EXHIBIT 13

MANAGMENT'S DISCUSSION AND ANALYSIS 
 
GENERAL 
 
      Granite State Bankshares, Inc. ("Granite State" or the "Company") is 
a single-bank holding company which was formed in 1986 to acquire all of 
the stock of the Granite Bank (the "subsidiary bank") upon its conversion 
from a mutual savings bank to a state-chartered guaranty (stock) savings 
bank. Since that time, the Company has acquired the Durham Trust Company, 
First Northern Co-operative Bank, First National Bank of Peterborough and 
the Granite Bank of Amherst. The acquired banks have all been merged into 
Granite Bank. Additionally, during 1991, Granite Bank converted from a 
state-chartered guaranty (stock) savings bank to a New Hampshire state-
chartered commercial bank. This discussion of the financial condition and 
results of operations of the Company should be read in conjunction with 
the financial statements and supplemental financial data contained 
elsewhere in this report. 
 
      The subsidiary bank has been and continues to be a community 
oriented commercial bank offering a variety of financial services. The 
principal business of the subsidiary bank consists of attracting deposits 
from the general public and underwriting loans secured by residential and 
commercial real estate and other loans. The subsidiary bank also 
originates fixed rate residential real estate loans for sale in the 
secondary mortgage market. The subsidiary bank has nine full service 
offices and an additional thirteen remote automatic teller locations. The 
subsidiary bank is a full service community bank with a diversified 
lending operation that services Cheshire, Hillsborough, Strafford and 
Rockingham counties, New Hampshire. 
 
      The subsidiary bank's deposits are primarily insured by the Bank 
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation 
("FDIC"), with the remaining portion of the subsidiary bank's deposits 
(approximately $35.6 million or 11.71% of total deposits at December 31, 
1996) being OAKAR deposits, which are deposits purchased from institutions 
previously insured by the Savings Association Insurance Fund ("SAIF") of 
the FDIC. These deposits are still insured by the SAIF. As a result of the 
foregoing, the subsidiary bank is subject to regulation by the FDIC. The 
Company, as a bank holding company, is subject to regulation by the 
Federal Reserve Board ("FRB"). 
 
      Financial institutions in general, including the Company, are 
significantly affected by economic conditions, competition and the 
monetary and fiscal policies of the Federal government. Lending activities 
are influenced by the demand for and supply of housing and local economic 
activity, competition among lenders, the interest rate conditions and 
funds availability. Deposit balances and cost of funds are influenced by 
prevailing market rates on competing investments, customer preference and 
the levels of personal income and savings in the subsidiary bank's primary 
market area. 
 
FINANCIAL CONDITION 
 
      Consolidated assets at December 31, 1996 were $370.4 million, up 
$24.0 million or 6.93% from $346.4 million at December 31, 1995. 
 
      Interest bearing deposits in the Federal Home Loan Bank of Boston 
("FHLBB") were $18.0 million at December 31, 1996 and $24.2 million at 
December 31, 1995. The decrease of $6.2 million or 25.77% was invested 
into higher yielding 3 to 5 year fixed income securities. 
 
      The Company follows Financial Accounting Standards Board ("FASB") 
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting 
for Certain Investments in Debt and Equity Securities. Accordingly, the 
Company classifies its investments in debt and equity securities as 
securities held to maturity, securities available for sale or trading 
securities. At December 31, 1996, securities held to maturity were $9.5 
million compared to $0 at December 31, 1995. Securities available for sale 
were $99.4 million at December 31, 1996 and $95.0 million at December 31, 
1995. The total of securities held to maturity and securities available 
for sale increased $13.9 million or 14.64% and was the result of investing 
the decrease of $6.2 million in interest bearing deposits in the FHLBB 
into higher yielding 3 to 5 year fixed income securities, as well as 
investing the portion of the funds received from increases in interest 
bearing liabilities that were not needed to fund loan growth. There were 
no securities classified as trading securities at December 31, 1996 and 
December 31, 1995. 
 
      At December 31, 1996 the net unrealized gains on securities 
available for sale, net of related tax effects were $2.0 million, compared 
to $1.6 million at December 31, 1995. These net unrealized gains are shown 
as a separate component of stockholders' equity. 
 
      At December 31, 1996, the weighted average life of the Company's 
investments in debt securities is approximately 27 months compared to 17 
months at December 31, 1995; however, actual maturities may differ from 
contractual maturities because certain issuers have the right to call 
obligations without call penalties. 
 
      The subsidiary bank originates fixed rate residential loans for sale 
in the secondary mortgage market. Mortgage loans held for sale at December 
31, 1996 and 1995 were $1.0 million and $2.0 million, respectively. Loans 
originated for sale in the secondary mortgage market during 1996 and 1995 
were $27.2 million and $29.2 million, respectively. Loans sold in the 
secondary mortgage market were $28.2

<PAGE>  9

million and $27.9 million, respectively. The Company began writing fifteen
year fixed rate loans for portfolio effective July 1, 1996. Such loans had 
previously been sold in the secondary mortgage market. The Company continues 
to write thirty year fixed rate loans for sale in the secondary mortgage 
market. At December 31, 1996 and 1995 the Company serviced loans for others 
totaling $174.0 million and $173.0 million, respectively. 

      Loans outstanding before deductions for unearned income and the 
allowance for possible loan losses increased $15.9 million or 8.39% to 
$206.3 million at December 31, 1996 from $190.4 million at December 31, 
1995. Residential real estate loans and commercial real estate loans were 
the areas where the increases occurred. Residential real estate loans 
increased $11.0 million or 9.84% to $122.6 million at December 31, 1996 
from $111.6 million at December 31, 1995 and commercial real estate loans 
increased $5.7 million or 10.94% to $58.3 million at December 31, 1996 
from $52.6 million at December 31, 1995. The increase in the residential 
real estate loans occurred throughout 1996 as the low interest rate 
environment during the latter part of 1995 continued into 1996 and 
encouraged borrowers to refinance loans. New home purchases were also 
stronger in 1996 than during 1995. Additionally, beginning on July 1, 
1996, the Company began writing fifteen year fixed rate loans for 
portfolio, which before that date were being sold into the secondary 
mortgage market. The increase in commercial real estate loans was a result 
of stronger loan demand in the latter part of 1996 as competitive loan 
rates became lower encouraging borrowers to refinance their loans. Total 
loan originations during 1996 and 1995, were $86.8 million and $62.6 
million, respectively. Loan originations for portfolio, excluding loans 
originated for sale in the secondary mortgage market during 1996 and 1995 
were $59.6 million and $33.4 million, respectively. Loan repayments for 
1996 and 1995,  were $41.6 million and $33.9 million, respectively. Loans 
charged off, net during 1996 and 1995 were $678 thousand and $1.3 million, 
respectively. Loans transferred to other real estate owned during 1996 and 
1995 amounted to $1.4 million and $1.8 million, respectively. 
 
      At December 31, 1996 and 1995 the Company's loan portfolio consisted 
of the following: 
 
<TABLE>
<CAPTION>
                                                          December 31,
                                                     ----------------------
                                                       1996         1995 
                                                     ---------    ---------
                                                         (In Thousands) 
 
<S>                                                  <C>          <C>
Commercial, financial and agricultural............   $   9,849    $  10,696 
Real estate--residential..........................     122,561      111,578 
Real estate--commercial...........................      58,302       52,555 
Real estate--construction and land development....       3,030        2,676 
Installment.......................................       4,488        4,438 
Other.............................................       8,109        8,426 
                                                     ----------------------
      Total loans.................................     206,339      190,369 
Less: 
  Unearned income.................................      (1,860)      (2,356) 
  Allowance for possible loan losses..............      (3,676)      (3,704) 
                                                     ----------------------
      Net loans...................................   $ 200,803    $ 184,309 
                                                     ======================
</TABLE>

      The Company's nonperforming assets decreased $955 thousand or 21.27% 
from $4.5 million at December 31, 1995 to $3.5 million at December 31, 
1996. The New Hampshire economy and the real estate market in the 
Company's market areas have stabilized and improved over the last 3 to 4 
years and at December 31, 1996 the Company's nonperforming assets have 
been reduced to 0.95% of total assets. However, any future deterioration 
in the economy or real estate market in the Company's market areas may 
adversely impact the quality of the Company's assets in future periods, as 
well as its results of operations. 
 
      The following table sets forth the Company's nonperforming loans and 
other real estate owned at the dates indicated. The Company generally does 
not accrue interest on any loans that are 90 days or more past due, unless 
the loan is well secured and in the process of collection. At the dates 
indicated, all loans delinquent 90 days or more were on nonaccrual status 
and therefore considered nonperforming, with the exception of $93 thousand 
of loans at December 31, 1996 and $21 thousand of loans at December 31, 
1994, all of which were in the process of collection at those dates. 

<PAGE> 10
 
<TABLE>
<CAPTION>
                                                           December 31, 
                                                  ------------------------------
                                                    1996       1995       1994 
                                                  --------   --------   --------
                                                         ($ In Thousands) 
<S>                                               <C>        <C>        <C>

Nonperforming loans: 
  Residential real estate                         $ 1,582    $ 1,341    $ 1,495 
  Commercial real estate                              386        332        646 
  Construction and land development real estate                   88         54
  Commercial, financial and agricultural               50         35         81 
  Consumer and other                                    4          2          8 
                                                  -----------------------------
      Total nonperforming loans                     2,022      1,798      2,284 
      Total other real estate owned                 1,512      2,691      3,009
                                                  ----------------------------- 
      Total nonperforming assets                  $ 3,534    $ 4,489    $ 5,293
                                                  ============================= 
 
Ratios: 
     Total nonperforming loans to total loans        0.98%      0.94%      1.17% 
                                                  =============================

     Total nonperforming assets to total assets      0.95%      1.30%      1.70% 
                                                  =============================
</TABLE>
 
      The Company adopted SFAS No. 114, "Accounting by Creditors for 
Impairment of a Loan," on January 1, 1995. This standard requires that a 
creditor measure impairment based on the present value of expected future 
cash flows discounted at the loan's effective interest rate, except that 
as a practical expedient, a creditor may measure impairment based on a 
loan's observable market price, or the fair value of the collateral if the 
loan is collateral dependent. Regardless of the measurement method, a 
creditor must measure impairment based on the fair value of the collateral 
when the creditor determines that foreclosure is probable. In October 
1994, SFAS No. 114 was amended by SFAS No. 118, "Accounting by Creditors 
for Impairment of a Loan--Income Recognition and Disclosures," which 
allows creditors to use their existing methods for recognizing interest 
income on impaired loans. Because the Company already recognized such 
reductions of value on impaired loans through its provision for possible 
loan losses, the adoption of SFAS No. 114, as amended by SFAS No. 118, did 
not have a material impact on its financial condition or results of 
operations. The balance of impaired loans was $805 thousand and $1.0 
million, respectively,  at December 31, 1996 and 1995. The Company has 
identified a loan as impaired when it is probable that interest and 
principal will not be collected according to the contractual terms of the 
loan agreements. The allowance for possible loan losses associated with 
impaired loans allocated from and part of the general allowance for 
possible loan losses, upon the adoption of SFAS No. 114, on January 1, 
1995 was $864 thousand. During 1996 and 1995, provisions to the allowance 
for impaired loans amounted to $377 thousand and $553 thousand, 
respectively, and impaired loans charged off amounted to $578 thousand and 
$1.1 million, respectively. The allowance for possible loan losses 
associated with impaired loans at December 31, 1996 and 1995 was $166 
thousand and $367 thousand, respectively. At December 31, 1996 and 1995, 
there were no impaired loans which did not have an allowance for possible 
loan losses determined in accordance with SFAS No. 114. The average 
recorded investment in impaired loans was $634 thousand and $1.5 million, 
respectively, in 1996 and 1995 and the income recognized on impaired loans 
during 1996 and 1995 was $4 thousand and $19 thousand, respectively. Total 
cash collected on impaired loans during 1996 and 1995 was $770 thousand 
and $103 thousand, respectively, of which $766 thousand and $84 thousand, 
respectively, was credited to the principal balance outstanding on such 
loans. Interest which would have been accrued on impaired loans during 
1996 and 1995, had they performed in accordance with the terms of their 
contracts, was $61 thousand and $166 thousand, respectively. The Company's 
policy for interest income recognition on impaired loans is to recognize 
income on nonaccrual loans under the cash basis when the loans are both 
current and the collateral on the loan is sufficient to cover the 
outstanding obligation to the Company; if these factors do not exist, the 
Company does not recognize income. 
 
      Other real estate owned is comprised of properties acquired through 
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. 
Real estate acquired in settlement of loans are recorded at the lower of 
the carrying value of the loan or the fair value of the property received 
less an allowance for estimated costs to sell. Loan losses arising from 
the acquisition of such properties are charged against the allowance for 
possible loan losses. Provisions to reduce the carrying value to net 
realizable value are charged to current period earnings as realized and 
reflected as an additional valuation allowance. Operating expenses and 
gains and losses upon disposition are reflected in earnings as realized. 
Other real estate owned amounted to $1.5 million and $2.7 million at 
December 31, 1996 and 1995, respectively. See note H of Notes to 
Consolidated Financial Statements for further information on other real 
estate owned. 
 
      The allowance for possible loan losses is a significant factor in 
the Company's operating results and is established through charges against 
income and is maintained at a level considered adequate to provide for 
potential loan losses based on management's evaluation of known and 
inherent risks in the loan portfolio. When a loan, or a portion of a loan, 
is considered uncollectible it is charged against the allowance. 
Recoveries of loans previously charged off are credited to the allowance 
when received. 

<PAGE> 11
 
      Management's evaluation of the allowance is based on a continuing 
review of the loan portfolio, which encompasses many factors, including 
identification and review of individual problem situations that may affect 
the borrower's ability to repay; review of overall portfolio quality 
through an analysis of current charge off, delinquency, and nonperforming 
loan data; review of regulatory authority examinations and evaluations of 
loans; an assessment of current and expected economic conditions and 
changes in the size and character of the loan portfolio. 
 
      At December 31, 1996, 1995 and 1994, the allowance for possible loan 
losses was $3.7 million, $3.7 million and $4.2 million, respectively, and 
the ratio of the allowance to total loans outstanding was 1.78%, 1.95% and 
2.17%, respectively. At December 31, 1996, 1995 and 1994, the allowance 
for possible loan losses represented 181.8%, 206.0% and 185.2%, 
respectively, of nonperforming loans. 
 
      Management is continuing to carefully monitor the allowance for 
possible loan losses in light of existing nonperforming loans, impaired 
loans and the trend in the New England real estate market and local 
economy. While management believes that the allowance for possible loan 
losses at December 31, 1996 is adequate based on its current review and 
estimate, further provisions to the allowance may be necessary if the 
market in which the Company operates deteriorates. Additionally, 
regulatory agencies review the Company's allowance for possible loan 
losses as part of their examination process. Such agencies may require the 
Company to recognize additions to the allowance based on judgments which 
may be different from those of management. 
 
