscal year ended December 31, 1998 are
$16,797,000.

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, as of a specified date within the last 60 days. On December 31,
1998: $16,477,459

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. The Company had 2,432,214
shares outstanding as of March 1, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive proxy statement pursuant to Regulation 14A,
which was delivered to the Commission for filing on March 15, 1999, and the 1998
Annual Report to Shareholders for the fiscal year ended December 31, 1998, are
incorporated by reference into Part II and III of this report.

Transitional Small Business Disclosure Format (check one):
Yes     No  X
    ---    ---
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                                TABLE OF CONTENTS
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PART I

         ITEM 1.  BUSINESS...................................................1
         ITEM 2.  DESCRIPTION OF PROPERTY...................................20
         ITEM 3.  LEGAL PROCEEDINGS.........................................21
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......21

PART II

         ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
                  STOCKHOLDER   MATTERS.....................................21
         ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS.......................21
         ITEM 7.  FINANCIAL STATEMENTS......................................22
         ITEM 8.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.......................22

PART III

         ITEM 9.  DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY;
                  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.........22
         ITEM 10. EXECUTIVE COMPENSATION....................................22
         ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT................................................22
         ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............22
         ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K....................23
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SIGNATURES

Forward Looking Statements

This Annual Report on Form 10-KSB contains certain forward looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Bank and the Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include: changes in general, economic and market
conditions, or the development of an adverse interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Bank's or the Company's operations and investments.

                                       -i-
<PAGE>

                                     PART I

ITEM 1. BUSINESS

General

     Merrill Merchants Bancshares, Inc. (the "Company"), a Maine corporation
organized in March 1992, is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHCA"). In October 1992, the Company
became the bank holding company for Merrill Merchants Bank (the "Bank") and
holds 100% of the Bank's outstanding common stock (the "Bank Stock"). The
Company, through its ownership of the Bank, is engaged in a general commercial
and retail banking business, along with trust and investment services. Unless
the context otherwise requires, references herein to the Company shall include
the Company and the Bank, on a consolidated basis.

     The Company is an entity legally separate and distinct from the Bank. The
only sources of the Company's income and cash flow are any dividends paid on the
Bank Stock, tax benefits received by the Company and earnings from amounts
deposited by the Company in interest bearing accounts and investments.

     The Bank was established in 1992 to purchase certain assets and assume
certain liabilities of certain branch banking offices formerly held by a large
out of state bank. Merrill Merchants Bank is headquartered in Bangor, Maine,
which is located 76 miles north of Augusta, Maine, the state capital. Presently,
the Bank maintains seven branch banking offices (collectively, the "Branch
Banks") in five area communities. The three Bangor offices provide city-wide
convenience and are complemented by: (i) an office in Brewer, Bangor's sister
city located on the eastern shore of the Penobscot River; (ii) a branch in
Orono, home of the University of Maine, the State's flagship campus; (iii) a
branch in Pittsfield, a small rural town of 4,000 people located about 30 miles
southwest of Bangor; and (iv) a supermarket branch in Newport, a small town
neighboring Pittsfield, approximately 25 miles southwest of Bangor. The Newport
Branch is located at the juncture of Interstate 95 and Route 2, which is the
main travel route to the winter and summer tourist area of the Moosehead Lake
Region. In addition to the Branch Banks, the Bank has seven ATM locations in its
primary market area.

     The Bank conducts a general commercial and retail banking business that
includes the acceptance of deposits from the general public and the application
of those funds to the origination of a variety of commercial loans, commercial
and residential real estate loans and consumer loans. The Bank has also
established a Trust and Investment Services Department, which has grown since
inception in April 1994 to $136.5 million in assets under management as of
December 31, 1998. As of December 31, 1998, the Company had total assets of
$199.7 million, loans net of allowances of $128.5 million, total deposits of
$164.1 million and shareholders' equity of $20.7 million.

     The Bank's income is derived principally from interest and fees earned in
connection with its lending activities, interest and dividends on investment
securities, and service charges and fees on deposit and trust accounts. Its main
expenses are the interest paid on deposits and operating expenses. The Bank's
customer deposits are insured, up to the applicable limits, by the Federal
Deposit Insurance Corporation ("FDIC").

     Community Banking Strategy

     Having identified the need for community banking services in its market
area, the Bank has worked to position itself as a service-oriented community
bank. The Bank is staffed by experienced management personnel, most of whom
reside in the area and who know the Bank's customers and are able to provide
personalized service for these customers. This strategy has been deliberately
developed and implemented at a time when consolidation within the industry has
resulted in an increasing depersonalization among the larger
<PAGE>

financial institutions. The Bank has focused on fostering banking relationships
with customers which include multiple financial services that range from basic
checking to investment management accounts.

     As a part of this strategy, the Company and the Bank have attracted local
business people, who actively promote the Bank in the community, to serve on
their Boards of Directors. In an effort to broaden the community's awareness of
the Bank and attract new business, the Company has also obtained additional
investments in and support for the Bank from local investors.

     The Bank is active in small business lending and has earned the designation
"Preferred Lender" by the Small Business Administration (SBA). The Bank is the
only community bank in the State to have been awarded this distinction. The Bank
is also active in residential mortgage lending, and a number of products,
including government insured loan programs, are available to meet the demands of
both the consumer and the commercial market. The Company's affiliations with
third party data processors have enabled the Bank to deliver high technology
products such as automated telephone banking, banking by personal computer, and
check imaging while maintaining a local, friendly flavor in its Branch Banks.
This same strategy has been implemented by the Trust and Investment Services
Department which is also serving many clients who appreciate the personal
attention and custom service provided locally. The depository custody services
and investment advisory services provided by the Trust Department are supported
through its affiliation with The Northern Trust Company.

     Market Area and Competition

     The Bank's primary market area, Greater Bangor, is at the center of
commercial activity for the northeastern and central region of the State of
Maine. Nearly 100,000 people live in the Bank's primary market area. The Bank is
part of a strategic link to Canada, as Bangor is the closest U.S. metropolitan
area to Eastern Quebec and the Canadian Maritime provinces. Many regional and
national companies site their operations in the Bangor area. Services, trades,
manufacturing and government are the four largest fields of employment in the
metropolitan Bangor region. Bangor is also a healthcare center for central,
eastern and northern Maine. The City is a regional financial center and is also
serviced by several statewide and regional accounting firms, law firms,
insurance companies and security and investment firms. Bangor is also a hub for
government services, with many local, state and federal offices located within
the city. Bangor is accessible by multiple exits from Interstate 95, a major
interstate highway which transits the eastern seaboard of the United States.
Major routes to all regions of the state bisect Bangor from various directions.
Bangor International Airport provides domestic and international passenger and
cargo service for a significant portion of the state. The Bank has targeted this
same area as its focus for possible expansion of the franchise. Any such
expansion would occur with carefully selected de novo branching or taking
advantage of opportunities created as the large regional banks consolidate and
sell or close branches.

     The financial services landscape has changed considerably over the past
five years in the Bank's primary market area, Greater Bangor. Two large out of
state banks have continued to experience local change as a result of mergers and
acquisitions at the regional and national level. The State's largest Maine-based
bank, with a strong presence in the local market, has also experienced
considerable change as it has acquired greater market share through acquisitions
in-state and out-of-state. A large locally-based bank has expanded its line of
financial services and acquired an extensive branch network beyond the local
market. Credit unions have continued to expand their membership and the scope of
banking services offered. Non-banking entities such as brokerage houses,
mortgage companies and insurance companies are offering very competitive
products. Many of these entities and institutions have resources substantially
greater than those available to the Bank and are not subject to the same
regulatory restrictions as the Company and the Bank. Interstate banking also
could intensify competition if out of state institutions increasingly take
advantage of recent legislation liberalizing interstate banking and branching
opportunities in Maine.