      Deposits increased $17.1 million or 5.93% to $304.2 million at 
December 31, 1996 from $287.1 million at December 31, 1995. The increase 
resulted primarily from the opening of a new branch office in downtown 
Portsmouth, New Hampshire and the continued success of new deposit account 
products introduced in 1995. Interest bearing deposits increased $17.2 
million and noninterest bearing deposits decreased $118 thousand. Of the 
$17.2 million increase in interest bearing deposits, NOW and Super NOW 
accounts increased $18.3 million and time certificates increased $10.2 
million, while savings accounts decreased $5.7 million and money market 
deposit accounts decreased $5.6 million. Much of the decrease in savings 
and money market deposit accounts related to transfers into a NOW account 
product which the subsidiary bank introduced in 1995, or into our higher 
yielding time certificates. Time certificates with minimum balances of 
$100 thousand increased $291 thousand, from $12.0 million at December 31, 
1995 to $12.3 million at December 31, 1996. The Company does not use 
brokers to solicit deposits. 
 
      Securities sold under agreements to repurchase increased $5.3 
million or 20.41% to $31.5 million at December 31, 1996 from $26.2 million 
at December 31, 1995. 
 
      The increase in deposits and securities sold under agreements to 
repurchase were used to fund loan growth and increases in securities 
available for sale and held to maturity. 
 
      Stockholders' equity was $31.3 million at December 31, 1996, an 
increase of $1.5 million from $29.8 million at December 31, 1995. Book 
value per share was $15.81 at December 31, 1996, up $1.18 or 8.07% from 
$14.63 at December 31, 1995. See "Capital Resources and Liquidity" for 
further information on stockholders' equity. 
 
Asset/Liability Management and 
 Interest Rate Sensitivity 
 
      The Company attempts to manage its liquidity, capital and interest 
rate risk position so as to minimize its exposure to interest rate risk. 
At December 31, 1996, the Company had interest rate sensitive assets which 
repriced or matured within one year of $186.1 million and interest rate 
sensitive liabilities which repriced or matured within one year of $274.5 
million. At December 31, 1995, interest rate sensitive assets which 
repriced or matured within one year were $235.3 million and interest rate 
sensitive liabilities which repriced or matured within one year were 
$260.2 million. 
 
      The Company actively manages its interest rate sensitivity position. 
The objectives of interest rate risk management are to control the 
exposure of net interest income to risks associated with interest rate 
movements and to achieve a stable and rising flow of net interest income. 
The Asset/Liability Management Committee, using policies approved by the 
Board of Directors, is responsible for managing the Company's rate 
sensitivity position. GAP measurement attempts to analyze any mismatches 
in the timing of interest rate repricing between assets and liabilities. 
It identifies those balance sheet sensitivity areas which are vulnerable 
to unfavorable interest rate movements. As a tool of asset/liability 
management, the GAP position is compared with potential changes in 
interest rate levels in an attempt to measure the favorable and 
unfavorable effect such changes would have on net interest income. For 
example, when the GAP is positive, (i.e., assets reprice faster than 
liabilities) a rise in interest rates will increase net interest income, 
and conversely, if the GAP is negative, a rise in rates will decrease net 
interest income. The accuracy of this measure is limited by unpredictable 
loan prepayments, lags in the interest rate indices used for repricing 
variable rate loans and lags in the interest rate changes made by the 
subsidiary bank on its deposit products. 
 
      The Company's principal measure of interest rate risk is GAP 
analysis. The Company's requirements for an acceptable GAP in its 
asset/liability management policy are within a range of positive 10% to 
negative 25% at a one year interval. As shown in the following table, the 
Company's 

<PAGE> 12

one year cumulative GAP was negative 23.85% of total assets at December 31, 
1996, which is within the requirements of the asset/liability management 
policy. The Company's one year cumulative GAP at December 31, 1995 was 
negative 7.18% of total assets. The change is primarily due to increases in 
securities and loans that reprice after one year of $71.6 million, partially 
offset by an increase in interest bearing liabilities that reprice after one 
year of $8.2 million. Assets and liabilities shown in the table are 
considered to reprice at the earlier of maturity or the next contractual 
repricing date. Nonperforming loans totaling $2.0 million have been excluded 
from this analysis. Regular savings, NOW and Super NOW and money market 
deposit accounts, totaling $156.8 million, are subject to immediate 
withdrawal and repricing, and are therefore included in the 0--6 month time 
period; however, this withdrawal and repricing assumption is not likely to 
occur. 


                   INTEREST RATE SENSITIVITY GAP ANALYSIS 
                            at December 31, 1996 
 
<TABLE>
<CAPTION>
                                                                    Sensitivity Period
                                          --------------------------------------------------------------------------
                                              0--6       6 Months--     1--3         3--5        Over 
                                             Months        1 Year       Years        Years      5 Years      Total 
                                          ------------   ----------   ----------   ---------   ---------   ---------
                                                                     ($ In Thousands) 
 
<S>                                       <C>            <C>          <C>          <C>         <C>        <C>
Interest Earning Assets: 
  Loans and loans held for sale           $   38,273     $ 113,845    $  40,998    $  4,444    $  7,782   $ 205,342
  Interest bearing deposits in FHLBB          17,993                                                         17,993 
  Securities, including stock in FHLBB        16,036                     58,944      18,379      18,779     112,138 
                                          -------------------------------------------------------------------------
      Total                               $   72,302     $ 113,845    $  99,942    $ 22,823    $ 26,561   $ 335,473
                                          ========================================================================= 
 
Interest Bearing Liabilities: 
  Deposits                                $  221,415     $  21,496    $  26,996    $  2,434    $      9   $ 272,350 
  Securities sold under agreements to 
   repurchase and other borrowings            31,555            20           88          99         464      32,226
                                          -------------------------------------------------------------------------
    Total                                 $  252,970     $  21,516    $  27,084    $  2,533    $    473   $ 304,576
                                          =========================================================================
 
Period Sensitivity Gap                    $ (180,668)    $  92,329    $  72,858    $ 20,290    $ 26,088   $  30,897 
Cumulative Sensitivity Gap                $ (180,668)    $ (88,339)   $ (15,481)   $  4,809    $ 30,897   $  30,897 
Cumulative Sensitivity Gap as a 
 Percent of Total Assets                      (48.77)%      (23.85)%      (4.18)%      1.30%       8.34%       8.34% 

</TABLE>
 
RESULTS OF OPERATIONS 
 
General

      The operating results of the Company depend primarily on the net 
interest and dividend income of its subsidiary bank, which is the 
difference between interest and dividend income on interest earning 
assets, primarily loans and securities, and interest expense on interest 
bearing liabilities, primarily deposits and securities sold under 
agreements to repurchase and other borrowings. The Company's operating 
results are also affected by the level of its provision for possible loan 
losses, noninterest income, including net gains on sales of securities 
available for sale and loans, fee and service charge income, and its 
noninterest expenses. 
 
Comparison of Operating Results for the Years 
 Ended December 31, 1996 and 1995 
 
Net Earnings 
 
      Operations in 1996 resulted in net earnings of $3.8 million, an 
increase of $345 thousand or 10.04% over net earnings of $3.4 million for 
1995. Earnings per common share were $1.79 in 1996 ($1.78 fully diluted), 
an increase of 13.29% over $1.58 in 1995 ($1.57 fully diluted). 
 
      Earnings before income taxes were $5.7 million in 1996, an increase 
of $417 thousand or 7.86% over earnings before income taxes of $5.3 
million in 1995. Earnings increases in 1996 compared to 1995, related 
primarily to increases in net interest and dividend income, net gains on 
sales of securities available for sale and loans and a decrease 

<PAGE> 13

in the provision for possible loan losses, partially offset by an increase in 
noninterest expense. 

Net Interest and Dividend Income 
 
      Net interest and dividend income was $13.7 million and $13.6 million 
in 1996 and 1995, respectively. The increase of $99 thousand in 1996 
compared to 1995 relates to an increase of $19.6 million or 6.57% in 
average interest earning assets to $317.9 million in 1996 from $298.3 
million in 1995, offset by a decrease in the interest rate spread from 
4.16 % in 1995 to 3.95% in 1996. 
 
      Interest income on loans decreased $254 thousand from $18.3 million 
in 1995 to $18.0 million in 1996. The decrease in 1996 was primarily the 
result of a decrease in the average yield earned from 9.56% in 1995 to 
9.37% in 1996, partially offset by an increase in average balances of $1.2 
million to $192.9 million in 1996 from $191.7 million in 1995. The 
decrease in yields in 1996 compared to 1995 reflects the lower interest 
rate environment for loans during 1996 compared to 1995. Relatively stable 
interest rates and competition for loans among financial institutions in 
the Company's market areas contributed to the lower interest rate 
environment during 1996. Management expects that the competition for loans 
will continue, which could reduce average yields realized on loans, 
thereby reducing the interest rate spread in future periods. The increase 
in average balances in the loan portfolio in 1996 compared to 1995, 
although relatively insignificant at less than 1% for the year, reflects 
relatively weak loan demand in the first half of the year, where average 
balances in fact decreased, and stronger loan demand in the last half of 
the year. Residential real estate loan demand was strong throughout most 
of 1996; however, commercial real estate loan demand was strong only 
during the latter part of the year. Additionally, beginning in July of 
1996 the Company began retaining for its portfolio, fifteen year fixed 
rate residential real estate loans which prior to that time were being 
sold in the secondary mortgage market. 
 
      Interest and dividend income on securities, including stock in FHLBB 
increased $1.3 million or 23.32% to $6.7 million in 1996 from $5.4 million 
in 1995. The increase in 1996 compared to 1995, was primarily the result 
of an increase in the average yield earned to 6.11% in 1996 from 5.90% in 
1995, coupled with an increase in average balances of $17.6 million or 
19.12% to $109.8 million in 1996 from $92.2 million in 1995. The increase 
in yield relates primarily to the reinvestment of amounts from maturing 2 
to 3 year U.S. Treasury obligations as well as the investment of new funds 
into higher yielding 3 to 5 year U.S. government agency obligations. This 
had the impact of changing the mix of the Company's investment in debt 
securities from approximately 69% in U.S. Treasury obligations at December 
31, 1995 to approximately 66% in U.S. government agency obligations at 
December 31, 1996. Additionally, the weighted average life of the 
Company's debt securities portfolio, although remaining relatively short 
at 27 months at December 31, 1996, was longer than the weighted average 
life of 17 months at December 31, 1995. 
 
      Interest income on interest bearing deposits with the FHLBB, 
decreased $47 thousand or 5.77% from $814 thousand in 1995 to $767 
thousand in 1996. The decrease in 1996 compared to 1995, is primarily 
related to a decrease in average yield earned from 5.64% in 1995 to 5.05% 
in 1996, partially offset by a slight increase in average balances of $775 
thousand or 5.37% to $15.2 million in 1996 from $14.4 million in 1995. The 
lower yield in 1996 compared to 1995, reflects the generally lower 
interest rate environment for short term overnight investments in 1996 
compared to 1995. 
 
      Interest expense on deposits increased $1.1 million or 12.22% to 
$10.6 million in 1996 from $9.5 million in 1995. The increase in 1996 
compared to 1995, is the result of an increase of $22.4 million or 9.24% 
in the average balances of interest bearing deposits to $264.3 million in 
1996 from $241.9 million in 1995, coupled with an increase in the cost of 
those deposits to 4.02% in 1996 from 3.92% in 1995. The opening of a new 
branch office in April 1996, the continued success of new deposit account 
products introduced in 1995 and the continuation of higher rates of 
interest offered on certain deposit products in 1996 resulted in the 
higher average balances in deposits and the higher cost of those deposits 
in 1996 compared to 1995. 
 
      Interest expense on securities sold under agreements to repurchase 
and other borrowings decreased $289 thousand or 19.33% from $1.5 million 
in 1995 to $1.2 million in 1996. The decrease in 1996 compared to 1995, 
was primarily the result of a decrease in average balances of $1.8 million 
or 6.40% to $25.5 million in 1996 from $27.3 in 1995, coupled with a 
decrease in the cost of those borrowings to 4.73% in 1996 from 5.48% in 
1995. The lower cost of borrowings related primarily to the lower interest 
rate environment for short term securities sold under agreements to 
repurchase that was prevalent during 1996, as well as the repayment of all 
short-term borrowings with the FHLBB in 1995, which were at a higher rate 
of interest than securities sold under agreements to repurchase. The 
decrease in the average balances related primarily to repayments of short-
term borrowings with the FHLBB in 1995 which were not outstanding in 1996, 
partially offset by an increase in the average balances of securities sold 
under agreements to repurchase of $3.6 million to $24.7 million in 1996 
from $21.1 million in 1995. This increase was the result of local 
municipalities making greater use of these products when investing their 
excess funds. 

<PAGE> 14
 
Average Balance Sheets and Net Interest 
 and Dividend Income 
 
      The following table presents, for the periods indicated, average 
balances, the total dollar amount of interest and dividend income from 
interest earning assets and their resultant yields, as well as the 
interest expense on interest bearing liabilities, and their resultant 
costs: 
 
<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                       ------------------------------------------------------------------------------------------
                                                  1996                           1995                           1994 
                                       ----------------------------   ----------------------------   ----------------------------
                                       Average               Yield/   Average               Yield/   Average               Yield/
                                       Balance    Interest   Cost     Balance    Interest   Cost     Balance    Interest   Cost 
                                       --------   --------   ------   --------   --------   ------   --------   --------   ------
                                              ($ In Thousands) 
<S>                                    <C>        <C>        <C>      <C>        <C>        <C>      <C>        <C>        <C>
Assets 
  Interest earning assets 
    Loans and loans held for sale <F1> $192,898   $18,073    9.37%    $191,696   $18,327    9.56%    $189,034   $15,587    8.25%
    Interest bearing deposits
     in FHLBB                            15,201       767    5.05       14,426       814    5.64        4,793       149    3.11 
    Securities, including stock 
     in FHLBB <F2>                      109,797     6,710    6.11       92,171     5,441    5.90       89,729     4,608    5.14 
                                       --------   -------             --------   -------             --------   -------
      Total interest earning assets     317,896    25,550    8.04      298,293    24,582    8.24      283,556    20,344    7.17 
                                                  -------                        -------                        -------
    Non-interest earning assets          37,954                         32,646                         30,164 
    Allowance for possible loan 
     losses                              (3,751)                        (3,830)                        (3,702) 
                                       --------                       --------                       --------
      Total assets                     $352,099                       $327,109                       $310,018
                                       ========                       ========                       ======== 
 
Liabilities and Stockholders' Equity 
  Interest bearing liabilities 
    Savings deposits                   $156,621     4,690    2.99     $142,695      4,139   2.90     $149,333     3,412    2.28 
    Time deposits                       107,689     5,946    5.52       99,248      5,339   5.38       76,967     2,935    3.81 
                                       --------   -------             --------   --------            --------   -------
      Total interest bearing deposits   264,310    10,636    4.02      241,943      9,478   3.92      226,300     6,347    2.80 
    Securities sold under agreements 
     to repurchase and other 
     borrowings                          25,523     1,206    4.73       27,269      1,495   5.48       29,086     1,357    4.67
                                       --------   -------             --------   --------            --------   -------
      Total interest bearing 
       liabilities                      289,833    11,842    4.09      269,212     10,973   4.08      255,386     7,704    3.02
                                                  -------                         -------                       -------
  Non-interest bearing liabilities 
    Demand deposits                      29,766                         27,685                         27,027 
    Other liabilities                     2,164                          2,118                          1,302
                                       --------                       --------                       --------
      Total non-interest bearing 
       liabilities                       31,930                         29,803                         28,329 
  Stockholders' equity                   30,336                         28,094                         26,303
                                       --------                       --------                       -------- 
      Total liabilities and 
       stockholders' equity            $352,099                       $327,109                       $310,018
                                       ========                       ========                       ======== 
  Net interest and dividend income/
   interest rate spread                           $13,708    3.95%                $13,609   4.16%               $12,640    4.15%
                                                  =======    =====                =======   =====               =======    =====
 
  Net earning balance/net yield on 
   interest earning assets             $ 28,063              4.31%    $ 29,081              4.56%    $ 28,170              4.46% 
                                       ========              =====    ========              =====    ========              =====
--------------------
<FN>
<F1>  Loans on nonaccrual status are included in the average balances for 
      all periods presented. 

<F2>  The yield on securities, including stock in FHLBB is calculated using  
      interest income divided by the average balance of the amortized  
      historical cost. 
</FN>

</TABLE>

<PAGE> 15
 
Rate Volume Analysis 
 
      The following table presents the dollar amount of changes in 
interest and dividend income and interest expense for each major component 
of interest earning assets and interest bearing liabilities, and the 
amount of change attributable to changes in average balances (volume), 
average rates, and average balances and rates for the periods indicated. 
 
<TABLE>
<CAPTION>

                                                             Year Ended December 31, 1996 vs. 1995 
                                                                   Increase (Decrease) Due To
                                                         ---------------------------------------------
                                                         Volume      Rate      Rate/Volume     Total 
                                                         -------   ---------   -----------   ---------
                                                                        (In Thousands) 
 
<S>                                                      <C>       <C>           <C>         <C> 
Interest income on loans                                 $   115   $   (364)     $   (5)     $   (254) 
Interest income on interest bearing deposits in FHLBB         44        (85)         (6)          (47) 
Interest and dividend income on securities and stock
 in FHLBB                                                  1,040        194          35         1,269 
                                                         --------------------------------------------
      Total interest and dividend income                   1,199       (255)         24           968
                                                         --------------------------------------------
Interest expense on deposits                                 877        242          39         1,158 
Interest expense on securities sold under agreements 
 to repurchase and other borrowings                          (96)      (205)         12          (289)
                                                         --------------------------------------------
      Total interest expense                                 781         37          51           869
                                                         -------------------------------------------- 
      Net interest and dividend income                   $   418   $   (292)     $  (27)     $     99
                                                         ============================================ 
 
<CAPTION>
                                                             Year Ended December 31, 1995 vs. 1994 
                                                                   Increase (Decrease) Due To
                                                         ---------------------------------------------
                                                         Volume      Rate      Rate/Volume     Total
                                                         -------   ---------   -----------   ---------
                                                                        (In Thousands) 
 
<S>                                                      <C>       <C>           <C>         <C>
Interest income on loans                                 $   220   $  2,476      $   44      $  2,740 
Interest income on interest bearing deposits in FHLBB        300        121         244           665 
Interest and dividend income on securities and stock 
 in FHLBB                                                    126        682          25           833
                                                         --------------------------------------------
      Total interest and dividend income                     646      3,279         313         4,238
                                                         -------------------------------------------- 
Interest expense on deposits                                 438      2,535         158         3,131 
Interest expense on securities sold under agreements 
 to repurchase and other borrowings                          (85)       236         (13)          138
                                                         -------------------------------------------- 
      Total interest expense                                 353      2,771         145         3,269
                                                         -------------------------------------------- 
      Net interest and dividend income                   $   293   $    508      $  168      $    969
                                                         ============================================ 
</TABLE>
 
Provision for Possible Loan Losses 
 
      The provision for possible loan losses was $650 thousand in 1996, 
representing an $85 thousand or 11.56% decrease from the provision of $735 
thousand in 1995. The decrease in the provision resulted primarily from 
the decrease in net loans charged off in 1996 compared to 1995, as well as 
management's overall evaluation of the loan portfolio and the adequacy of 
the level of the allowance for possible loan losses in relation to total 
loans and nonperforming loans. Loans charged off in 1996 were $1.2 million 
compared to $1.4 million in 1995. Recoveries of loans previously charged 
off were $515 thousand in 1996 compared to $144 thousand in 1995. Net 
loans charged off were $678 thousand in 1996 compared to $1.3 million in 
1995. 
 
Noninterest Income 
 
      Noninterest income was $3.2 million in 1996, an increase of $666 
thousand or 26.48% from $2.5 million in 1995. 
 
      The increase in 1996 over 1995, was primarily attributable to an 
increase in net gains on sales of securities available for sale of $361 
thousand and an increase in net gains on sales of loans of $238 thousand. 
Net gains on sales of loans increased primarily as a result of the 
Company's adoption of SFAS No. 122, Accounting for Mortgage Servicing 
Rights, which increased net gains on sales of loans by $257 thousand. 
 
<PAGE> 16

Noninterest Expense 
 
      Noninterest expense was $10.5 million in 1996, an increase of $433 
thousand or 4.30% over $10.1 million in 1995. 
 
      Salaries and benefits expense increased $398 thousand or 7.89% to 
$5.4 million in 1996 from $5.0 million in 1995. The increase in 1996 was 
attributable to increases in salary and compensation expense of $495 
thousand and decreases in benefit expenses of $97 thousand. The increase 
in salary and compensation expense was the result of normal salary 
increases of approximately 4.43%, or $180 thousand, $220 thousand in 
compensation for the reimbursement of personal income taxes to certain 
officers upon their exercise of non-statutory stock options during 1996 
and other salary increases of $95 thousand relating primarily to higher 
salaries associated with loan origination and one additional full time 
equivalent employee during the year. The after tax impact of the expense 
associated with the reimbursement of taxes upon the exercise by certain 
officers of non-statutory stock options was offset by an income tax 
benefit to the Company upon the exercise of these options, which benefit 
was credited to additional paid-in capital and which is reflected in the 
Consolidated Statement of Stockholders' Equity. The decrease in benefits 
expense of $97 thousand relates to a decrease in health insurance costs of 
$228 thousand because of better health experience of employees within the 
Company's self insured health insurance plan, partially offset by 
increases in payroll taxes, retirement and other benefits. 
 
      Occupancy and equipment expense increased $259 thousand or 14.99% to 
$2.0 million in 1996 from $1.7 million in 1995. The increase was primarily 
attributable to increases in depreciation expense of $96 thousand, 
maintenance contracts of $76 thousand and software development expenses of 
$30 thousand. These increases were the result of new equipment associated 
with the Company upgrading its data processing systems during the third 
quarter of 1995 and making further enhancements to those systems during 
1996. 
 
      Expenses associated with other real estate owned decreased $161 
thousand or 41.49% to $227 thousand in 1996 from $388 thousand in 1995. 
The decrease was primarily the result of a decrease in net foreclosure and 
holding costs of $72 thousand, to $275 thousand in 1996 compared to $347 
thousand in 1995, as a result of lower levels of other real estate owned 
in the Company's portfolio in 1996 compared to 1995 and a decrease in 
provisions for loss subsequent to foreclosure of $102 thousand, to $101 
thousand in 1996 from $203 thousand in 1995. 
 
      Other noninterest expense decreased $63 thousand in 1996 compared to 
1995, staying constant at $2.9 million each year. Components with 
significant changes in other noninterest expense were advertising, FDIC 
deposit insurance premiums and a special assessment by the FDIC to 
recapitalize the SAIF on the Company's SAIF-assessable OAKAR deposits. 
Advertising expense decreased $112 thousand to $220 thousand in 1996 from 
$332 thousand in 1995, as the amount expended to advertise new deposit 
products in 1995 was reduced in 1996. FDIC deposit insurance premiums 
decreased $210 thousand to $73 thousand in 1996 from $283 thousand in 
1995. The decrease is the result of the FDIC further decreasing BIF 
deposit insurance premiums in 1996 compared to 1995 as a result of the BIF 
being fully recapitalized in 1995. Further significant decreases in FDIC 
deposit insurance premiums are not expected. The special SAIF assessment 
on the Company's SAIF-assessable OAKAR deposits was $187 thousand in 1996 
compared to $0 in 1995, as a result of the FDIC making this special 
assessment for the purpose of recapitalizing the SAIF as a result of 
legislation signed by the President on September 30, 1996. Such an 
assessment is not expected in 1997. 
 
Income Taxes 
 
      Income tax expense increased $72 thousand or 3.84%, but remained 
relatively constant at $1.9 million in 1996 and 1995 and represented 
effective tax rates of 34.0% and 35.3%, respectively, of pretax income. 
 
Comparison of Operating Results for the Years 
 Ended December 31, 1995 and 1994 
 
Net Earnings 
 
      Operations in 1995 resulted in net earnings of $3.4 million, an 
increase of $612 thousand or 21.68% over net earnings of $2.8 million for 
1994. Net earnings per common share were $1.58 ($1.57 fully diluted) in 
1995, an increase of 24.41% over $1.27 ($1.26 fully diluted) in 1994. 
 
      Earnings before income taxes were $5.3 million in 1995, an increase 
of $1.2 million or 30.26% over $4.1 million in 1994. Earnings increases in 
1995 compared to 1994 related primarily to an increase in net interest and 
dividend income, increases in net gains on securities transactions and 
sales of loans and a slight decrease in noninterest expense, partially 
offset by an increase in the provision for possible loan losses. 

<PAGE> 17
 
Net Interest and Dividend Income 
 
      Net interest and dividend income was $13.6 million and $12.6 million 
in 1995 and 1994, respectively. The increase in 1995 of $969 thousand or 
7.67% over 1994, relates primarily to an increase in the net yield on 
interest earning assets to 4.56 % in 1995 from 4.46% in 1994, coupled with 
an increase in average interest earning assets to $298.3 million in 1995 
from $283.6 million in 1994. 
 
      The interest rate spread for the years ended December 31, 1995 and 
1994, was 4.16% and 4.15%, respectively. 
 
      Interest income on loans increased $2.7 million or 17.58% from $15.6 
million in 1994 to $18.3 million in 1995. The increase in 1995 was 
primarily the result of an increase in the average yield earned to 9.56% 
in 1995 from 8.25% in 1994 and a slight increase in average balances to 
$191.7 million in 1995 from $189.0 million in 1994. The increase in yield 
reflects the upward trend in interest rates during the last three quarters 
of 1994 and through the first quarter of 1995 with interest rates 
stabilizing throughout most of the remainder of 1995 and trending downward 
slightly during the latter part of 1995. Therefore, adjustable rate loans, 
which comprise a majority of the Company's loan portfolio adjusted for the 
most part to higher rates in 1995. The slight increase in average balances 
in the loan portfolio in 1995 compared to 1994 reflects weak loan demand 
in the commercial and commercial real estate sectors of the market. 
Additionally, as interest rates trended lower in the latter part of 1995, 
many residential borrowers with adjustable rate loans refinanced into 
fixed rate loans which the Company sold into the secondary mortgage 
market, thereby reducing the Company's portfolio of residential real 
estate loans. 
 
      Interest and dividend income on securities, including stock in FHLBB 
increased $833 thousand or 18.08% to $5.4 million in 1995 from $4.6 
million in 1994. The increase in 1995 compared to 1994, was primarily the 
result of an increase in the average yield earned to 5.90% in 1995 from 
5.14% in 1994 coupled with a slight increase in average balances to $92.2 
million in 1995 from $89.7 million in 1994. The increase in yield reflects 
the upward trend in interest rates during the last three quarters of 1994 
and the first quarter of 1995 with maturing securities reinvested and new 
investments in securities invested at higher interest rates during 1995 
than during 1994. 
 
      Interest income on interest bearing deposits with the FHLBB, 
increased $665 thousand to $814 thousand in 1995 from $149 thousand in 
1994. The increase in 1995 compared to 1994, is primarily related to an 
increase in average balances to $14.4 million in 1995 compared to $4.8 
million in 1994, coupled with an increase in average yield earned to 5.64% 
in 1995 from 3.11% in 1994. The increase in average balances was primarily 
attributable to the flattening and inversion of the interest rate yield 
curve during the latter part of 1995, making these investments more 
attractive than investments in 2 to 3 year fixed income securities from a 
yield standpoint. The increase in yields relates to the higher yields 
realized on these investments in 1995 as compared to lower rates in early 
1994, which is when the Company was invested in these investments in 1994. 
During the latter part of 1994, as rates increased, these investments were 
transferred into investments in 2 to 3 year fixed income securities. 
 
      Interest expense on deposits increased $3.2 million or 49.33% to 
$9.5 million in 1995 from $6.3 million in 1994. The increase in 1995 
compared to 1994, is the result of an increase of $15.6 million in the 
average balances of interest bearing deposits to $241.9 million in 1995 
from $226.3 million in 1994,  coupled with an increase in the cost of 
those deposits to 3.92% in 1995 from 2.80% in 1994. New deposit account 
products, coupled with higher market rates of interest offered by the 
subsidiary bank in 1995, resulted in the higher average balances in 
deposits and the higher cost of deposits. 
 
      Interest expense on securities sold under agreements to repurchase 
and other borrowings increased $138 thousand or 10.17% to $1.5 million in 
1995 from $1.4 million in 1994. The increase in 1995 compared to 1994, was 
primarily the result of an increase in the cost of borrowings to 5.48% in 
1995 from 4.67% in 1994, partially offset by a decrease in the average 
balances of borrowings to $27.3 million in 1995 from $29.1 million in 
1994. 
 
Provision for Possible Loan Losses 
 
      The provision for possible loan losses was $735 thousand and $600 
thousand, respectively, in 1995  and 1994. Total loans charged against the 
allowance were $1.4 million and $421 thousand, respectively, in 1995 and 
1994. Recoveries of loans previously charged off were $144 thousand and 
$47 thousand, respectively, in 1995 and 1994. The increase in the 
provision of $135 thousand or 22.50% in 1995 compared to 1994, was 
primarily the result of the increased level of loan charge offs in 1995. 
The increase in charge offs in 1995 compared to 1994, was primarily the 
result of an increase in commercial, financial and agricultural loan 
charge offs of $757 thousand, an increase in residential real estate loan 
charge offs of $129 thousand and an increase in commercial real estate 
loan charge offs of $101 thousand. 