                                      -2-
<PAGE>

     Over the past decade, due to more liberal interstate banking laws,
northeastern and central Maine has seen an increase in acquisitions of
locally-owned Maine-based banks, including Maine-based banks in the Bank's
primary market area, by non-local entities. It has been the observation of the
Company's management that these acquisitions often result in customer
dissatisfaction as the decision-making on loans, marketing, and other aspects of
the acquired banks' businesses are shifted from local bank management possessing
independent decision-making power to management operating under policies and
guidelines from corporate headquarters in other states. The Company believes
that this shift often results in delayed decision-making by management which is
not familiar with the needs of the acquired bank's customers or the communities
they serve. Individuals and small businesses are particularly sensitive to these
changes since they may not fit the product parameters established by the larger
banks.

     Thus, the Company believes that there will continue to be a need for a bank
in the Bank's primary market area with local management having decision-making
power and emphasizing loans to small and medium sized businesses and to
individuals. The Bank has concentrated on extending business loans to such
customers in the Bank's primary market area and to extending trust services to
clients with accounts of all sizes. The Bank's management also makes decisions
based upon, among other things, the knowledge of the Bank's employees regarding
the communities and customers in the Bank's primary market area. The individuals
employed by the Bank, to a large extent, reside near the Branch Banks and thus
are generally familiar with the Branch Banks' communities and customers. This is
important in local decision-making and allows the Bank to respond to customer
questions and concerns on a timely basis and fosters quality customer service.

     The Trust and Investment Services Department of the Bank has taken
advantage of opportunities created as the larger banks have altered their
personal service commitment to clients not meeting established account criteria.
The Bank is able to offer a comprehensive array of trust and investments
services to individuals, businesses, non-profit organizations and municipalities
of varying asset size and to provide the highest level of personal service. The
staff includes attorneys as well as investment and employee benefits
professionals with trust and banking experience.

     The Bank has worked and will continue to work to position itself to be
competitive in its market area. The Bank's ability to make decisions close to
the marketplace, management's commitment to providing quality banking products,
the caliber of the professional staff, and the community involvement of the
Bank's employees are all factors affecting the Bank's ability to be competitive.
If the Company and the Bank are unable to compete successfully, however, the
business and operations could be adversely affected.

     Lending Activities

     The Bank has experienced loan growth since it was established in October
1992. One of the primary factors contributing to the growth has been an
experienced local lending group. Many commercial lending relationships have been
developed by the Bank as a result of long standing business associations over
many years. Many of the Bank's officers have held lending positions with Bangor
area banks for in excess of fifteen years. Management believes that these
relationships have been not only instrumental in loan growth but in developing
quality customers.

     The Company strives to provide a full range of financial products and
services to small and medium-sized businesses and consumers. The Bank has an
established Officer Loan Committee which meets weekly to review and approve
credits and a Director Loan Committee which meets monthly, or as necessary, to
approve credits in excess of $250,000. The Bank's loan mix is subject to the
discretion of its Board of Directors and the demands of the local marketplace.
Management has established relationships with local area legal and accounting
professionals to cultivate referrals by hosting informational meetings at the
Bank. Asset quality is a top priority for the Bank and a significant
consideration in business development efforts.

                                       -3-
<PAGE>

     Commercial and Commercial Real Estate Lending

     Loans in this category principally include loans to service, retail,
medical, wholesale and light manufacturing businesses. Commercial loans are made
based on the management, financial strength and repayment ability of the
borrower. As of December 31, 1998, commercial and commercial real estate loans
represented the largest class of loans at $77.2 million or 60% of total loans.
The Bank participates in government guaranteed lending including programs with
the Finance Authority of Maine (FAME) and Rural Development (RD). The Bank had
originated the second highest number of SBA loans in the State of Maine for the
SBA Maine District Office during their 1998 fiscal year. The Bank is the only
community bank in the state to have been awarded designation as a Preferred
Lender by the SBA.

     The Bank's commercial real estate loans are ordinarily made at variable
rates of interest, and amortized up to fifteen years, although some loans are
originated for terms of five years or less at fixed rates of interest. A broad
range of short-to-medium term commercial loans, both collateralized and
uncollateralized are made available to businesses for working capital (including
inventory and receivables), business expansion (including acquisition and
development of real estate and improvements) and the purchase of equipment and
machinery. The purpose of a particular loan generally determines its structure.
The commercial real estate loans are secured by a variety of properties,
including buildings occupied by small-to-medium sized businesses, apartment
complexes and non-owner/user office and retail business.

     The Bank's commercial loans primarily are underwritten in the Bank's
primary market area on the basis of the borrowers' ability to service such debt
from income. Many of these loans involve lines of credit written at variable
rates of interest on a demand basis, or for terms not exceeding one year, while
others are written on a term basis typically for up to five years, generally at
variable rates of interest. As a general practice, the Bank takes as collateral
a security interest in any available real estate, equipment or other chattel
although such loans may also be made on an uncollateralized basis. As additional
security for commercial loans, the Bank normally requires the personal guarantee
of the principals and may require financial performance covenants.

     Commercial loans generally present a higher level of risk than
one-to-four-family residences due to the concentration of principal in a limited
number of loans and borrowers, the effect of general economic considerations in
commercial properties and the increased difficulty of evaluating and monitoring
these types of loans. In addition, the repayment of loans secured by commercial
real estate is typically dependent on the successful operation of the related
business activities.

     Residential Mortgage Lending

     The Bank endeavors to meet the needs of its individual customers by making
residential mortgage loans. Residential loans include the origination of
conventional mortgages, residential lot loans and residential acquisition,
development and construction loans for the purchase or construction of
single-family housing or lots. The Bank offers fixed and adjustable rate
mortgages ("ARMs"). With these loans, the real estate normally constitutes the
primary collateral.

     Loans in this category include both portfolio loans which are held by the
Bank until maturity and loans which are sold on the secondary market. In the
case of secondary market loans, all servicing rights are retained by the Bank
which maintains the service connection to the customer. The Bank participates in
government guaranteed programs and has also helped coordinate several innovative
programs including a partnership with Penquis Community Action Program in their
"Own Me" program which assists low income women in the purchase of a home, and
housing workshops for the hearing impaired.

                                       -4-
<PAGE>

     As of December 31, 1998, residential loans accounted for a total of $25.2
million representing 19% of total loans. The Bank's secondary market servicing
portfolio stands at $56.8 million.

     The Bank offers one-year ARMs with rate adjustments tied to the weekly
average rate of U.S. Treasury securities adjusted to a constant one-year
maturity with specified minimum and maximum interest rate adjustments. The
interest rates on a majority of these mortgages are adjusted yearly with
limitations on upward adjustments of 2% per adjustment period and 6% over the
life of the loan. The Bank generally charges a higher interest rate if the
property is not owner-occupied. It has been the Bank's experience that the
proportion of fixed-rate and adjustable-rate loan originations depends in large
part on the level of interest rates. As interest rates fall, there is generally
a reduced demand for ARMs and, as interest rates rise, there is generally an
increased demand for ARMs.

     Fixed and adjustable rate mortgage loans collateralized by single family
residential real estate generally have been originated in amounts of no more
than 80% of appraised value. However, in some instances, the Bank may lend in
excess of 80% of the value of the property collateralizing the loan. The Bank,
in most cases, requires title, fire and extended casualty insurance to be
obtained by the borrower, and, where required by applicable regulations, flood
insurance. The Bank maintains its own errors and omissions insurance policy to
protect against loss in the event of failure of a mortgagor to pay premiums on
fire and other hazard insurance policies. Although the contractual loan payment
period for single family residential real estate loans is generally for a 15 to
30 year period, such loans often remain outstanding for significantly shorter
periods than their contractual terms. The Bank charges no penalty for prepayment
of mortgage loans. Mortgage loans originated by the Bank customarily include a
"due on sale" clause giving the Bank the right to declare a loan immediately due
and payable in the event, among other matters, that the borrower sells or
otherwise disposes of the real property subject to a mortgage. In general, the
Bank enforces due on sale clauses.