<PAGE> 18
 
Noninterest Income 
 
      Noninterest income was $2.5 million and $2.2 million, respectively, 
in 1995 and 1994. 
 
      The increase in 1995 of $318 thousand or 14.47% over 1994, was 
primarily attributable to an increase in net gains on sales of securities 
available for sale of $131 thousand and a decrease in net losses on 
trading securities of $141 thousand. 
 
Noninterest Expense 
 
      Noninterest expense was $10.1 million and $10.2 million in 1995 and 
1994, respectively. The Company has closely monitored and continues its 
efforts to reduce noninterest expense. 
 
      Salaries and benefits expense increased $329 thousand to $5.0 
million in 1995 from $4.7 million in 1994. The increase in 1995 over 1994, 
was primarily attributable to salary increases of $130 thousand, as a 
result of average salary increases of 4.3% and an increase in health 
insurance costs of $180 thousand, associated with the Company's self 
insured health insurance plan.  
 
      Occupancy and equipment expense decreased $104 thousand or 5.68% to 
$1.7 million in 1995 from $1.8 million in 1994. The decrease is primarily 
attributable to a decrease in depreciation expense of $34 thousand and 
decreases in costs associated with maintenance contracts of $29 thousand 
and insurance expense of $18 thousand as a result of reviewing and 
renegotiating certain of these contracts. 
 
      Expenses associated with other real estate owned decreased $101 
thousand or 20.65% to $388 thousand in 1995 from $489 thousand in 1994. 
The decrease was primarily attributable to a reduction in net foreclosure 
and holding costs of $36 thousand, from $383 thousand in 1994 to $347 
thousand in 1995, as a result of lower levels of other real estate owned 
in the Company's portfolio in 1995 compared to 1994 and an increase in 
gains on sales of other real estate owned of $95 thousand, to $162 
thousand in 1995 from $67 thousand in 1994, partially offset by an 
increase in the provision for loss subsequent to foreclosure of $30 
thousand, from $173 thousand in 1994 to $203 thousand in 1995. 
 
      Other noninterest expenses decreased $205 thousand or 6.56% to $2.9 
million in 1995 from $3.1 million in 1994. The decrease was primarily 
attributable to a reduction in FDIC deposit insurance premiums of $298 
thousand to $283 thousand in 1995 from $581 thousand in 1994, partially 
offset by an increase in advertising costs of $97 thousand to $332 
thousand in 1995 from $235 thousand in 1994, associated with advertising 
new deposit account products and higher market rates of interest offered 
by the subsidiary bank in 1995. The decrease in FDIC deposit insurance 
premiums resulted primarily from the reduction of BIF deposit insurance 
premiums in August of 1995, effective as of June 1, 1995. The majority of 
the Company's deposits are insured by the BIF. A portion of the Company's 
deposits are OAKAR deposits (approximately $42.4 million at December 31, 
1995), which are deposits purchased from institutions previously insured 
by the SAIF. Such deposits continue to be insured by the SAIF. 
 
Income Taxes 
 
      Income tax expense in 1995 and 1994 was $1.9 million and $1.3 
million,  respectively. The increase in 1995 of $621 thousand compared to 
1994, relates primarily to the increase in pretax income. 
 
CAPITAL RESOURCES AND LIQUIDITY 
 
Capital Resources 
 
      The Company's capital base totaled $31.3 million or 8.45% of total 
assets at December 31, 1996 compared to $29.8 million, or 8.60% of total 
assets at December 31,1995. Stockholders' equity increased $1.5 million, 
as a result of earnings of $3.8 million, $376 thousand in unrealized gains 
on securities available for sale net of related income taxes, $217 
thousand from the issuance of common stock upon the exercise of stock 
options and $126 thousand of tax benefits associated with the exercise of 
non-statutory stock options, partially offset by cash dividends declared 
on common stock of $1.1 million and the purchase of common stock for 
treasury in the amount of $1.9 million. 
 
      On June 14, 1994, the Company announced a Stock Repurchase Plan 
("Plan"), whereby the Company's Board of Directors authorized the 
repurchase of up to 9% of its outstanding common shares from time to time. 
Shares repurchased under the Plan may be held in treasury, retired or used 
for general corporate purposes. As of August 13, 1996, the Company 
completed the repurchase of its stock under the Plan. 
 
      On August 13, 1996, the Company announced another Stock Repurchase 
Program ("Program"), whereby the Company's Board of Directors authorized 
the repurchase of up to 10% of its outstanding common shares from time to 
time. Shares repurchased under the program may be held in treasury, 
retired or used for general corporate purposes. As of December 31, 1996, 
the Company has repurchased 34,989 shares under the Program, representing 
1.77% of common shares outstanding at August 13, 1996. 

<PAGE> 19
 
      The Company and subsidiary bank are subject to various regulatory 
capital requirements administered by federal banking agencies. Failure to 
meet minimum requirements can initiate certain mandatory and possibly 
additional discretionary actions by regulators that, if undertaken, could 
have a direct material effect on the Company's consolidated financial 
statements. Under capital adequacy guidelines and the regulatory framework 
for prompt corrective action, the Company and subsidiary bank must meet 
specific capital guidelines that involve quantitative measures of their 
assets, liabilities, and certain off-balance-sheet items as calculated 
under regulatory accounting practices. The capital amounts and 
classification are also subject to qualitative judgments by the regulators 
about components, risk weightings, and other factors. 
 
      Quantitative measures established by regulation to ensure capital 
adequacy require the Company and subsidiary bank to maintain minimum 
amounts and ratios (set forth in the table below) of total and Tier I 
capital (as defined in the regulations) to risk weighted assets (as 
defined), and of Tier I capital (as defined) to average assets (as 
defined). Management believes, as of December 31, 1996, that the Company 
and subsidiary bank meet all capital adequacy requirements to which they 
are subject. 
 
      As of December 31, 1996, the most recent notification from the FDIC 
categorized the Company's wholly-owned subsidiary bank as "well-
capitalized" under the regulatory framework for prompt corrective action. 
To be categorized as well-capitalized, the subsidiary bank must maintain 
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as 
set forth in the table. There have been no conditions or events since that 
notification that management believes would cause a change in the 
subsidiary bank's categorization. 
 
      The Company's and the subsidiary bank's actual capital amounts and 
ratios as of December 31, 1996 and 1995 are presented in the following 
table: 
 
<TABLE>
<CAPTION>

                                                                                           To Be Well 
                                                                                        Capitalized Under
                                                                      For Capital       Prompt Corrective 
                                                    Actual         Adequacy Purposes    Action Provisions
                                               ----------------    -----------------    ------------------
                                               Amount    Ratio     Amount     Ratio     Amount    Ratio 
                                               -------   ------    -------   -------    -------   --------
 
<S>                                            <C>       <C>       <C>       <C>        <C>       <C>
As of December 31, 1996: 
  Total Capital (to Risk Weighted Assets): 
    Consolidated                               $29,791   14.23%    $16,748   >=8.00%    N/A 
    Subsidiary Bank                            $29,128   14.14%    $16,485   >=8.00%    $20,607   >=10.00% 
  Tier I Capital (to Risk Weighted Assets): 
    Consolidated                               $27,161   13.14%    $ 8,269   >=4.00%    N/A 
    Subsidiary Bank                            $26,501   13.03%    $ 8,138   >=4.00%    $12,206   >= 6.00% 
  Tier I Capital (to Average Assets): 
    Consolidated                               $27,161    7.50%    $14,494   >=4.00%    N/A 
    Subsidiary Bank                            $26,501    7.32%    $14,485   >=4.00%    $18,106   >= 5.00% 
 
As of December 31, 1995: 
  Total Capital (to Risk Weighted Assets): 
    Consolidated                               $27,992   15.85%    $14,132   >=8.00%    N/A 
    Subsidiary Bank                            $26,572   15.06%    $14,114   >=8.00%    $17,642   >=10.00% 
  Tier I Capital (to Risk Weighted Assets): 
    Consolidated                               $25,739   14.76%    $ 6,976   >=4.00%    N/A 
    Subsidiary Bank                            $24,320   13.96%    $ 6,967   >=4.00%    $10,450   >= 6.00% 
  Tier I Capital (to Average Assets): 
    Consolidated                               $25,739    7.47%    $13,788   >=4.00%    N/A 
    Subsidiary Bank                            $24,320    7.08%    $13,750   >=4.00%    $17,187   >= 5.00% 

</TABLE>

<PAGE> 20
 
Liquidity 
 
      The principal source of funds for the payment of dividends and 
expenses by the Company, is dividends paid to it by the subsidiary bank. 
Bank regulatory authorities generally restrict the amounts available for 
payment of dividends by the subsidiary bank to the Company if the effect 
thereof would cause the capital of the subsidiary bank to be reduced below 
applicable capital requirements. These restrictions indirectly affect the 
Company's ability to pay dividends. Dividends paid to the Company by the 
subsidiary bank in 1996, 1995 and 1994 were $2.0 million, $2.0 million and 
$1.9 million, respectively. The primary source of liquidity in the Company 
is its interest bearing deposit with its subsidiary bank of $719 thousand 
at December 31, 1996. Management believes that these funds are adequate to 
provide for the Company's needs. 
 
      The subsidiary bank monitors its level of short-term assets and 
liabilities, maintaining an appropriate balance between liquidity, risk 
and return. The major sources of liquidity are securities available for 
sale, maturities of securities held to maturity, interest bearing deposits 
in FHLBB and amortization, prepayments and maturities of outstanding 
loans. 
 
      The Company's and subsidiary bank's liquidity, represented by cash 
and due from banks, is a product of its operating activities, investing 
activities and financing activities. These activities are summarized as 
follows: 

<TABLE>
<CAPTION>
                                                       Year Ended December 31, 
                                                   ------------------------------
                                                     1996       1995       1994 
                                                   --------   --------   --------
                                                           (In Thousands) 
 
<S>                                                <C>        <C>        <C>
Cash and due from banks at beginning of year       $ 17,771   $  9,255   $  9,593 
 
Operating activities: 
  Net earnings                                        3,780      3,435      2,823 
  Adjustments to reconcile net earnings to net 
   cash provided by operating activities                788        354     25,939 
                                                   ------------------------------
Net cash provided by operating activities             4,568      3,789     28,762 
Net cash used in investing activities               (23,801)   (24,398)   (35,466) 
Net cash provided by financing activities            19,591     29,125      6,366
                                                   ------------------------------ 
Cash and due from banks at end of year             $ 18,129   $ 17,771   $  9,255
                                                   ============================== 
</TABLE>
 
      Cash provided by operating activities in 1996 and 1995 related 
primarily to net earnings. Cash provided by operating activities in 1994 
was primarily attributable to net earnings and a decrease in trading 
securities. 
 
      The Company's and subsidiary bank's primary investing activities are 
loans, securities and interest bearing deposits with the FHLBB. Net 
lending activities used $18.1 million in cash in 1996, provided $1.2 
million in cash in 1995 and used $10.5 million in cash in 1994. Cash used 
in lending activities in 1996 reflects the strong loan demand throughout 
the year for residential real estate loans and for the latter part of the 
year for commercial real estate loans. The cash used to fund this loan 
demand came from increases in deposits and securities sold under 
agreements to repurchase. Cash provided in lending activities in 1995 
reflects the weak loan demand  for 1995, whereas the use of cash in 
lending activities in 1994 reflects relatively strong loan demand in that 
year. During 1996, purchases of securities available for sale and held to 
maturity exceeded proceeds from sales of securities available for sale, 
maturities of securities available for sale and held to maturity and a 
decrease in interest bearing deposits in the FHLBB by $6.3 million. The 
cash used for these net purchases came primarily from increases in 
deposits and securities sold under agreements to repurchase. During 1995, 
purchases of securities available for sale and increases in interest 
bearing deposits in the FHLBB exceeded proceeds from sales of securities 
available for sale and maturities of securities available for sale and 
held to maturity by $26.7 million. The cash used for these net purchases 
came primarily from increases in deposits. During 1994, purchases of 
securities held to maturity, securities available for sale and stock in 
the FHLBB, exceeded proceeds from sales of securities available for sale, 
maturities of securities available for sale and held to maturity and 
decreases in interest bearing deposits in the FHLBB by $26.8 million. The 
funds used for these net purchases came primarily from operating 
activities.  
 
      Cash was provided by financing activities in 1996,  1995 and 1994. 
The Company's and subsidiary bank's primary financing activities are 
deposits, securities sold under agreements to repurchase and other 
borrowings. Total deposits increased by $17.0 million and $47.1 million in 
1996 and 1995, respectively, and decreased by $21.3 million in 1994. The 
increase in 1996 related primarily to the opening 

<PAGE> 21

of a new branch office in downtown Portsmouth, New Hampshire, the continued 
success of new deposit account products introduced in 1995 and the 
continuation of higher rates of interest offered on certain deposit products.
The funds provided by this increase were utilized to fund loan demand and 
purchase securities available for sale and held to maturity. The increase in 
1995 related to the introduction of new deposit account products, coupled 
with higher market rates of interest offered by the subsidiary bank. The funds 
provided by this increase were utilized to purchase securities and 
interest bearing deposits in the FHLBB, as well as to pay off all short-
term borrowings with the FHLBB. The decreases in deposits in 1994 related 
to the low interest rate environment, which continued to encourage 
depositors to seek other financial instruments outside of traditional 
banking products with higher yields. Short-term borrowings in the form of 
securities sold under agreements to repurchase increased $5.3 million, 
$4.2 million and $8.2 million, respectively, in 1996, 1995 and 1994. The 
funds provided by the increase in 1996 were utilized to fund loan demand 
and purchase securities available for sale and held to maturity.The 
increase in 1995 contributed to an increase in cash on hand and due from 
banks, while the increase in 1994 was used to fund deposit outflows. In 
1994, the subsidiary bank borrowed $21.2 million from the FHLBB, $20.9 
million of which was short-term overnight advances. During 1995, these 
short-term overnight borrowings were paid off with funds provided by 
deposit increases. In 1994, these borrowings were used to fund deposit 
outflows.

      Liquidity management is both a daily and long-term function of 
management. Excess liquidity is generally invested in short-term 
investments such as interest bearing deposits in the FHLBB and 2 to 5 year 
fixed income US Treasury and US Government agency securities and, to a 
lesser extent, corporate securities. If the subsidiary bank requires funds 
beyond its ability to generate them internally, borrowing arrangements 
with the FHLBB can provide additional funds. At December 31, 1996, the 
subsidiary bank had $691 thousand of outstanding borrowings with the 
FHLBB, with an additional borrowing capacity of approximately $154.4 
million. The outstanding FHLBB borrowings were used to fund affordable 
housing projects in the subsidiary bank's market area. 
 
      The Company anticipates that the subsidiary bank will have 
sufficient funds available to meet its current loan commitments. At 
December 31, 1996, the subsidiary bank had outstanding loan commitments of 
$22.8 million. For additional information as to loan commitments, see note 
L of Notes to Consolidated Financial Statements. Time deposits which are 
scheduled to mature in one year or less at December 31, 1996, totalled 
$86.2 million. Management believes that a significant portion of such 
deposits will remain with the subsidiary bank. 
 
      For a discussion of the limitations that federal law places on 
extensions of credit from banks to their parent holding company, see note 
Q of Notes to Consolidated Financial Statements. 
 
IMPACT OF INFLATION AND CHANGING PRICES 
 
      The consolidated financial statements and related consolidated 
financial data herein have been presented in accordance with generally 
accepted accounting principles which require the measurement of financial 
position and operating results in terms of historical dollars, without 
considering changes in the relative purchasing power of money over time 
due to inflation. Inflation can affect the Company in a number of ways, 
including increased operating costs and interest rate volatility. Unlike 
most industrial companies, virtually all the assets and liabilities of a 
financial institution are monetary in nature. As a result, interest rates 
have a more significant impact on a financial institution's performance 
than the effects of general levels of inflation. Interest rates do not 
necessarily move in the same direction or to the same extent as the prices 
of goods and services. Management attempts to minimize the effects of 
inflation by maintaining an approximate match between interest rate 
sensitive assets and interest rate sensitive liabilities and, where 
practical, by adjusting service fees to reflect changing costs. 
 
LEGAL PROCEEDINGS 
 
      The Company is a defendant in ordinary and routine pending legal 
actions incident to its business, none of which is believed by management 
to be material to the financial condition of the Company. 
 
RECENT ACCOUNTING DEVELOPMENTS 
 
      Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of. In March 1995, the FASB issued SFAS No. 
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 is 
effective for years beginning after December 15, 1995 and establishes 
accounting standards for the impairment of long-lived assets, certain 
identifiable intangibles, and goodwill related to those assets to be held 
and used and for long-lived assets and certain identifiable intangibles to 
be disposed of. This statement requires that long-lived assets, certain 
identifiable intangibles and goodwill related to those assets to be held 
and used by an entity be reviewed for impairment whenever events or 
changes in circumstances indicate that the carrying amount of an asset may 
not be recoverable. The Company's adoption of SFAS No. 121 on Janu-

<PAGE> 22

ary 1, 1996 had no significant effect on its consolidated financial statements.
 
      Accounting for Mortgage Servicing Rights. In May 1995, the FASB 
issued SFAS No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 
122"). The Statement, which was prospectively adopted by the Company on 
January 1, 1996, requires the Company to recognize as separate assets 
rights to service mortgage loans for others, however those servicing 
rights are acquired. When the Company acquires mortgage servicing rights 
either through the purchase or origination of mortgage loans (originated 
mortgage loan servicing rights) and sells those loans with servicing 
rights retained, it allocates the total cost of the mortgage loans to the 
mortgage servicing rights and the loans (without the mortgage servicing 
rights) based on their relative fair values. As a result of adoption, the 
Company recorded additional gains on sales of mortgage loans of 
approximately $257 thousand and amortization expense on originated 
mortgage servicing rights of $35 thousand for the year ended December 31, 
1996. The after tax impact of these items increased net earnings by $136 
thousand or $.06 per share. 
 
      Purchased and originated loan servicing rights are amortized on a 
basis which results in approximately level rates of return in proportion 
to, and over the period of, estimated net servicing income. 
 
      On a quarterly basis, the Company assesses the carrying values of 
originated and purchased mortgage servicing rights for impairment based on 
the fair value of such rights. A valuation model that calculates the 
present value of future cash flows is used to estimate such fair value. 
This valuation model incorporates assumptions that market participants 
would use in estimating future net servicing income including estimates of 
the cost of servicing loans, discount rate, float value, ancillary income, 
prepayment speeds and default rates. Any impairment is recognized as a 
charge to earnings through a valuation allowance. 
 
      Accounting for Stock-Based Compensation. In October 1995, the FASB 
issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 
123"). SFAS No. 123 establishes a fair value based method of accounting 
for stock-based compensation arrangements with employees, rather than the 
intrinsic value based method that is contained in Accounting Principles 
Board Opinion No. 25 ("Opinion 25"). However, SFAS No. 123 does not 
require an entity to adopt the new fair value based method for purposes of 
preparing its basic financial statements. Entities are allowed (1) to 
continue to use the intrinsic value based method under Opinion 25 or (2) 
to adopt the SFAS No. 123 fair value based method. SFAS No. 123 applies to 
all transactions in which an entity acquires goods or services by issuing 
equity instruments or by incurring liabilities where the payment amounts 
are based on the entity's common stock price, except for employee stock 
ownership plans. For entities not adopting the SFAS No. 123 fair value 
based method, SFAS No. 123 requires the entity to display in the footnotes 
to the financial statements pro forma net earnings and earnings per share 
information as if the fair value based method had been adopted. The 
accounting requirements of SFAS No. 123 are effective for transactions 
entered into in years that begin after December 15, 1995. The disclosure 
requirements are effective for financial statements for years beginning 
after December 15, 1995. The Company adopted SFAS No. 123 in 1996, by 
continuing to account for stock-based compensation under the intrinsic 
value based method under Opinion 25. The adoption of SFAS No. 123 had no 
effect on the Company's consolidated financial statements, since the 
Company granted no stock options in 1995 or 1996. Should the Company grant 
stock options in the future, the pro forma effects on net earnings and 
earnings per share will be determined as if the fair value based method 
had been applied and disclosed in the notes to consolidated financial 
statements. 
 
      Accounting for Transfers and Servicing of Financial Assets and 
Extinguishments of Liabilities. In June, 1996, the FASB issued SFAS No. 
125, "Accounting for Transfers and Servicing of Financial Assets and 
Extinguishments of Liabilities," ("SFAS No. 125") as amended by SFAS No. 
127, "Deferral of the Effective Date of Certain Provisions of SFAS 
Statement No. 125" ("SFAS No. 127"). SFAS No. 125 provides accounting and 
reporting standards for transfers and servicing of financial assets and 
extinguishments of liabilities based on consistent application of a 
financial-components approach that focuses on control. It distinguishes 
transfers of financial assets that are sales from transfers that are 
secured borrowings. Under the financial-components approach, after a 
transfer of financial assets, an entity recognizes all financial and 
servicing assets it controls and liabilities that have been extinguished. 
The financial-components approach focuses on the assets and liabilities 
that exist after the transfer. Many of these assets and liabilities are 
components of financial assets that existed prior to the transfer. If a 
transfer does not meet the criteria for a sale, the transfer is accounted 
for as a secured borrowing with a pledge of collateral. SFAS No. 125 is 
effective for transfers and servicing of financial assets and the 
extinguishments of liabilities occurring after December 31, 1996, and will 
be applied prospectively. Earlier or retroactive application of SFAS No. 
125 is not permitted. SFAS No. 127 defers cetain provisions of SFAS No. 
125 due to logistical issues connected to the application of those 
provisions using certain information systems and accounting processes. The 
provisions of SFAS No. 127 are not expected to impact the Company's 
application of SFAS No. 125. The Company expects that the adoption of SFAS 
No. 125 will not have a material impact on its consolidated financial 
statements. 

<PAGE> 23
 
                      [LETTERHEAD OF GRANT THORNTON LLP]

 
 
             REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 
 
To the Board of Directors and Stockholders 
Granite State Bankshares, Inc. 
 
      We have audited the accompanying consolidated statements of 
financial condition of Granite State Bankshares, Inc. and subsidiary as of 
December 31, 1996 and 1995, and the related consolidated statements of 
earnings, stockholders' equity and cash flows for each of the three years 
in the period ended December 31, 1996. These financial statements are the 
responsibility of the management of Granite State Bankshares, Inc.  Our 
responsibility is to express an opinion on these financial statements 
based on our audits. 
 
      We conducted our audits in accordance with generally accepted 
auditing standards. Those standards require that we plan and perform the 
audit to obtain reasonable assurance about whether the financial 
statements are free of material misstatement. An audit includes examining, 
on a test basis, evidence supporting the amounts and disclosures in the 
financial statements. An audit also includes assessing the accounting 
principles used and significant estimates made by management, as well as 
evaluating the overall financial statement presentation. We believe that 
our audits provide a reasonable basis for our opinion. 
 
      In our opinion, the financial statements referred to above, present 
fairly, in all material respects, the consolidated financial position of 
Granite State Bankshares, Inc. and subsidiary as of December 31, 1996 and 
1995 and the consolidated results of their operations and their 
consolidated cash flows for each of the three years in the period ended 
December 31, 1996, in conformity with generally accepted accounting 
principles. 
 
      As discussed in note A5 of notes to consolidated financial 
statements, the Company changed its method of accounting for mortgage 
servicing rights for the year ended December 31, 1996. 
 
 
 
                                       /s/ GRANT THORNTON LLP 
 
Boston, Massachusetts 
January 9, 1997 

<PAGE> 25 
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 
 
<TABLE>
<CAPTION>

                                                                          December 31,
                                                                      ---------------------
                                                                        1996        1995 
                                                                      ---------   ---------
                                                                          (In Thousands) 
                                   ASSETS 
 
<S>                                                                   <C>         <C>
Cash and due from banks                                               $  18,129   $  17,771 
Interest bearing deposits in Federal Home Loan Bank of Boston,
 at cost, which approximates market value                                17,993      24,239 
Securities available for sale (amortized cost $96,384,000 in 
 1996 and $92,547,000 in 1995)                                           99,423      95,016 
Securities held to maturity (market value $9,493,000 in 1996)             9,500 
Stock in Federal Home Loan Bank of Boston                                 3,215       3,215 
Loans held for sale                                                       1,025       1,985 
 
Loans                                                                   206,339     190,369 
  Less:  Unearned income                                                 (1,860)     (2,356) 
         Allowance for possible loan losses                              (3,676)     (3,704)
                                                                      ---------------------
Net loans                                                               200,803     184,309 

Premises and equipment                                                   10,783       9,937 
Other real estate owned                                                   1,512       2,691 
Other assets                                                              8,050       7,251 
                                                                      ---------------------
      Total assets                                                    $ 370,433   $ 346,414
                                                                      ===================== 
 
                    LIABILITIES AND STOCKHOLDERS' EQUITY 
 
LIABILITIES: 
Interest bearing deposits                                             $ 272,350   $ 255,208 
Noninterest bearing deposits                                             31,804      31,922 
                                                                      ---------------------
      Total deposits                                                    304,154     287,130 
 
Securities sold under agreements to repurchase                           31,535      26,189 
Long-term debt                                                              691         728 
Other liabilities                                                         2,757       2,578 
                                                                      ---------------------
      Total liabilities                                                 339,137     316,625 
 
STOCKHOLDERS' EQUITY: 
Preferred stock, $1.00 par value; authorized 7,500,000 shares; 
 none issued
Common stock, $1.00 par value; authorized 12,500,000 shares; 
 2,579,133 and 2,535,833 shares issued at December 31, 1996 and 
 1995, respectively                                                       2,579       2,536 
Additional paid-in capital                                               19,518      19,218 
                                                                      ---------------------
                                                                         22,097      21,754 
Retained earnings                                                        13,193      10,529 
Unrealized gain on securities available for sale, net of related
 tax effects                                                              2,006       1,630
                                                                      ---------------------
                                                                         37,296      33,913 
  Less:  Treasury stock, at cost, 600,080 and 500,252 shares at 
         December 31, 1996 and 1995, respectively                        (6,000)     (4,124)
                                                                      ---------------------
      Total stockholders' equity                                         31,296      29,789
                                                                      --------------------- 
      Total liabilities and stockholders' equity                      $ 370,433   $ 346,414
                                                                      ===================== 

</TABLE>


       The accompanying notes are an integral part of these statements.

<PAGE> 26
 
CONSOLIDATED STATEMENTS OF EARNINGS 
 
<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                                         ----------------------------------
                                                           1996         1995         1994 
                                                         --------     --------     --------
                                                        (In Thousands, except per share data) 

<S>                                                      <C>          <C>          <C>
Interest and dividend income 
  Loans                                                  $ 18,073     $ 18,327     $ 15,587 
  Debt securities available for sale                        5,853        4,522        2,789 
  Marketable equity securities available for sale             257          165          126 
  Securities held to maturity                                 394          533        1,114 
  Interest bearing deposits in Federal Home Loan Bank 
   of Boston                                                  767          814          149 
  Dividends on Federal Home Loan Bank of Boston stock         206          221          184 
  Trading securities                                                                    395 
                                                         ----------------------------------
      Total interest and dividend income                   25,550       24,582       20,344 
Interest expense 
  Deposits                                                 10,636        9,478        6,347 
  Short-term borrowings                                     1,155        1,483        1,342 
  Long-term debt                                               51           12           15
                                                         ---------------------------------- 
      Total interest expense                               11,842       10,973        7,704
                                                         ---------------------------------- 
      Net interest and dividend income                     13,708       13,609       12,640 
Provision for possible loan losses                            650          735          600 
                                                         ----------------------------------
      Net interest and dividend income after provision
       for possible loan losses                            13,058       12,874       12,040 
Noninterest income 
  Customer account fees and service charges                   941          969          988 
  Mortgage service fees                                       677          703          696 
  Net losses on trading securities                                                     (141) 
  Net gains on sales of securities available for sale         687          326          195 
  Net gains on sales of loans                                 554          316          261 
  Other                                                       322          201          198 
                                                         ----------------------------------
                                                            3,181        2,515        2,197 
Noninterest expense 
  Salaries and benefits                                     5,442        5,044        4,715 
  Occupancy and equipment                                   1,987        1,728        1,832 
  Other real estate owned                                     227          388          489 
  Other                                                     2,858        2,921        3,126 
                                                         ----------------------------------
                                                           10,514       10,081       10,162
                                                         ---------------------------------- 
      Earnings before income taxes                          5,725        5,308        4,075 
Income taxes                                                1,945        1,873        1,252
                                                         ---------------------------------- 
      NET EARNINGS                                       $  3,780     $  3,435     $  2,823
                                                         ================================== 
 
Net earnings per common share--primary                   $   1.79     $   1.58     $   1.27
                                                         ================================== 
 
Net earnings per common share--fully diluted             $   1.78     $   1.57     $   1.26
                                                         ================================== 
</TABLE>
 
       The accompanying notes are an integral part of these statements.