     Home Equity Lending

     The Bank originates home equity loans on a fixed and variable interest rate
basis. At December 31, 1998, fixed rate loans totaled $10.9 million and variable
rate loans amounted to $8.5 million. Fixed rate loans are for terms of 5 to 10
years with monthly amortization required and interest rates ranging from 8.5% to
12.5%. Interest rates on variable rate loans are 1.50% to 2.00% over the prime
interest rate. These home equity loans are generally secured by a second
mortgage on the principal residential property.

     Consumer Lending

     Consumer loans made by the Bank have included home improvement, automobile,
boat and recreation vehicle loans, credit cards and overdraft protection
accounts. The Bank's consumer loan portfolio consists primarily of loans to
individuals for various consumer purposes. A majority of these loans are for
terms of less than 60 months and although generally collateralized by liens on
various personal assets of the borrower may be made uncollateralized. Consumer
loans are made at fixed and variable interest rates.

     Consumer loans are attractive to the Bank because they typically have a
shorter term and carry higher interest rates than that charged on other types of
loans. Consumer loans, however, do pose additional risks of collectability when
compared to traditional types of loans granted by commercial banks, such as
residential mortgage loans. In many instances, the Bank is required to rely on
the borrower's ability to repay since the collateral may be of reduced value at
the time of collection. Accordingly, the initial determination of the borrower's
ability to repay is of primary importance in the underwriting of consumer loans.

     Consumer loans totaled approximately $7.0 million and represented 5% of the
Bank's loan portfolio at December 31, 1998. Such loans bear interest at fixed
rates ranging from 9% to 18%.

                                       -5-
<PAGE>

     M&M Joint Venture

     In 1996, the Bank and MSB Leasing, Inc. (a subsidiary of Machias Savings
Bank, a state chartered mutual savings bank) formed M&M Consulting Limited
Liability Company ("M&M"), a jointly owned subsidiary. M&M was established to
provide a review of various internal bank risk control functions. M&M, which has
a former FDIC examiner as one of its principals, provides the Bank, Machias
Savings Bank and approximately 17 other financial institutions in Maine access
to experienced individuals who are highly trained in loan review, regulatory
compliance, training and internal auditing in a cost-efficient and timely
manner.

     Maine Acceptance Corporation

     In January, 1999, the Company established Maine Acceptance Corporation
("MAC"), a finance company, as a wholly-owned subsidiary under the Maine
Consumer Credit Code. MAC will provide credit products commonly referred to as
"sub-prime" lending, which usually denotes a weakness in credit history or a
high loan-to-value on collateral. MAC will engage in indirect auto lending, as
well as provide other types of loans, including personal unsecured loans,
recreational vehicle loans, auto loans, mobile home loans and home equity loans.
MAC has engaged in minimal business to date.

                                       -6-
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                      SELECTED CONSOLIDATED FINANCIAL DATA
                  (Dollars in thousands, except per share data)

     The following table presents selected consolidated financial data for the
Company. The data for the fiscal years ended December 31, 1998, 1997, 1996, 1995
and 1994 are derived from audited consolidated financial statements of the
Company. The selected financial data should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Annual Report.

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                                                                         At or for the Year Ended December 31,
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                                                            1998            1997           1996           1995             1994
                                                        ------------  ---------------  -------------  --------------  --------------
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Financial Condition Data:                                                         (Dollars in Thousands)
Total assets ........................................   $  199,743     $  178,619        $  158,425      $  135,744     $  113,231
Cash and cash equivalents ...........................        7,627         10,164             8,591           6,723          6,683
Investment securities ...............................       55,909         45,321            41,014          30,257         21,692
Loans receivable, net (1) ...........................      128,507        117,679           104,320          95,256         81,137
Deposits ............................................      164,128        146,312           126,704         111,340         91,812
Repurchase agreements ...............................       11,747         11,897            12,164          10,173          7,827
Other borrowed funds ................................        1,461          5,144             2,832             192          1,000
Long-term debt ......................................           --          2,895             3,695           4,000          4,000
Mandatory convertible debentures ....................          300            300               300             300            300
Shareholders' equity ................................       20,655         10,967             9,671           8,761          7,675
Income Statement Data:
Interest and dividend income ........................   $   14,586     $   13,215        $   11,826      $   10,349     $    7,445
Interest expense ....................................        6,554          6,060             5,383           4,371          2,774
Net interest income .................................        8,032          7,155             6,443           5,978          4,671
Provision for loan losses ...........................          360            355               360             355            150
Net interest income after provision for loan losses .        7,672          6,800             6,083           5,623          4,521
Non-interest income .................................        2,211          1,724             1,489           1,302            911
Non-interest expense ................................        6,939          6,357             5,813           5,407          4,840
Income before income taxes ..........................        2,944          2,167             1,759           1,518            592
Income tax expense ..................................        1,028            765               639             551            219
Net income ..........................................        1,916          1,402             1,120             967            373
Per Share Data:
Earnings per share-basic (2) ........................          .96            .82               .65             .55            .19
Earnings per share-diluted (2) ......................          .78            .71               .58             .52            .19
Cash dividends on Common Stock (2) ..................          .14            .03                --              --             --
Book value (2)(3) ...................................         8.61           6.77              5.98            5.33           4.79
Weighted average shares outstanding (2) .............    1,925,595      1,619,226         1,619,226       1,619,226      1,619,226
Selected Financial Ratios and Other Data:
Return on average assets ............................         1.05%          0.86%             0.78%           0.80%          0.37%
Return on average equity (3) ........................        12.97          13.63             12.28           11.83           4.95
Net interest margin (4) .............................         4.66           4.67              4.72            5.25           4.99
Net interest spread .................................         3.89           3.98              3.97            4.48           4.34
Non-performing assets to total assets (5) ...........         0.08           0.13              0.45            0.33           0.63
Non-performing loans to total loans (5) .............         0.12           0.15              0.36            0.15           0.87
Allowance for loan losses to total loans ............         1.55           1.44              1.37            1.18           1.17
Allowance for loan losses to non-performing loans (5)      1330.92         933.15            384.62          760.40         133.80
Net loan charge-offs to average loans ...............         0.04           0.08              0.04            0.21           0.02
Efficiency ratio (6) ................................        67.74          71.60             73.29           74.27          86.71
Capital Ratios:
Tier 1 risk-based capital (7) .......................        16.39           9.77              9.53            9.03           8.83
Total risk-based capital (7) ........................        17.89          11.30             11.10           10.63          10.46
Leverage ratio (7) (8) ..............................        10.31%          6.06%             5.98%           5.84%          6.31%
</TABLE>

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(1)  Includes loans held for sale.
(2)  Adjusted to reflect the 9:1 Stock Split, 5% stock dividends in 1998 and
     1997 and a 3% stock dividend in 1996.
(3)  Excludes unrealized gain or loss on securities available for sale net of
     taxes.
(4)  Represents net interest income as a percentage of average interest earning
     assets. Calculation is shown tax-effected for tax exempt interest income
     assuming a federal tax rate of 34%.
(5)  Non-performing assets consist of non-performing loans and other real estate
     owned. Non-performing loans consist of non-accrual loans and accruing loans
     90 days or more past due while other real estate owned consists of real
     estate acquired through foreclosure and real estate acquired by acceptance
     of a deed-in-lieu of foreclosure.
(6)  Non-interest expense divided by the sum of net interest income plus
     non-interest income.
(7)  The minimum regulatory capital ratios in order for the Company to be
     adequately capitalized are: Tier 1 capital - 4.00%; total risk-based
     capital -- 8.00%; and leverage ratio -- 4.00%
(8)  The leverage ratio is defined as the ratio of Tier 1 capital to average
     total assets.