<PAGE> 27

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 
 
<TABLE>
<CAPTION>

                                                                                          Unrealized
                                                                                        Gain (Loss) on 
                                                    Additional                            Securities       Unearned 
                                          Common     Paid-in     Retained   Treasury      Available      Compensation 
                                           Stock     Capital     Earnings    Stock      for Sale, net        ESOP        Total 
                                          -------   ----------   --------   --------    --------------   ------------   --------
                                                                              (In Thousands) 

<S>                                       <C>        <C>         <C>        <C>            <C>             <C>          <C>
Balance as of December 31, 1993           $ 2,536    $ 19,218    $  6,029   $ (2,540)      $   288         $ (150)      $ 25,381 
Net earnings                                                        2,823                                                  2,823 
Payment of Employee Stock Ownership 
 Plan Indebtedness                                                                                             86             86 
Cash dividends declared on common 
 stock, $.36 per share                                               (769)                                                  (769) 
Unrealized loss on securities 
 available for sale, net of related 
 income taxes                                                                                 (991)                         (991) 
Purchase of common stock for treasury                                           (889)                                       (889)
                                          --------------------------------------------------------------------------------------
Balance as of December 31, 1994             2,536      19,218       8,083     (3,429)         (703)           (64)        25,641 
Net earnings                                                        3,435                                                  3,435 
Payment of Employee Stock Ownership 
 Plan Indebtedness                                                                                             64             64 
Cash dividends declared on common 
 stock, $.48 per share                                               (989)                                                  (989) 
Unrealized gain on securities 
 available for sale, net of related
 income taxes                                                                                2,333                         2,333 
Purchase of common stock for treasury                                           (695)                                       (695) 
                                          --------------------------------------------------------------------------------------
Balance as of December 31, 1995             2,536      19,218      10,529     (4,124)        1,630              0         29,789 
Net earnings                                                        3,780                                                  3,780 
Cash dividends declared on common 
 stock, $.56 per share                                             (1,116)                                                (1,116) 
Issuance of common stock upon exercise
 of stock options                              43         174                                                                217 
Tax benefit associated with the 
 exercise of non-statutory stock options                  126                                                                126 
Unrealized gain on securities available 
 for sale, net of related income taxes                                                         376                           376 
Purchase of common stock for treasury                                         (1,876)                                     (1,876)
                                          --------------------------------------------------------------------------------------
Balance as of December 31, 1996           $ 2,579    $ 19,518    $ 13,193   $ (6,000)      $ 2,006         $    0       $ 31,296
                                          ====================================================================================== 
</TABLE>

       The accompanying notes are an integral part of these statements.

<PAGE> 28
 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
 
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                      --------------------------------
                                                                        1996        1995        1994 
                                                                      --------    --------    --------
                                                                               (In Thousands) 
 
<S>                                                                   <C>         <C>         <C>
Increase (decrease) in cash and due from banks 
 
Cash flows from operating activities 
  Net earnings                                                        $  3,780    $  3,435    $  2,823 
  Adjustments to reconcile net earnings to net cash provided by 
   operating activities 
    Provision for possible loan losses                                     650         735         600 
    Provision for depreciation and amortization                          1,277       1,199       1,295 
    Accretion of security discounts net of premium amortizaton             (59)       (125)       (391) 
    Net decrease in trading securities                                                          23,362 
    Provision for loss on other real estate owned                          101         203         173 
    Deferred income taxes (benefits)                                       107        (107)       (139) 
    Realized gains on sales of securities available for sale, net         (687)       (326)       (195) 
    Realized losses on trading securities                                                          141 
    Loans originated for sale                                          (27,205)    (29,159)    (19,003) 
    Proceeds from sale of loans originated for sale                     28,719      28,154      21,891 
    (Increase) decrease in other assets                                   (822)        883      (2,329) 
    Increase (decrease) in other liabilities                              (155)       (115)      1,210 
    Decrease in unearned compensation--ESOP                                             64          86 
    Realized gains on sales of loans                                      (554)       (316)       (261) 
    Realization of unearned income                                        (435)       (574)       (434) 
    Realized gains on sales of other real estate owned                    (149)       (162)        (67) 
                                                                      --------------------------------
      Net cash provided by operating activities                          4,568       3,789      28,762
                                                                      -------------------------------- 
 
Cash flows from investing activities 
  Proceeds from sales of securities available for sale                  18,289       1,238       4,244 
  Proceeds from maturities of securities available for sale             42,000      11,998      15,000 
  Purchase of securities available for sale                            (63,380)    (31,236)    (70,522) 
  Purchase of securities held to maturity                              (12,500)                   (503) 
  Proceeds from maturities of securities held to maturity                3,000      15,500      14,500 
  Purchase of Federal Home Loan Bank of Boston stock                                            (1,996) 
  Loan (originations) repayments, net                                  (18,063)      1,183     (10,506) 
  Purchase of premises and equipment                                    (1,694)       (913)       (623) 
  Advances made on other real estate owned                                             (22)        (52) 
  Net (increase) decrease in interest-bearing deposits in Federal
   Home Loan Bank of Boston                                              6,246     (24,213)     12,480 
  Proceeds from sales of other real estate owned                         2,581       2,073       2,569 
  Other                                                                   (280)         (6)        (57) 
                                                                      --------------------------------
      Net cash used in investing activities                            (23,801)    (24,398)    (35,466) 
                                                                      --------------------------------
 
Cash flows from financing activities 
  Net increase (decrease) in demand, NOW, money market and 
   savings accounts                                                      6,791      17,656     (14,323) 
  Net increase (decrease) in time certificates                          10,233      29,445      (7,020) 
  Net increase in securities sold under agreements to repurchase         5,346       4,221       8,204 
  Increase (decrease) in short-term borrowings from Federal Home 
   Loan Bank of Boston                                                             (20,904)     20,904 
  Increase (decrease) in long-term borrowings from Federal Home 
   Loan Bank of Boston                                                     (37)        464         264 
  Repayment on liability relating to ESOP                                              (64)        (86) 
  Dividends paid on common stock                                        (1,083)       (998)       (688) 
  Issuance of common stock upon exercise of stock options                  217             
  Purchase of treasury stock                                            (1,876)       (695)       (889) 
                                                                      --------------------------------
      Net cash provided by financing activities                         19,591      29,125       6,366
                                                                      -------------------------------- 
      Net increase (decrease) in cash and due from banks                   358       8,516       (338) 
Cash and due from banks at beginning of year                            17,771       9,255       9,593
                                                                      -------------------------------- 
Cash and due from banks at end of year                                $ 18,129    $ 17,771    $  9,255 
                                                                      ================================
</TABLE>

 
        The accompanying notes are an integral part of these statements.
 
<PAGE> 29


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--Summary of Significant Accounting Policies

      The accounting and reporting policies of Granite State Bankshares, 
Inc. (the "Company") and its wholly-owned subsidiary, Granite Bank (the 
"subsidiary bank") conform to generally accepted accounting principles and 
to general practices within the banking industry.

      The subsidiary bank has been and continues to be a community 
oriented commercial bank offering a variety of financial services. The 
principal business of the subsidiary bank consists of attracting deposits 
from the general public and underwriting loans secured by residential and 
commercial real estate and other loans. The subsidiary bank also 
originates fixed rate residential real estate loans for sale in the 
secondary mortgage market. The subsidiary bank has nine full service 
offices and an additional thirteen remote automatic teller locations. The 
subsidiary bank is a full service community bank with a diversified 
lending operation that services Cheshire, Hillsborough, Strafford and 
Rockingham counties, New Hampshire.

      In preparing the financial statements, management is required to 
make estimates and assumptions that affect the reported amounts of assets 
and liabilities as of the dates of the balance sheets, and income and 
expense for the periods. Actual results could differ from those estimates.

      Material estimates that are particularly susceptible to change in 
the near-term relate to the determination of the allowance for possible 
loan losses and valuation of other real estate owned. In connection with 
the determination of the allowance for possible loan losses and the 
carrying value of other real estate owned, management obtains independent 
appraisals for significant properties.

      A substantial portion of the Company's loans are secured by real 
estate in New Hampshire. In addition, a majority of other real estate 
owned is located in New Hampshire. Accordingly, the ultimate 
collectibility of a substantial portion of the Company's loan portfolio 
and the recovery of all the other real estate owned is susceptible to 
changing conditions in New Hampshire.

      Certain 1995 and 1994 information has been reclassified to conform 
with the 1996 presentation. The following is a description of the 
significant accounting policies.

1. Principles of Consolidation

      The consolidated financial statements include the accounts of the 
Company and the subsidiary bank. All  significant intercompany 
transactions and balances have been eliminated in consolidation.

2. Securities

      The Company follows Financial Accounting Standards Board ("FASB") 
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting 
for Certain Investments in Debt and Equity Securities." Under SFAS No. 
115, debt securities that the Company has the positive intent and ability 
to hold to maturity are classified as held to maturity and reported at 
amortized cost; debt and equity securities that are bought and held 
principally for the purpose of selling in the near term are classified as 
trading and reported at fair value, with unrealized gains and losses 
included in earnings; and debt and equity securities not classified as 
either held to maturity or trading are classified as available for sale 
and reported at fair value, with unrealized gains and losses excluded from 
earnings and reported as a separate component of stockholders' equity, net 
of estimated income taxes. At December 31, 1996 and 1995 the Company had 
no securities classified as trading securities and at December 31, 1995 
had no securities classified as held to maturity.

      Premiums and discounts on securities are amortized or accreted into 
income on the straight-line method over the life of the investments. 
Income recognized by use of this method does not differ materially from 
that which would be recognized by use of the level-yield method. If a 
decline in fair value below the amortized cost basis of a security is 
judged to be other than temporary, the cost basis of the security is 
written down to fair value as a new cost basis and the amount of the 
write-down is included as a charge against net gains or losses on 
securities. Gains and losses on the sale of securities are recognized at 
the time of sale on a specific identification basis.

      In October 1994, the FASB issued SFAS No. 119, "Disclosure About 
Derivative Financial Instruments and Fair Value of Financial Instruments." 
SFAS No. 119 was effective for financial statements issued after December 
15, 1994 and requires financial statement disclosure of certain derivative 
financial instruments, defined as futures, forwards, swaps, option 
contracts, or other financial instruments with similar characteristics. 
The disclosure requirements of SFAS No. 119 had no material effect on the 
Company's consolidated financial condition or results of operations, as 
the Company has not invested in derivative financial instruments, as 
defined in SFAS No. 119.

3. Loans

      Real estate mortgage loans and other loans are stated at the amount 
of unpaid principal, less unearned income and the allowance for possible 
loan losses.

<PAGE> 30

      Interest on loans is included in income as earned based on rates 
applied to principal amounts outstanding. Accrual of interest on loans is 
discontinued either when reasonable doubt exists as to the full, timely 
collection of interest or principal, or when a loan becomes contractually 
past due by ninety days, unless the loan is well secured and in the 
process of collection. When a loan is placed on nonaccrual status, all 
interest previously accrued is reversed against current period interest 
income. Interest subsequently received on nonaccrual loans is either 
applied against principal or recorded as income according to management's 
judgment as to the collectibility of principal.

      The Company adopted SFAS No. 114, "Accounting by Creditors for 
Impairment of a Loan," on January 1, 1995. This standard requires that a 
creditor measure impairment based on the present value of expected future 
cash flows discounted at the loan's effective interest rate, except that 
as a practical expedient, a creditor may measure impairment based on a 
loan's observable market price, or the fair value of the collateral if the 
loan is collateral dependent. Regardless of the measurement method, a 
creditor must measure impairment based on the fair value of the collateral 
when the creditor determines that foreclosure is probable. In October 
1994, SFAS No. 114 was amended by SFAS No. 118, "Accounting by Creditors 
for Impairment of a Loan--Income Recognition and Disclosures," which 
allows creditors to use their existing methods for recognizing interest 
income on impaired loans. Because the Company already recognized such 
reductions of value on impaired loans through its provision for possible 
loan losses, the adoption of SFAS No. 114, as amended by SFAS No. 118, did 
not have a material impact on its financial condition or results of 
operations.

      Loan origination and commitment fees and certain direct loan 
origination costs are being deferred and amortized as an adjustment of the 
related loan yield over the contractual life of the loans.

4. Allowance for Possible Loan Losses

      The adequacy of the allowance for possible loan losses is evaluated 
on a regular basis by management. Factors considered in evaluating the 
adequacy of the allowance include previous loss experience, current 
economic conditions and their effect on borrowers and the performance of 
individual loans in relation to contract terms. The provision for possible 
loan losses charged to operations is based upon management's judgment of 
the amount necessary to maintain the allowance at a level adequate to 
absorb possible losses. Loan losses are charged against the allowance when 
management believes the collectibility of the principal is unlikely, and 
recoveries are credited to the allowance when received.

      Management believes that the allowance for possible loan losses is 
adequate. While management evaluates the allowance for possible loan 
losses based upon available information, future additions to the allowance 
may be necessary. Additionally, regulatory agencies review the Company's 
allowance for possible loan losses as part of their examination process. 
Such agencies may require the Company to recognize additions to the 
allowance based on judgments which may be different from those of 
management.

5. Mortgage Banking Activities

      Mortgage loans held for sale into the secondary market and 
commitments to fund such loans are carried at the lower of cost or 
estimated market value as determined by outstanding investor and 
origination commitments or, in the absence of such commitments, current 
investor yield requirements. Valuation adjustments are charged against 
gain/loss on sales of mortgage loans. Gains or losses on sales of mortgage 
loans are recognized at the time of the sale.

      In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage 
Servicing Rights, an Amendment of FASB Statement No. 65." The Statement, 
which was prospectively adopted by the Company on January 1, 1996, 
requires the Company to recognize as separate assets rights to service 
mortgage loans for others, however those servicing rights are acquired. 
When the Company acquires mortgage servicing rights either through the 
purchase or origination of mortgage loans (originated mortgage loan 
servicing rights) and sells those loans with servicing rights retained, it 
allocates the total cost of the mortgage loans to the mortgage servicing 
rights and the loans (without the mortgage servicing rights) based on 
their relative fair values. As a result of adoption, the Company recorded 
additional gains on sales of mortgage loans of approximately $257,000 and 
amortization expense on originated mortgage servicing rights of $35,000 
for the year ended December 31, 1996. The after tax impact of these items 
increased net earnings by $136,000, or $.06 per share.

      Purchased and originated loan servicing rights are amortized on a 
basis which results in approximately level rates of return in proportion 
to, and over the period of, estimated net servicing income.

      On a quarterly basis, the Company assesses the carrying values of 
originated and purchased mortgage servicing rights for impairment based on 
the fair value of such rights. A valuation model that calculates the 
present value 

<PAGE> 31

of future cash flows is used to estimate such fair value. This valuation 
model incorporates assumptions that market participants would use in 
estimating future net servicing income including estimates of the cost of 
servicing loans, discount rate, float value, ancillary income, prepayment 
speeds and default rates. Any impairment is recognized as a charge to 
earnings through a valuation allowance.

6. Premises and Equipment

      Premises and equipment are stated at cost less accumulated 
depreciation. Depreciation is computed using the straight-line method over 
the estimated useful lives of the assets. Useful lives are 15--50 years 
for bank buildings and 3--10 years for furniture and equipment.

      Gains or losses on routine dispositions are credited or charged to 
income. Maintenance and repairs are charged to expense as incurred, and 
improvements are capitalized.

7. Other Real Estate Owned

      Other real estate owned is comprised of properties acquired through 
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. 
Other real estate owned is recorded at the lower of the carrying value of 
the loan or the fair value of the property received less a valuation 
allowance for estimated costs to sell. Loan losses arising from the 
acquisition of such properties are charged against the allowance for 
possible loan losses. Provisions to reduce the carrying value to net 
realizable value are charged to current period earnings as realized and 
are reflected as an additional valuation allowance. Operating expenses and 
gains and losses upon disposition are reflected in earnings as realized.

8. Other Assets

      Goodwill arising from acquisitions is included in other assets, net 
of accumulated amortization, and is amortized on the straight-line basis 
over 15 years.

      Core deposit intangibles arising from acquisitions are included in 
other assets, net of accumulated amortization, and are amortized on an 
accelerated method over 8 years.

      Mortgage servicing rights are included in other assets, net of 
accumulated amortization, and are amortized on a basis which results in 
approximately level rates of return in proportion to, and over the period 
of, estimated net servicing income.

9. Impairment of Long-Lived Assets

      In March 1995, the FASB issued SFAS No. 121, "Accounting for the 
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed 
Of" ("SFAS No. 121"). SFAS No. 121 is effective for years beginning after 
December 15, 1995 and establishes accounting standards for the impairment 
of long-lived assets, certain identifiable intangibles, and goodwill 
related to those assets to be held and used and for long-lived assets and 
certain identifiable intangibles to be disposed of. This statement 
requires that long-lived assets, certain identifiable intangibles and 
goodwill related to those assets to be held and used by an entity be 
reviewed for impairment whenever events or changes in circumstances 
indicate that the carrying amount of an asset may not be recoverable. The 
Company's adoption of SFAS No. 121 on January 1, 1996, had no significant 
effect on its consolidated financial statements.

10. Fair Value of Financial Instruments

      In accordance with SFAS No. 107, Disclosures about Fair Value of 
Financial Instruments, the Company is required to disclose estimated fair 
values of financial instruments. Fair value estimates, methods, and 
assumptions are set forth below in note T of Notes to Consolidated 
Financial Statements.

11. Income Taxes

      The Company uses the asset and liability method of accounting for 
income taxes. Under the asset and liability method, deferred tax assets 
and liabilities are recognized for the future tax consequences 
attributable to differences between the financial statement carrying 
amounts of existing assets and liabilities and the respective tax bases 
and operating loss and tax credit carryforwards. Deferred tax assets and 
liabilities are measured using enacted tax rates expected to apply to 
taxable income in the years in which those temporary differences are 
expected to be recovered or settled. Under the asset and liability method, 
the effect on deferred tax assets and liabilities of a change in tax rates 
is recognized in earnings in the period that includes the enactment date.

      Tax credits are accounted for under the flow-through method as a 
reduction of income tax expense in the period they are realized.

12. Retirement and Benefit Plans

      The Company and its subsidiary bank have a non-contributory defined 
benefit Pension Plan covering substan-

<PAGE> 32

tially all of the Company's employees. Contributions are intended to provide 
for benefits attributed to services rendered to date and for those expected 
to be earned in the future.

      The Company sponsors a Supplemental Executive Retirement Plan 
("SERP"). The SERP is a nonqualified plan designed to provide supplemental 
retirement benefits to certain key employees, whose benefits under the 
Company's other retirement plans are limited by Federal tax laws.

      On August 19, 1986, the Company established an Employee Stock 
Ownership Plan ("ESOP"), covering eligible employees with one year of 
service as defined by the ESOP. In November 1993, the American Institute 
of Certified Public Accountants issued Statement of Position 93-6, 
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). 
SOP 93-6 addresses the accounting for shares of stock issued to employees 
by an employee stock ownership plan. SOP 93-6 requires that the employer 
record compensation expense in an amount equal to the fair value of shares 
committed to be released from the ESOP to employees. SOP 93-6 was 
effective for years beginning after December 15, 1993 and relates to 
shares purchased by an ESOP after December 31, 1992. For shares purchased 
by the ESOP prior to December 31, 1992, the shares allocated method is 
used to recognize compensation expense in the consolidated statements of 
earnings. The Company's adoption of SOP 93-6 on January 1, 1994 had no 
significant impact on consolidated financial position or results of 
operations at December 31, 1994 or for the year then ended.

13. Stock-Based Compensation

      In October 1995, the FASB issued SFAS No. 123, "Accounting for 
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a 
fair value based method of accounting for stock-based compensation 
arrangements with employees, rather than the intrinsic value based method 
that is contained in Accounting Principles Board Opinion No. 25 ("Opinion 
25"). However, SFAS No. 123 does not require an entity to adopt the new 
fair value based method for purposes of preparing its basic financial 
statements. Entities are allowed (1) to continue to use the intrinsic 
value based method under Opinion 25 or (2) to adopt the SFAS No. 123 fair 
value based method. SFAS No. 123 applies to all transactions in which an 
entity acquires goods or services by issuing equity instruments or by 
incurring liabilities where the payment amounts are based on the entity's 
common stock price, except for employee stock ownership plans. For 
entities not adopting the SFAS No. 123 fair value based method, SFAS No. 
123 requires the entity to display in the footnotes to the financial 
statements pro forma net earnings and earnings per share information as if 
the fair value based method had been adopted. The accounting requirements 
of SFAS No. 123 are effective for transactions entered into in years that 
begin after December 15, 1995. The disclosure requirements are effective 
for financial statements for years beginning after December 15, 1995. The 
Company adopted SFAS No. 123 in 1996, by continuing to account for stock-
based compensation under the intrinsic value based method under Opinion 
25. The adoption of SFAS No. 123 had no effect on the Company's 
consolidated financial statements, since the Company granted no stock 
options in 1995 or 1996. Should the Company grant stock options in the 
future, the proforma effects on net earnings and earnings per share will 
be determined as if the fair value based method had been applied and 
disclosed in the notes to the consolidated financial statements.

14. Earnings Per Common Share

      Primary earnings per common share for 1996, 1995 and 1994 were 
determined by dividing net earnings by the weighted average number of 
common shares outstanding. Outstanding common shares also include common 
stock equivalents which consist of certain outstanding stock options 
utilizing the treasury stock method, based upon the average market price 
of common stock during the year. Fully diluted earnings per share for 
1996, 1995 and 1994 were determined by dividing net earnings by the 
weighted average number of outstanding shares on a fully diluted basis. On 
a fully diluted basis, outstanding common shares include the outstanding 
stock options utilizing the treasury stock method, based upon the year end 
market price of the common stock. The average number of common shares 
outstanding (including common stock equivalents) for 1996, 1995 and 1994 
were 2,112,099, 2,175,734 and 2,229,075 shares, respectively (2,118,860, 
2,183,478 and 2,232,986 shares, respectively, fully diluted).

15. Transfers and Servicing of Financial Assets and Extin-
    guishments of Liabilities

      During 1996, the FASB issued SFAS No. 125, "Accounting for Transfers 
and Servicing of Financial Assets and Extinguishments of Liabilities," 
("SFAS No. 125") and SFAS No. 127, "Deferral of the Effective Date of 
Certain Provisions of SFAS No. 125" ("SFAS No. 127"). SFAS No. 125 
provides accounting and reporting standards for transfers and servicing of 
financial assets and extinguishments of liabilities based on consistent 
application of a financial-components approach that focuses on control. It 
distinguishes transfers of financial assets that are sales

<PAGE> 33

from transfers that are secured borrowings. Under the financial-components 
approach, after a transfer of financial assets, an entity recognizes all 
financial and servicing assets it controls and liabilities that have been 
extinguished. The financial-components approach focuses on the assets and 
liabilities that exist after the transfer. Many of these assets and 
liabilities are components of financial assets that existed prior to the 
transfer. If a transfer does not meet the criteria for a sale, the transfer 
is accounted for as a secured borrowing with a pledge of collateral. SFAS No. 
125 is effective for transfers and servicing of financial assets and the 
extinguishments of liabilities occurring after December 31, 1996, and will be 
applied prospectively. Earlier or retroactive application of this Statement 
is not permitted. SFAS No. 127 defers certain provisions of SFAS No. 125 due 
to logistical issues connected to the application of those provisions using 
certain information systems and accounting processes. The provisions of SFAS 
No. 127 are not expected to impact the Company's application of SFAS No. 125. 
The Company expects that the adoption of SFAS No. 125 will not have a material 
impact on its consolidated financial statements.

16. Consolidated Statements of Cash Flows

      For purposes of the consolidated statements of cash flows, cash and 
cash equivalents include cash and due from banks.

NOTE B--Cash and Due From Banks

      The Federal Reserve Bank requires the subsidiary bank to maintain 
average reserve balances. The average amount of these reserve balances for 
the year ended December 31, 1996 was approximately $9,302,000.

NOTE C--Securities

      The amortized cost and estimated market values of securities at 
December 31, were as follows:

<TABLE>
<CAPTION>
                                                                                     Estimated
                                               Amortized   Unrealized   Unrealized    Market
                                                 Cost        Gains        Losses       Value
                                               ---------   ----------   ----------   ---------
                                                               (In Thousands)

<S>                                            <C>           <C>          <C>        <C>
Securities held to maturity
 At December 31, 1996
  US Government agency obligations             $  9,500      $     4      $  11      $  9,493
                                               ----------------------------------------------
      Total securities held to maturity        $  9,500      $     4      $  11      $  9,493
                                               ==============================================

Securities available for sale
 At December 31, 1996
  US Treasury obligations                      $ 25,847      $    26      $  21      $ 25,852
  US Government agency obligations               52,749           13        204        52,558
  Other corporate obligations                     5,476                      27         5,449
  Mutual Fund                                     5,239            5                    5,244
  Marketable equity securities                    7,073        3,252          5        10,320
                                               ----------------------------------------------
      Total securities available for sale      $ 96,384      $ 3,296      $ 257      $ 99,423
                                               ==============================================

Securities available for sale
 At December 31, 1995
  US Treasury obligations                      $ 59,016      $   452      $  16      $ 59,452
  US Government agency obligations               17,000            7                   17,007
  Other corporate obligations                     9,495                      51         9,444
  Mutual Fund                                     3,000            9                    3,009
  Marketable equity securities                    4,036        2,077          9         6,104
                                               ----------------------------------------------
      Total securities available for sale      $ 92,547      $ 2,545      $  76      $ 95,016
                                               ==============================================
</TABLE>

<PAGE> 34

      As a member of the Federal Home Loan Bank of Boston ("FHLBB"), the 
subsidiary bank is required to invest in $100 par value stock of the FHLBB 
in the amount of 1% of its outstanding loans secured by residential 
housing, or 1% of 30% of total assets, or 5% of its outstanding advances 
from the FHLBB, whichever is higher. When such stock is redeemed, the 
subsidiary bank would receive from the FHLBB an amount equal to the par 
value of the stock. As of December 31, 1996 and 1995, the subsidiary bank 
had investments in FHLBB stock of $3,215,000 and $3,215,000, respectively. 
Such investments are reflected separately in the Consolidated Statements 
of Financial Condition.

      Gross realized gains and gross realized losses on sales of 
securities available for sale for the years ended December 31 were as 
follows:

<TABLE>
<CAPTION>
                                            1996                   1995                   1994
                                    -------------------    -------------------    -------------------
                                    Realized   Realized    Realized   Realized    Realized   Realized
                                      Gain       Loss        Gain       Loss        Gain       Loss
                                    --------   --------    --------   --------    --------   --------
                                                              (In Thousands)

<S>                                  <C>         <C>        <C>         <C>        <C>         <C>
Securities
  Debt securities                    $   6       $ 8                               $   8       $ 22
  Marketable equity securities         689                  $ 326                    209
                                     --------------------------------------------------------------
                                     $ 695       $ 8        $ 326       $ 0        $ 217       $ 22
                                     ==============================================================

</TABLE>

      At December 31, 1996, U. S. Treasury and U. S. Government Agency 
Obligations with carrying and market values of $40,345,000 were pledged as 
collateral for securities sold under agreements to repurchase and for 
government deposit accounts.

      The following tables set forth the maturity distribution of debt 
securities held to maturity and available for sale at amortized cost and 
estimated market value at December 31, 1996. Actual maturities may differ 
from contractual maturities because certain issuers have the right to call 
obligations without call penalties.

<TABLE>
<CAPTION>

                                                                  Over 1 Year
                                                       Within       Through
                                                       1 Year       5 Years       Total
                                                      --------    -----------    --------
                                                                (In Thousands)

<S>                                                   <C>          <C>           <C>
Amortized Cost
At December 31, 1996
  Securities held to maturity
    US Government agency obligations                  $      0     $  9,500      $  9,500
                                                      ===================================

  Securities available for sale
    US Treasury obligations                           $ 16,015     $  9,832      $ 25,847
    US Government agency obligations                                 52,749        52,749
    Other corporate obligations                                       5,476         5,476
                                                      -----------------------------------
      Total debt securities available for sale        $ 16,015     $ 68,057      $ 84,072
                                                      ===================================

Estimated Market Value
At December 31, 1996
  Securities held to maturity
    US Government agency obligations                  $      0     $  9,493      $  9,493
                                                      ===================================

  Securities available for sale 
    US Treasury obligations                           $ 16,036     $  9,816      $ 25,852   
    US Government agency obligations                                 52,558        52,558
    Other corporate obligations                                       5,449         5,449
                                                      -----------------------------------
      Total debt securities available for sale        $ 16,036     $ 67,823      $ 83,859
                                                      ===================================
</TABLE>

<PAGE> 35

NOTE D--Loans

      Loans consist of the following at:

<TABLE>
<CAPTION>

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

<S>                                                    <C>          <C>
Commercial, financial and agricultural                 $   9,849    $  10,696
Real estate--residential                                 122,561      111,578
Real estate--commercial                                   58,302       52,555
Real estate--construction and land development             3,030        2,676
Installment                                                4,488        4,438
Other                                                      8,109        8,426
                                                       ----------------------
      Total loans                                        206,339      190,369
Less:
  Unearned income                                         (1,860)      (2,356)
  Allowance for possible loan losses                      (3,676)      (3,704)
                                                       ----------------------
  Net loans                                            $ 200,803    $ 184,309
                                                       ======================
</TABLE>

      At December 31, 1996 and 1995, loans which were on nonaccrual status 
were $2,022,000 and $1,798,000, respectively. Interest income which would 
have been accrued on nonaccrual loans, had they performed in accordance 
with the terms of their contracts, for the years ended December 31, 1996, 
1995 and 1994,  was $263,000, $230,000 and $238,000, respectively. 
Interest income recognized on nonaccrual loans in 1996, 1995 and 1994 
amounted to $93,000, $56,000 and $39,000, respectively.