                                       -7-
<PAGE>

Lending Activities

     The following table summarizes the composition of the Bank's loan portfolio
by type of loan at the dates indicated:

                           Loan Portfolio Composition

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                                                                               At December 31,
                                                      ------------------------------------------------------------------
                                                                    1998                             1997
                                                      ------------------------------------------------------------------
                                                           Amount             %          Amount               %
                                                      -------------------------------------------------------------------
                                                                       (Dollars in thousands)
Real Estate
<S>                                                      <C>             <C>             <C>               <C>
     Commercial ..............                           $  48,896           38%         $40,984             34%
     Construction ............                               1,833            1            3,012              3
     Residential .............                              22,279           17           26,638             22
     Home equity .............                              19,362           15           20,036             17
     Loans held for sale .....                               2,875            2              508             --
                                                         ---------       ------         --------            ---
     Total real estate .......                              95,245           73           91,178             76
Commercial ...................                              28,322           22           20,757             18
Consumer .....................                               6,963            5            7,461              6
                                                         ---------       ------         --------            ---
     Total loans .............                             130,530          100%         119,396            100%
                                                                         ======                             ===
Less allowance for loan losses                              (2,023)                       (1,717)
                                                         ---------                      --------
Total ........................                           $ 128,507                      $117,679
                                                         =========                      ========
</TABLE>

     The following table sets forth as of December 31, 1998, loans by scheduled
due date for the periods indicated. Loans maturing after one year are further
distinguished between those with predetermined interest rates and loans which
have floating or adjustable interest rates.

                             Loan Maturity Schedule

<TABLE>
<CAPTION>
                                                                      At December 31, 1998
                                           ---------------------------------------------------------------------------
                                                Due in
                                              one year or      Due after one year     Due after 5
                                                 less          but before 5 years        years            Total
                                           ---------------------------------------------------------------------------
                                                                     (Dollars in thousands)
<S>                                           <C>                 <C>                   <C>              <C>
Real estate .........................         $ 19,430            $ 30,229              $ 42,711         $ 92,370
Loans held for sale .................            2,875                  --                    --            2,875
Commercial ..........................           16,080               9,523                 2,719           28,322
Consumer ............................            2,704               3,031                 1,228            6,963
                                              --------            --------              --------         --------

Total loans .........................         $ 41,089            $ 42,783              $ 46,658         $130,530
                                              ========            ========              ========         ========

Loans maturing after one year:
Predetermined interest rates ........                                                                    $ 43,701
Floating or adjustable interest rates                                                                      45,740
                                                                                                         --------
Total ...............................                                                                    $ 89,441
                                                                                                         ========
</TABLE>

                                       -8-
<PAGE>

     The following is a summary of non-performing assets at December 31, 1998
and 1997:

                              Non-Performing Assets

<TABLE>
<CAPTION>
                                                                           At December 31,
                                                                  -----------------------------------

                                                                        1998             1997
                                                                  -----------------------------------
                                                                        (Dollars in thousands)
<S>                                                                     <C>              <C>
Loans:
    Non-accrual loans ................................                  $148             $181
    Loans 90 days or more past due but still accruing                      4                3
    Restructured loans ...............................                    --               --
                                                                        ----             ----
       Non-performing loans ..........................                   152              184
OREO .................................................                    12               43
                                                                                         ----
       Non-performing assets .........................                  $164             $227
                                                                        ====             ====

Non-performing loans as a percentage of total loans .........           0.12%            0.15%
Non-performing assets as a percentage of total assets .......           0.08%            0.13%
Non-performing assets as a percentage of total loans and OREO           0.13%            0.19%
</TABLE>

     At December 31, 1998, loans on non-accrual status totaled $148,000.
Interest income not recognized on non-accrual loans was $27,000 in 1998. There
was no interest income recognized on non-accrual loans in 1998.

     Adversely Classified Assets

     The Bank's management adversely classifies certain assets as "doubtful" or
"loss" based on criteria established under banking regulations. An asset is
considered substandard if inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if existing deficiencies are not
corrected. Assets classified as doubtful have all the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted.

     At December 31, 1998, the Bank had $1.3 million of loans that were
classified as substandard and $341,000 classified as doubtful. This compares to
$2.2 million and $307,000 of loans that were classified as substandard and
doubtful at December 31, 1997. The Bank had no loans which were classified as
loss at either date. Delinquent loans may or may not be adversely classified
depending upon management's judgment with respect to each individual loan. As of
December 31, 1998 and 1997, the portion of loans guaranteed by either the SBA,
RD or FAME amounted to approximately 25% and 44% of the total loan balances
adversely classified, respectively. At December 31, 1998, included in the $1.6
million of loans that were classified as substandard and doubtful were $1.5
million of performing loans. This compares to $2.3 million of adversely
classified performing loans as of December 31, 1997. These amounts constitute
loans that, in the opinion of management, could potentially migrate to
non-performing or loss status.

                                       -9-
<PAGE>

Allowance for Loan Losses

         The following table sets forth activity in the Bank's allowance for
loan losses during the years indicated:

                         Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                         -----------------------
                                                            1998         1997
                                                         -----------------------
                                                          (Dollars in thousands)
<S>                                                      <C>           <C>
Total net loans outstanding at the end of year (1) ...   $ 128,507     $ 117,679
Average net loans outstanding during the year  (1) ...   $ 120,070     $ 109,427
Allowance for loan losses, beginning of year .........   $   1,717     $   1,450
Loans charged off during the period:
           Real estate:
              Commercial .............................          --            (6)
              Residential ............................         (20)          (16)
              Home equity ............................          (7)           --
              Loans held for sale ....................          --            --
           Commercial ................................         (20)          (23)
           Consumer ..................................         (31)          (55)
                                                         ---------     ---------

                 Total ...............................         (78)         (100)
                                                         ---------     ---------

Recoveries of loans previously charged off:
           Real estate:
              Commercial .............................          --            --
              Residential ............................          22            12
              Home equity ............................          --            --
              Loans held for sale ....................          --            --
           Commercial ................................          --            --
           Consumer ..................................           2            --
                                                         ---------     ---------

                 Total ...............................          24            12
                                                         ---------     ---------

Net loans charged off during the year ................         (54)          (88)
                                                         ---------     ---------

Provisions charged to income statement ...............         360           355
                                                         ---------     ---------

Allowance for loan losses, end of year ...............   $   2,023     $   1,717
                                                         =========     =========

Ratios:
Net charge-offs to average loans outstanding .........        0.04%         0.08%
Net charge-offs to loans, end of period ..............        0.04%         0.07%
Allowance for loan losses to average loans outstanding        1.68%         1.57%
Allowance for loan losses to loans, end of year ......        1.55%         1.44%
Allowance for loan losses to non-performing loans ....     1330.92%       933.15%
</TABLE>

------------------------------------
(1) Includes loans held for sale.

                                      -10-
<PAGE>

     The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of an allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.

<TABLE>
<CAPTION>
                                                                            At December 31,
                                                   -------------------------------------------------------------------
                                                                 1998                             1997
                                                   --------------------------------   --------------------------------
                                                                     % of Loans to                     % of Loans to
                                                        Amount        Total Loans        Amount         Total Loans
                                                   -------------------------------------------------------------------
<S>                                                    <C>                <C>            <C>                 <C>
Commercial and Commercial Real Estate (1)              $  999             60%            $  989              52%
Construction ............................                   9              1                 15               3
Residential .............................                 120             17                134              22
Home equity .............................                 193             15                199              17
Loans held for sale (2) .................                  --              2                 --              --
Consumer ................................                 179              5                200               6
Unallocated .............................                 523             --                180              --
                                                       ------            ---             ------             ---
         Total allowance for loan losses               $2,023            100%            $1,717             100%
                                                       ======            ===             ======             ====
</TABLE>
-------------------
(1)  Commercial and commercial real estate loans have been combined in
     allocating the allowance for loan losses as the Bank utilizes an internal
     risk rating system for these loans on a consolidated basis.
(2)  No allowance has been allocated to loans held for sale as these loans are
     sold without recourse within approximately ten days after the loan closing
     resulting in minimal loan loss risk to the Bank.

     The unallocated portion of the allowance for loan losses increased to $523
at December 31, 1998 from $180 at December 31, 1997. Management determined an
increase in the unallocated portion of the allowance to be necessary in 1998 due
to a number of factors impacting the local economy that have not yet been fully
reflected in the financial information provided by borrowers. These factors
include a continued deterioration in trade with Canada, due to the currency
exchange rate imbalance and provincial sales taxes; another relatively weak
holiday season for retailers; and depressed conditions in certain natural
resource-based industries, such as commercial fishing, timber and agriculture.
While these factors are not yet identifiable with respect to specific borrowers,
the Bank has determined an overall increase in the allowance for loan losses to
be necessary to provide for resultant expected losses.

     Investment Activities

     The Company's investment portfolio serves three important functions: first,
it enables the adjustment of the balance sheet's sensitivity to changes in
interest rate movements; second, it provides an outlet for investing excess
funds; and third, it provides liquidity. The investment portfolio is structured
to maximize the return on invested funds within conservative risk guidelines.

     The composition of the investment portfolio as of December 31, 1998 was 44%
U.S. Treasury notes and U.S. Government agencies and corporations, 38%
mortgage-backed securities and collateralized mortgage obligations and 18% other
securities. The comparable distributions for December 31, 1997 was 54% U.S.
Treasury notes and U.S. Government agencies and corporations, 39%
mortgage-backed securities and collateralized mortgage obligations and 7% other
securities.

                                      -11-
<PAGE>

     The following table sets forth the composition of the Company's investment
portfolio at the dates indicated:

                   Investment Securities Portfolio Composition

<TABLE>
<CAPTION>
                                                                                       At December 31,
                                                                         --------------------------------------------

                                                                                  1998                  1997
                                                                         --------------------  ----------------------
<S>                                                                              <C>                   <C>
Securities held to maturity (1):
    Mortgage-backed securities and collateralized mortgage obligations .         $   668               $ 1,962
                                                                                 =======               =======
Securities available for sale (2):
    U.S. Treasury securities ...........................................         $20,304               $21,043
    U.S. Government agencies and corporations ..........................           4,034                 3,579
    Mortgage-backed securities and collateralized mortgage obligations .          20,647                15,851
    State and local government debt securities .........................             621                 1,402
    U.S. Government and agency money market funds ......................           5,081                   166
     Certificates of deposit ...........................................           3,664                   495
    Other securities (3) ...............................................             890                   823
                                                                                 -------               -------

    Total ..............................................................         $55,241               $43,359
                                                                                 =======               =======
</TABLE>

------------------------------
(1)  Carried at amortized cost.
(2)  Carried at estimated market value.
(3)  Includes FHLB stock, Federal Reserve stock and FNMA stock.

               Maturity Schedule of Securities Available for Sale

<TABLE>
<CAPTION>
                                                                           At December 31, 1998
                                                                             (At Market Value)
                                      ----------------------------------------------------------------------------------------------
                                             One year       Over one year       Over 5 years
                                              or less       through 5 years   through 10 years    Over 10 years        Total
                                      ------------------- ------------------  -----------------  -----------------  ----------------
                                                Weighted            Weighted           Weighted           Weighted          Weighted
                                       Amount   Yield(1)  Amount    Yield(1)  Amount   Yield(1)  Amount   Yield(1)  Amount  Yield(1)
                                      ------------------- ------------------  -----------------  -----------------  ----------------
                                                                          (Dollars in thousands)

<S>                                   <C>         <C>     <C>        <C>     <C>        <C>      <C>        <C>     <C>      <C>
U.S. Treasury securities ............ $10,077     5.99%   $10,227    5.14%   $   --       --     $    --      --    $20,304  5.56%

U.S. Government agencies and
  corporations ......................      --       --      4,034    5.37%       --       --          --      --      4,034  5.37%

Mortgaged-backed securities and
  collateralized mortgage obligations      --       --      1,355    5.97%    7,428     6.16%     11,864    6.04%    20,647  6.08%

States and local government
  debt securities ...................      --       --        390    5.14%      231     7.14%         --      --        621  5.89%

U.S. Government and agency
  money  market funds ...............   5,081     4.80%        --      --        --       --          --      --      5,081  4.80%

Certificates of deposit .............   3,664     5.67%        --      --        --       --          --      --      3,664  5.67%

Other securities ....................     890     6.35%        --      --        --       --          --      --        890  6.35%
                                      -------     ----    -------    ----    ------     ----    ----------  ----    -------  ----
Total ............................... $19,712     5.64%   $16,006    5.27%   $7,659     6.19%    $11,864    6.04%   $55,241  5.70%
                                      =======     ====    =======    ====    ======     ====    ==========  ====    =======  ====
</TABLE>
------------------------
(1)  Yield is adjusted for the effect of tax-exempt securities assuming a
     Federal tax rate of 34%.

                                      -12-
<PAGE>

                Maturity Schedule of Securities Held to Maturity

<TABLE>
<CAPTION>
                                                                           At December 31, 1998
                                                                           (At Amortized Cost)
                                      ----------------------------------------------------------------------------------------------
                                             One year       Over one year       Over 5 years
                                              or less       through 5 years   through 10 years    Over 10 years        Total
                                      ------------------- ------------------  -----------------  -----------------  ----------------
                                                Weighted            Weighted           Weighted           Weighted          Weighted
                                       Amount   Yield(1)  Amount    Yield(1)  Amount   Yield(1)  Amount   Yield(1)  Amount  Yield(1)
                                      ------------------- ------------------  -----------------  -----------------  ----------------
                                                                           Dollars in thousands)
<S>                                        <C>      <C>        <C>     <C>   <C>        <C>           <C>     <C>      <C>   <C>
Mortgage-backed securities
 and collateralized
 mortgage obligations....                  --       --         --      --    $  668     5.91%         --      --       $668  5.91%
</TABLE>

                  Deposit Activities

     The following table sets forth the average balances and weighted average
rates for the Bank's categories of deposits for the periods indicated:

                       Average Deposit Balances and Rates

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                     -------------------------------------------------------------------------
                                                   1998                                1997
                                     -------------------------------------------------------------------------
                                      Average    Average     % of Total    Average     Average     % of Total
                                      Balance      Rate      Deposits      Balance     Rate        Deposits
                                     --------   ---------   ------------  ---------   ---------   ------------
                                                            (Dollars in thousands)
<S>                                    <C>        <C>           <C>       <C>           <C>           <C>
Non-interest checking .............. $ 23,593       --          16%       $ 20,631       --           15%
Interest checking and  money market    25,772     2.32%         17%         23,794      2.29%         18%
Savings ............................   43,007     4.36%         29%         32,717      4.40%         25%
Certificates of deposit ............   57,220     5.66%         38%         55,306      5.68%         42%
                                       ------                  ---          ------                   ---

Total .............................. $149,592                  100%       $132,448                   100%
                                     ========                  ===        ========                   ===
</TABLE>

     The Bank does not have a concentration of deposits from any one source, the
loss of which would have a material adverse effect on the business of the Bank.
Management believes that substantially all the Bank's depositors are residents
in its primary market area. The Bank has not sought brokered deposits and does
not intend to do so in the future.

     The following table summarizes at December 31, 1998 the Bank's certificates
of deposit of $100,000 or more by time remaining until maturity:

<TABLE>
<CAPTION>
                                                                              December 31, 1998
                                                                          --------------------------
<S>                                                                            <C>
Maturity Period:
                     Less than three months..............................      $  3,323
                     Over three months through six months................         2,107
                     Over six months through twelve months...............         1,632
                     Over twelve months..................................         3,702
                                                                               --------
                        Total............................................      $ 10,764
                                                                               =========
</TABLE>

                                      -13-
<PAGE>

     Short-Term Borrowings

     The borrowings utilized by the Bank primarily have been securities sold
under agreements to repurchase. Other short-term borrowings generally include
federal funds purchased, FHLB advances, treasury tax and loan deposits and
interest-bearing demand notes due to the U.S. Treasury, which are repaid upon
notification by the U.S. Treasury.

     The following table sets forth certain information regarding securities
sold under agreement to repurchase for the dates indicated:

<TABLE>
<CAPTION>
                                                                     At or for the
                                                                Year Ended December 31,
                                                    ------------------------------------------------

                                                            1998                     1997
                                                    ----------------------  ------------------------
<S>                                                       <C>                       <C>
Average balances outstanding.......................       $12,163                   $11,931
Maximum amount outstanding at any month-
   end during the year.............................       $13,554                   $12,991
Balance outstanding at end of year.................       $11,747                   $11,897
Weighted average rate during the year..............          4.28%                     4.23%
Weighted average rate at end of year...............          3.60%                     4.30%
</TABLE>

Federal and State Taxation

     General

     The Company and the Bank file a consolidated federal income tax return on a
fiscal year basis. Consolidated returns have the effect of eliminating
intercompany distributions, including dividends, from the computation of
consolidated taxable income for the taxable year in which the distributions
occur. Banks and bank holding companies are subject to federal income taxes in
the same manner as other corporations. In accordance with an income tax sharing
agreement, income tax charges or credits will be allocated to the Company and
the Bank on the basis of their respective taxable income or loss included in the
consolidated income tax return.

     Federal Income Taxation

         Although the Bank's income tax liability is determined under provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), which is
applicable to all taxpayers or corporations, Sections 581 through 597 of the
Code apply specifically to financial institutions.

     The two primary areas in which the treatment of financial institutions
differ from the treatment of other corporations under the Code are in the areas
of bond gains and losses and bad debt deductions. Bond gains and losses
generated from the sale or exchange of portfolio instruments are generally
treated for financial institutions as ordinary gains and losses as opposed to
capital gains and losses for other corporations, as the Code considers bond
portfolios held by banks to be inventory in a trade or business rather than
capital assets. Banks are allowed a statutory method for calculating a reserve
for bad debt deductions. Based on the asset size of the Bank, it is permitted to
maintain a bad debt reserve calculated on an experience method, based on
charge-offs for the current and preceding five years or a "grandfathered" base
year reserve, if larger.

                                      -14-
<PAGE>

     State and Local Taxation

     The Company on a consolidated basis is subject to a separate state
franchise tax in lieu of state corporate income tax. The amount of the tax is
the sum of 1% of Maine net income and $.08 per $1,000 of Maine assets as defined
in Maine law. Maine assets are the corporation's total end of the year assets as
reported on the federal income tax return. Maine net income is the corporation's
net income or loss as reported on the federal income tax return which is
apportioned to Maine under Maine law.

                           SUPERVISION AND REGULATION

     Bank holding companies and state banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.

     General

     As a bank holding company, the Company is subject to the regulation and
supervision of the Federal Reserve under the BHCA. The Company is also subject
to the regulation and supervision of the Maine Bureau of Banking by virtue of
provisions of Maine law which govern financial institution holding companies
such as the Company. Under applicable federal law, the Company must obtain the
approval of the Federal Reserve Board before it acquires all or substantially
all of the assets of a bank or another bank holding company, merges or
consolidates with another bank holding company, or acquires direct or indirect
ownership or control of any voting shares of a bank or bank holding company if,
after such acquisition, it would own or control more than 5% of any class of
voting shares of such bank or bank holding company (unless it already owns or
controls a majority of such shares). Similarly, under applicable Maine law, the
Company must obtain the prior approval of the Maine Superintendent of the Bureau
of Banking before acquiring more than 5% of the voting shares of a Maine
financial institution or of any financial institution holding company which
directly or indirectly controls a Maine financial institution. Under certain
circumstances, the Company may be required to obtain Federal Reserve Board
approval before redeeming any of its equity securities in an amount in excess of
10% of its net worth in any twelve-month period. Furthermore, under certain
circumstances, any redemptions, dividends, or distributions with respect to the
Company's Common Stock and Preferred Stock may be considered an unsafe or
unsound practice by the Federal Reserve Board.

     Before any "company," as defined in the BHCA, may acquire "control," as
defined in the BHCA, over the Company, the prior approval of the Federal Reserve
Board generally is required. In addition, before any individual or entity which
is not required to seek prior approval from the Federal Reserve Board may
acquire control of the Company, prior notice to the Federal Reserve Board
generally is required. Similarly, notice to and approval by the Maine
Superintendent of the Bureau of Banking is required before any "financial
institution holding company," as defined in the Maine Banking Code, may acquire
more than 5% of a Maine financial institution or Maine financial institution
holding company.

     Under the BHCA and the Maine Banking Code, the Company is permitted,
directly or through subsidiaries, to engage in a variety of financial activities
deemed by the Federal Reserve Board to be so closely related to banking, or
managing or controlling banks, as to be a proper incident thereto. A bank
holding company normally is not permitted, however, to acquire direct or
indirect control of any company which is not a bank or not engaged in activities
determined by the Federal Reserve Board to be closely related to banking.
Certain exemptions are available with respect to subsidiaries engaged in
activities that have been determined by regulation to be closely related to
banking such as making or servicing loans, underwriting credit life

                                      -15-
<PAGE>

insurance, performing certain data processing services, acting as an investment
or financial advisor, and providing securities brokerage services.

     As a condition to the approval by the Federal Reserve of the Company's
application to become a bank holding company, the Federal Reserve imposed
additional requirements on the Company, including the following: (i) the Company
may not incur any debt in addition to that evidenced by the Debentures without
the prior approval of the Federal Reserve Bank of Boston; and (ii) except with
the prior approval of the Federal Reserve Bank of Boston, the Company cannot
repurchase any outstanding Common Stock if the proposed stock repurchase would
cause its debt to equity ratio to exceed 30%. The Federal Reserve Board
possesses cease and desist powers over bank holding companies to prevent or
remedy unsafe or unsound practices or violations of law. These and other
restrictions limit how the Company may conduct its business and obtain
financing.

     The Bank is also subject to continued regular supervision and examination
by applicable federal and state banking agencies. The Bank is a Maine
state-chartered bank that is a member of the Federal Reserve System. The Federal
Reserve exercises primary supervision over the Bank through periodic
examination. The Bank is also subject to regulation by the FDIC as well as the
Bureau. The FDIC has authority to terminate insurance for accounts pursuant to
procedures established for that purpose. The Bank must comply with various
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the operations of the Bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit availability
in order to influence the economy.

     Payment of Dividends

     The Company is a legal entity separate and distinct from the Bank. The
principal source of cash flow of the Company, including cash flow to pay
dividends on its stock or principal and interest on debt, if any, is dividends
from the Bank. There are statutory and regulatory limitations on the payment of
dividends by the Bank to the Company, as well as by the Company to its
shareholders.

     In addition to the statutory prohibition against the withdrawal of any
portion of the Bank's capital and certain statutory limitations on the payment
of dividends, under Maine law the Bank may not pay dividends if it is insolvent
or if the payment of such dividends would render the Bank insolvent. In
addition, Maine law generally requires that dividends may be paid only out of
either unreserved and unrestricted earned surplus or out of the unreserved and
unrestricted net earnings of the then current and preceding fiscal years. If the
dividends are to be paid only out of net earnings, shareholders must be notified
of the source of the dividend and of the fact that there was no earned surplus
from which to pay the dividend.

     The payment of dividends by any state bank that is a member of the Federal
Reserve System is affected by the requirement to maintain adequate capital
pursuant to the capital adequacy guidelines issued by the Federal Reserve Board.
The regulations and restrictions on dividends paid by the Bank may limit the
Company's ability to obtain funds from such dividends for its cash needs,
including funds for payment of operating expenses, and dividends on the Common
Stock.

     If, in the opinion of the applicable federal bank regulatory authority, a
depository institution or holding company is engaged in or is about to engage in
an unsafe or unsound practice (which, depending on the financial condition of
the depository institution or holding company, could include the payment of
dividends), such authority may require, after notice and hearing (except in the
case of an emergency proceeding where

                                      -16-
<PAGE>

there is no notice or hearing), that such institution or holding company cease
and desist from such practice. The federal banking agencies have indicated that
paying dividends that deplete a depository institution's or holding company's
capital base to an inadequate level would be such an unsafe and unsound banking
practice. Moreover, the Federal Reserve and the FDIC have issued policy
statements which provide that bank holding companies and insured depository
institutions generally should only pay dividends out of current operating
earnings. In addition, under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), a FDIC-insured depository institution may
not pay any dividend if payment would cause it to become undercapitalized or
once it is undercapitalized. See "FDICIA."

     The payment of dividends by the Company and the Bank also may be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines.

     Transactions With Affiliates and Insiders

     The Bank is subject to Section 23A of the Federal Reserve Act, which places
limits on the amount of loans or extensions of credit to, or investments in, or
certain other transactions with, affiliates, including the Company. In addition,
limits are placed on the amount of advances to third parties collateralized by
the securities or obligations of affiliates. Most of these loans and certain
other transactions must be secured in prescribed amounts. The Bank is also
subject to Section 23B of the Federal Reserve Act, which, among other things,
prohibits an institution from engaging in transactions with certain affiliates
unless the transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those prevailing at the
time for comparable transactions with non-affiliated companies.

     Capital Adequacy

         The federal banking agencies have adopted risk-based capital guidelines
for banks and bank holding companies. The minimum guideline for the ratio of
total capital to risk-weighted assets ("Total Risk Based Capital" ratio) for
"adequately capitalized" institutions is 8%. The minimum adequate capitalization
guideline for the ratio of Tier 1 Capital to risk-weighted assets ("Tier 1 Risk
Based Capital" ratio) is 4%.

     In addition, the federal banking agencies have established minimum leverage
ratio guidelines for banks and bank holding companies. Their guidelines provide
for a minimum ratio of Tier 1 Capital to average assets, less goodwill and
certain other intangible assets (the "Leverage Ratio"), of 3% for banks that
meet certain specific criteria and 4% for other institutions. The Company's
Leverage Ratio at December 31, 1998 was 10.3%. Failure to meet capital
guidelines could subject a bank to a variety of enforcement remedies, including
the termination of deposit insurance by the FDIC, and to certain restrictions on
its business. See "FDICIA."

     Holding Company Structure and Support of the Bank

     Because the Company is the parent holding company of the Bank, its right to
participate in the assets of any subsidiary upon the Bank's liquidation or
reorganization will be subject to the prior claims of the subsidiary's creditors
(including depositors in the case of bank subsidiaries) except to the extent
that the Company may itself be a creditor with recognized claims against the
subsidiary.

     Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by the FDIC in connection with (i) the
default of a commonly-controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to any commonly-controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence

                                      -17-
<PAGE>

of regulatory assistance. The FDIC's claim for damages is superior to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution. The Bank
is subject to these cross-guarantee provisions.

     The following table sets forth capital ratios required by the Federal
Reserve to be maintained by the Company in order for the Company to be
adequately capitalized, and the Company's actual ratios of capital to total
regulatory or risk-weighted assets, as applicable, at December 31, 1998.

<TABLE>
<CAPTION>
                                   Company Regulatory
                                        Minimum                Company             Bank
                              -------------------------   -----------------   --------------

<S>                                     <C>                      <C>               <C>
Tier 1 capital...............           4.00%                    16.39%            12.23%
Total risk-based capital.....           8.00%                    17.89%            13.49%
</TABLE>

     FDICIA

     The FDICIA requires the federal banking regulators to take "prompt
corrective action" in respect of FDIC insured depository institutions that do
not meet minimum capital requirements. FDICIA established five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." An FDIC-insured depository
institution is well capitalized if it maintains a Leverage Ratio of at least 5%,
a risk adjusted Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of
at least 10% and is not subject to a directive, order or written agreement to
meet and maintain specific capital levels. An insured depository institution is
defined to be adequately capitalized if it meets all of its minimum capital
requirements as described above. In addition, an insured depository institution
will be considered undercapitalized if it fails to meet any minimum required
measure, significantly undercapitalized if it is significantly below any such
measure and critically undercapitalized if it fails to maintain a level of
tangible equity equal to not less than 2% of total assets. An insured depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.

     The capital-based prompt corrective action provisions of FDICIA and their
implementing regulations apply to FDIC-insured depository institutions and are
not directly applicable to holding companies which control such institution.
However, the Federal Reserve Board has indicated that, in regulating bank
holding companies, it will take appropriate action at the holding company level
based on an assessment of the effectiveness of supervisory actions imposed upon
subsidiary depository institutions pursuant to such provisions and regulations.

     FDICIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized.

     Undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve. In addition, undercapitalized depository
institutions are subject to growth limitations and are required to submit
capital restoration plans. A depository institution's holding company must
guarantee the capital plan, up to an amount equal to the lesser of 5% of the
depository institution's assets at the time it becomes undercapitalized or the
amount of the capital deficiency when the institution fails to comply with the
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.

                                      -18-
<PAGE>

     Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.

     The Company and the Bank, at December 31, 1998 and 1997, were "well
capitalized" under the criteria discussed above.

     FDIC Insurance Premiums

     The Bank is required to pay semiannual FDIC deposit insurance assessments.
Each financial institution is assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized -- and further assigned
to one of three subgroups within a capital group, on the basis of supervisory
evaluations by the institution's primary federal and, if applicable, state
supervisors and other information relevant to the institution's financial
condition and the risk posed to the FDIC deposit insurance fund. The actual
assessment rate applicable to a particular institution (and any applicable
refund) will, therefore, depend in part upon the risk assessment classification
so assigned to the institution by the FDIC. The FDIC is authorized by federal
law to raise insurance premiums in certain circumstances. Any increase in
premiums would have an adverse effect on the Bank and the Company's earnings.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.

     Interstate Banking

     The acquisition by the Company of more than 5% of the outstanding voting
securities or substantially all of the assets of a bank located outside of the
State of Maine is regulated by the BHCA. Such acquisition is also subject to the
law of the state in which the bank to be acquired is located. Under certain
circumstances, the Company might not be permitted to acquire an interest in
another bank located outside Maine. Further, any company attempting to acquire
control of the Company or the Bank also may be subject to certain limitations on
interstate banking. Even assuming that the law of the state in which the bank is
located permits acquisition, the Maine Banking Code requires prior approval of
the Superintendent of the Bureau of Banking for certain acquisitions of more
than 5% of a financial institution having operations conducted outside of Maine.

     The status of interstate banking legislation adopted by individual states
has been in a constant state of change in recent years. While federal law has
substantially liberalized interstate banking, a number of states have adopted
some form of legislation which limits interstate banking by bank holding
companies.

     Interstate Act

     Subject to certain conditions and exceptions, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Act"), (i) permits
bank holding company acquisitions of banks of a minimum age of up to five years
as established by state law in any state, (ii) permits mergers of national and
state banks across state lines unless the state has opted out of the interstate
bank merger provisions, (iii) permits branching de novo by national and state
banks into other states and (iv) permits certain interstate bank agency
activities one year after enactment. Subject to certain limitations, Maine law
permits out of state financial institutions, federal associations and national
banks to establish de novo branches or to acquire branches in Maine.

                                      -19-
<PAGE>

     Community Reinvestment Act

     The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal
Reserve, the FDIC, the Office of the Comptroller of the Currency and the Office
of Thrift Supervision evaluate the record of such financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.

     Other Regulations

     Interest and certain other charges collected or contracted for by banks are
subject to state usury laws and certain federal laws concerning interest rates.
The Bank's loan operations are also subject to certain federal laws applicable
to credit transactions, such as the federal Truth-In-Lending Act governing
disclosures of credit terms to consumer borrowers, the Home Mortgage Disclosure
Act of 1975 requiring financial institutions to provide information to enable
the public and public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the community it
serves, the Equal Credit Opportunity Act prohibiting discrimination on the basis
of race, creed or other prohibited factors in extending credit, the Fair Credit
Reporting Act of 1978 governing the use and provision of information to credit
reporting agencies, the Fair Debt Collection Act governing the manner in which
consumer debts may be collected by collection agencies and the rules and
regulations of the various federal agencies charged with the responsibility of
implementing such federal laws. The deposit operations of the Bank also are
subject to the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and the Electronic
Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that act, which govern automatic deposits to and withdrawals from
deposit accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services.

ITEM 2. DESCRIPTION OF PROPERTY

     Over the past six years, the Company has made improvements to or relocated
from nearly all of the properties it acquired in connection with the Bank's
formation. The most significant project being the 1997 two-story expansion and
renovation of its headquarters building at 201 Main Street. This increased the
size of the structure from 8,000 to a total of 17,000 square feet, and includes
a large branch, commercial, trust and administrative offices as well as a board
room and two conference rooms. The property is located at the gateway to
downtown Bangor and the enhancements to the site have significantly improved the
area. The site suits the Company's present needs and further expansion is
available on the premises if the needs of the Company change in the future.

     992 Union Street Branch, Bangor

     The Bank's most recent project, completed in late 1997, was the relocation
of this office from a small, outdated facility at 559 Union Street to a new
branch at the Airport Plaza Mall located at 992 Union Street. This branch
includes a spacious lobby, three comfortable offices, a conference room and
kitchen. Adequate parking and convenient access to the multi-lane drive up and
ATM are added benefits.

     920 Stillwater Avenue, Bangor

     In 1994, the Bank relocated from an office within the Bangor Mall to a
spacious facility located in the CrossRoads Plaza. This office includes the
branch and the Residential Mortgage Department and its

                                      -20-
<PAGE>

operational staff. This location features a multi-lane drive up and ATM and
provides service to another ATM located inside the Bangor Mall.

     366 Wilson Street, Brewer

     In 1995, the Company sold the original Brewer branch building on North Main
Street and relocated to the present location. This is a leased facility which
had been recently renovated by another bank. It features a multi-lane drive-up
and ATM and is conveniently located at the center of the Brewer business
district.

     69 Main Street, Orono

     The Orono branch is also located near the center of town on the first floor
of a former bank building. The Company assumed this lease in 1992 and has made
some cosmetic improvements to the facility since that time. In 1998 an ATM was
installed at the site to complement the existing drive-up services.

     27 Main Street, Pittsfield

     The Pittsfield branch, which was acquired by the Bank as part of the
start-up, is a historic two story Main Street building with approximately 12,600
square feet of space.

     Newport Plaza, Newport

     In 1997, the Company opened its first branch in a locally owned supermarket
in Newport. This facility is unlike most supermarket banks in that it includes a
drive-up as well as in-store tellers and loan and customer service personnel.

ITEM 3. LEGAL PROCEEDINGS

     Although the Bank and the Company, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Bank or the Company, its directors or
its officers is a party or to which any of its property is subject as of the
date of this Form 10-KSB.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     The following information included in the Merrill Merchants Bancshares,
Inc. 1998 Annual Report to Stockholders (the "Annual Report") is incorporated
herein by reference: "Market for Common Stock."

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The following information included in the Annual Report is incorporated
herein by reference: "Selected Financial Highlights" on page 1 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 5 through 14 of the Annual Report.

                                      -21-
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

     The following information included in the Annual Report is incorporated
herein by reference: "Audited Financial Statements and Notes to Consolidated
Financial Statements" on pages 15 through 33 of the Annual Report.

ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE

     None.

                                    PART III

ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY; COMPLIANCE WITH SECTION
        16(a) OF THE EXCHANGE ACT

     The following information included in the Company's 1998 Proxy Statement
for the 1999 Annual Meeting of Shareholders ("Proxy Statement") is incorporated
herein by reference: "Election of Directors," "Nominees, Continuing and Retiring
Directors," "Executive Officers," and "Section 16(a) Beneficial Ownership
Reporting Compliance."

ITEM 10. EXECUTIVE COMPENSATION

     The following information included in the Proxy Statement is incorporated
herein by reference: "Proposal 1 -- Election of Directors -- Directors'
Compensation," "-- Compensation Table," "-- Stock Option Plan" and "--
Transactions with Certain Related Persons."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following information included in the Proxy Statement is incorporated
herein by reference: "Security Ownership of Certain Beneficial Owners and
Management."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The following information included in the Proxy Statement is incorporated
herein by reference: "Transactions with Certain Related Persons."

                                      -22-
<PAGE>

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

     (a)  The following financial statements included in the 1998 Annual Report
          are incorporated herein by reference:

          Consolidated Statements of Financial Condition -- December 31, 1998
          and 1997; Consolidated Statements of Income -- Years Ended December
          31, 1998 and 1997; Consolidated Statements of Changes in Shareholders
          Equity -- December 31, 1998 and 1997; Consolidated Statements of Cash
          Flows -- Years Ended December 31, 1998 and 1997; and Notes to
          Consolidated Financial Statements -- Years Ended December 31, 1998 and
          1997.

     (b)  Exhibits. The following exhibits are either filed as part of this
                    report or are incorporated herein by reference:

3.1   Articles of Incorporation of Merrill Merchants Bancshares, Inc.*

3.2   By-laws of Merrill Merchants Bancshares, Inc.*

4     Specimen Stock Certificate of Merrill Merchants Bancshares, Inc.*

10.1  Operating Agreement between the Company and M&M Consulting Limited
      Liability Company.*

10.2  Services Agreements between the Company and M&M Consulting Limited
      Liability Company.*

10.3  Data Processing Services Agreement between the Company and M&I Data
      Services, a Division of Marshall & Ilsley Corporation.*

10.4  Financial Services Agreement with Financial Institutions Service
      Corporation.*

10.5  Form of Life Insurance Endorsement Method Split Dollar Plan Agreement.*

10.6  Form of Unfunded Deferred Compensation Agreement.*

10.7  Form of Executive Supplemental Retirement Plan.*

10.8  Form of Mandatory Convertible Debentures.*

10.9  Correspondent Trust Services Agreement with Northern Trust Company.*

10.10 Stock Option Plan, as amended.*

10.11 Form of Stock Option Agreement.*

10.12 1998 Directors' Deferred Compensation Plan.*

13    Annual Report to Shareholders for the Year Ended December 31, 1998.

21    Subsidiaries of the Registrant.

23    Consent of Berry Dunn McNeil & Parker.

27    Financial Data Schedule.**

                                      -23-
<PAGE>

99   1999 Proxy Statement (previously filed on March 12, 1999).

-----------

*    Incorporated by reference to the Company's Registration Statement on Form
     SB-2 (File No. 333-56197), and any amendments thereto filed with the
     Securities and Exchange Commission.

**   Filed in electronic format only.

     (c)  Reports on Form 8-K.

      None.

                                      -24-
<PAGE>

SIGNATURES

    In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

MERRILL MERCHANTS BANCSHARES, INC.

By:  /s/ Edwin N. Clift
     -------------------------------------
     President and Chief Executive Officer

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
                   Name                                          Title                            Date
                   ----                                          -----                            ----
<S>                                               <C>                                        <C>
/s/ Edwin N. Clift                                Director, President and                    March 25, 1999
------------------------------------------        Chief Executive Officer
Edwin N. Clift                                    (Principal executive officer)

/s/ Deborah A. Jordan                             Treasurer (Principal                       March 25, 1999
------------------------------------------        financial officer)
Deborah A. Jordan

/s/ William C. Bullock, Jr.                       Chairman of the Board                      March 25, 1999
------------------------------------------
William C. Bullock, Jr.

/s/ Joseph H. Cyr                                 Director                                   March 25, 1999
------------------------------------------
Joseph H. Cyr

/s/ Perry B. Hansen                               Director                                   March 25, 1999
------------------------------------------
Perry B. Hansen

/s/ Leonard E. Minsky                             Director                                   March 25, 1999
------------------------------------------
Leonard E. Minsky

/s/ Joseph Sewall                                 Director                                   March 25, 1999
------------------------------------------
Joseph Sewall

/s/ Dennis L. Shubert, M.D.                       Director                                   March 25, 1999
------------------------------------------
Dennis L. Shubert, M.D.

/s/ Susan B. Singer                               Director                                   March 25, 1999
------------------------------------------
Susan B. Singer

/s/ Harold S. Wright                              Director                                   March 25, 1999
------------------------------------------
Harold S. Wright
</TABLE>
                                      -25-