      The balance of impaired loans was $805,000 and $1,022,000, 
respectively, at December 31, 1996 and 1995. The Company has identified a 
loan as impaired when it is probable that interest and principal will not 
be collected according to the contractual terms of the loan agreements. 
The allowance for possible loan losses associated with impaired loans 
allocated from and part of the general allowance for possible loan losses 
(see note E), upon the adoption of SFAS No. 114, on January 1, 1995 was 
$864,000. During 1996 and 1995, provisions to the allowance for impaired 
loans amounted to $377,000 and $553,000, respectively, and impaired loans 
charged off amounted to $578,000 and $1,050,000, respectively. The 
allowance for possible loan losses associated with impaired loans at 
December 31, 1996 and 1995 was $166,000 and $367,000, respectively.  At 
December 31, 1996 and 1995, there were no impaired loans which did not 
have an allowance for possible loan losses determined in accordance with 
SFAS No. 114. The average recorded investment in impaired loans was 
$634,000 and $1,482,000, respectively, in 1996 and 1995 and the income 
recognized on impaired loans during 1996 and 1995 was $4,000 and $19,000, 
respectively. Total cash collected on impaired loans during 1996 and 1995 
was $770,000 and $103,000, respectively, of which $766,000 and $84,000, 
respectively, was credited to the principal balance outstanding on such 
loans. Interest which would have been accrued on impaired loans during 
1996 and 1995, had they performed in accordance with the terms of their 
contracts, was $61,000 and $166,000, respectively. The Company's policy 
for interest income recognition on impaired loans is to recognize income 
on nonaccrual loans under the cash basis when the loans are both current 
and the collateral on the loan is sufficient to cover the outstanding 
obligation to the Company; if these factors do not exist, the Company does 
not recognize income.

      Unearned income at December 31, 1996 and 1995, includes $1,369,000 
and $1,743,000, respectively, in net loan discounts on loans acquired in 
connection with the acquisition of First Northern Co-operative Bank in 
August of 1991. Additionally, at December 31, 1996 and 1995 unearned 
income includes $128,000 and $144,000, respectively, in net loan discounts 
on other loans acquired. Discounts on acquired loans are amortized as a 
yield adjustment over the estimated lives of the respective loans.

      The Company's lending activities are conducted principally in New 
Hampshire and to a lesser extent in selected areas in other New England 
states. The Company grants single family and multi-family residential 
loans, commercial real estate loans, commercial loans, and a variety of 
consumer loans. In addition, the Company grants loans for the construction 
of residential homes, multi-family properties and commercial real estate 
properties. Most loans granted by the Company are collateralized by real 
estate. The ability and willingness of the single family residential and 
consumer borrowers to honor their repayment commitments is generally 
dependent on the level of overall economic activity within the borrowers' 
geographic areas, and real estate values. The ability and willingness of 
commercial real estate, commercial and construction loan borrowers to 
honor their repayment commitments is generally dependent on the health of 
the real estate economic sector in the borrowers' geographic areas, and 
the general economy.

      At December 31, 1996 and 1995, the Company's subsidiary serviced 
real estate loans sold to others in the amounts of $174,039,000 and 
$173,017,000, respectively.

<PAGE> 36

NOTE E--Allowance for Possible Loan Losses

      Changes in the allowance for possible loan losses are as follows:

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                               ---------------------------
                                                1996      1995      1994
                                               -------   -------   -------
                                                     (In Thousands)

<S>                                            <C>       <C>       <C>
Balance at beginning of year                   $ 3,704   $ 4,230   $ 4,004
Provision for possible loan losses                 650       735       600
Loans charged off                               (1,193)   (1,405)     (421)
Recoveries of loans previously charged off         515       144        47
                                               ---------------------------
Balance at end of year                         $ 3,676   $ 3,704   $ 4,230
                                               ===========================
</TABLE>

NOTE F--Loans to Related Parties

      The Company's banking subsidiary has granted loans to its officers 
and directors, and those of the Company and to their associates. The 
aggregate amount of these loans was $2,549,000 and $2,141,000 at December 
31, 1996 and 1995, respectively. During 1996, $1,149,000 of new loans were 
made and repayments totaled $633,000. Approximately $108,000 of related 
party loans at December 31, 1995 were loans to officers and directors who 
were no longer associated with the Company in those capacities at December 
31, 1996.

NOTE G--Premises and Equipment

      The following is a summary of premises and equipment:

<TABLE>
<CAPTION>

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

<S>                                     <C>         <C>
Bank buildings                          $  9,614    $  8,870
Leasehold improvements                       150         187
Furniture and equipment                    5,902       5,128
                                        --------------------
                                          15,666      14,185
  Less:  Accumulated depreciation          6,945       6,305
                                        --------------------
                                           8,721       7,880
Land                                       2,047       2,040
Construction in progress                      15          17
                                        --------------------
                                        $ 10,783    $  9,937
                                        ====================
</TABLE>

      Depreciation expense for the years ended December 31, 1996, 1995 and 
1994 was $892,000, $796,000 and  $785,000, respectively.

NOTE H--Other Real Estate Owned

      A summary of other real estate owned follows:

<TABLE>
<CAPTION>

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

<S>                                     <C>         <C> 
Condominiums and apartment projects     $   340     $   266
Single family housing projects              775         787
Retail and office                                       426
Non-retail commercial                       556       1,593
Residential                                 306          75
                                        -------------------
                                          1,977       3,147
Less:Valuation allowance                    465         456
                                        -------------------
                                        $ 1,512     $ 2,691
                                        ===================
</TABLE>

<PAGE> 37

      An analysis of other real estate owned follows:

<TABLE>
<CAPTION>

                                                     Year Ended December 31,
                                                  -----------------------------
                                                   1996       1995       1994
                                                  -------    -------    -------
                                                         (In Thousands)

<S>                                               <C>        <C>        <C>
Balance at beginning of year                      $ 2,691    $ 3,009    $ 4,269
Other real estate owned acquired                    1,354      1,774      1,363
Advances for construction and other                               22         52
Sales proceeds                                     (2,581)    (2,073)    (2,569)
Gains on sales, net                                   149        162         67
Provisions for loss subsequent to foreclosure        (101)      (203)      (173)
                                                  -----------------------------
Balance at end of year                            $ 1,512    $ 2,691    $ 3,009
                                                  =============================
</TABLE>

      An analysis of other real estate owned expense follows:

<TABLE>
<CAPTION>

                                                   Year Ended December 31,
                                                  -------------------------
                                                   1996      1995     1994
                                                  ------    ------    -----
                                                       (In Thousands)

<S>                                               <C>       <C>       <C>
Foreclosure and holding costs, net                $  275    $  347    $ 383
Provision for loss subsequent to foreclosure         101       203      173
Gains on sales, net                                 (149)     (162)     (67)
                                                  -------------------------
                                                  $  227    $  388    $ 489
                                                  =========================
</TABLE>

      Changes in the valuation allowance for other real estate owned are 
as follows:

<TABLE>
<CAPTION>

                                   Year Ended December 31,
                                  -------------------------
                                  1996       1995     1994
                                  -----     ------    -----
                                       (In Thousands)

<S>                               <C>       <C>       <C>
Balance at beginning of year      $ 456     $  496    $ 409
Provision for loss                  101        203      173
Charge offs, net                    (92)      (243)     (86)
                                  -------------------------
Balance at end of year            $ 465     $  456    $ 496
                                  =========================
</TABLE>

NOTE I--Other Assets

      Goodwill, core deposit intangibles and mortgage servicing rights 
included in other assets at December 31, consisted of the following:

<TABLE>
<CAPTION>
                                                 1996
                                 -----------------------------------
                                                              Net
                                 Original    Accumulated      Book
                                  Amount     Amortization     Value
                                 --------    ------------    -------
                                            (In Thousands)

<S>                              <C>           <C>           <C>
Goodwill                         $ 3,682       $ 1,553       $ 2,129
                                 ===================================

Core deposit intangibles         $   879       $   863       $    16
                                 ===================================

Mortgage servicing rights        $ 1,001       $   666       $   335
                                 ===================================

<CAPTION>
                                                 1995
                                 -----------------------------------
                                                              Net
                                 Original    Accumulated      Book
                                  Amount     Amortization     Value
                                 --------    ------------    -------
                                            (In Thousands)

<S>                              <C>           <C>           <C>
Goodwill                         $ 3,682       $ 1,308       $ 2,374
                                 ===================================

Core deposit intangibles         $   879       $   833       $    46
                                 ===================================

Mortgage servicing rights        $   729       $   556       $   173
                                 ===================================
</TABLE>

      Amortization expense for the years ended December 31, 1996, 1995 and 
1994 was $385,000, $403,000 and  $468,000, respectively.

NOTE J--Interest Bearing Deposits

      Interest bearing deposits consist of the following:

<TABLE>
<CAPTION>
                                            December 31,
                                       ----------------------
                                         1996         1995
                                       ---------    ---------
                                           (In Thousands)

<S>                                    <C>          <C>
NOW and Super NOW accounts             $ 108,941    $  90,681
Savings accounts                          36,217       41,914
Money market deposit accounts             11,595       17,249
Time certificates                        115,597      105,364
                                       ----------------------
                                       $ 272,350    $ 255,208
                                       ======================
</TABLE>

<PAGE> 38

      Maturities of time certificates after December 31, 1996 are 
$86,157,000 in 1997, $21,832,000 in 1998, $5,164,000 in 1999, $1,351,000 
in 2000, $1,084,000 in 2001 and $9,000 in years thereafter.

      Time certificates with balances of $100,000 or more at December 31, 
1996 and 1995 totaled $12,274,000 and $11,983,000, respectively.

NOTE K--Borrowings

Securities Sold Under Agreements to Repurchase

      Short-term overnight borrowings in the form of securities sold under 
agreements to repurchase at December 31, 1996 and 1995, totaled 
$31,535,000 and $26,189,000, respectively. Such borrowings were 
collateralized at December 31, 1996 by a portion of the Company's U.S. 
Treasury and U.S. Government agency securities with a carrying value and 
estimated market value of $38,840,000 (see note C). The collateral is 
maintained under the control of the Company in a separate custodial 
account at the Federal Home Loan Bank of Boston. The weighted average 
interest rate on those borrowings was 4.66% and 4.72%, respectively, at 
December 31, 1996 and 1995.

      The maximum amount of securities sold under agreements to repurchase 
at any month end during 1996, 1995 and 1994, were $31,535,000, $28,298,000 
and  $21,968,000, respectively. The average amount of securities sold 
under agreements to repurchase in 1996, 1995 and 1994 were $24,727,000, 
$21,133,000 and $15,500,000,  respectively. The average cost of securities 
sold under agreements to repurchase was 4.67%, 5.24% and 4.16% during 
1996, 1995 and 1994, respectively.

Other Short-term Borrowings

      The Company's subsidiary bank maintains a line of credit with the 
FHLBB to meet short or long-term financing needs that may arise. As of 
December 31, 1996 and 1995, there were no outstanding short-term FHLBB 
borrowings.

      Short and long-term borrowings from the FHLBB are secured by a 
blanket lien on substantially all unencumbered interest-earning assets and 
FHLBB stock held. The Company's subsidiary bank is able to commingle, 
encumber or dispose of any collateral held subject to its ability to 
maintain specific "qualifying" collateral levels in excess of collateral 
maintenance requirements and meet minimum capital ratios, both of which 
were met as of December 31, 1996 and 1995.

      Based upon "qualifying" collateral held, the Company's subsidiary 
bank had a total borrowing capacity with the FHLBB as of December 31, 1996 
of approximately $155,058,000, of which approximately $154,367,000 was 
still available.

Long-Term Debt

      Long-term debt consists of the following:

<TABLE>
<CAPTION>

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

<S>                                                        <C>      <C>
FHLBB long term borrowings
  Advances with monthly payments of principal and 
   interest, weighted average interest rate of 
   6.13%, final payment due in October, 2005               $ 432    $ 467
  Advances with monthly payments of principal and 
   interest, with interest at the rate of 5.00% 
   per annum, final payment due in August, 2014               73       75
  Advances maturing at various dates in 2014, with
   monthly payments of interest only at the rate 
   of 5.00% per annum                                        186      186
                                                           --------------
                                                           $ 691    $ 728
                                                           ==============
</TABLE>

      Principal payments due on long-term debt after December 31, 1996 are 
$40,000 in 1997, $43,000 in 1998, $45,000 in 1999, $48,000 in 2000, 
$51,000 in 2001 and $464,000 in years thereafter.

NOTE L--Commitments and Contingencies

Financial Instruments With Off-Balance Sheet Risk

      The Company is party to financial instruments with off-balance sheet 
risk in the normal course of business to meet the financing needs of its 
customers. These financial instruments include commitments to originate 
loans, standby letters of credit, and forward commitments. The instruments 
involve, to varying degrees, elements of credit and interest rate risk in 
excess of the amount recognized in the consolidated statement of financial 
condition. The contract or notional amount of those instruments reflects 
the extent of involvement the Company has in particular classes of 
financial instruments.

<PAGE> 39

      The Company's exposure to credit loss in the event of nonperformance 
by the other party to the financial instrument for loan commitments, 
standby letters of credit and recourse arrangements is represented by the 
contractual amount of those instruments. The Company uses the same credit 
policies in making commitments and conditional obligations as it does for 
on-balance sheet instruments. For forward commitments, the contract or 
notional amounts do not represent exposure to credit loss. The Company 
controls the credit risk of its forward commitments through credit 
approvals, limits, and monitoring procedures. There were no forward 
commitments outstanding at December 31, 1996 and 1995.

      Financial instruments with off-balance sheet risk at December 31, 
1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                                                         Contract or
                                                        Notional Amount
                                                     --------------------
                                                       1996        1995
                                                     --------    --------
                                                        (In Thousands)

<S>                                                  <C>         <C>
Financial instruments whose contract amounts 
 represent credit risk
  Commitments to originate loans                     $  5,686    $  7,646
  Unused lines and standby letters of credit           16,435      12,646
  Unadvanced portions of construction loans               675         532

</TABLE>

      Commitments to originate loans are agreements to lend to a customer 
provided there is no violation of any condition established in the 
contract. Commitments generally have fixed expiration dates or other 
termination clauses and may require payment of a fee. Since many of the 
commitments are expected to expire without being drawn upon, the total 
commitment amounts do not necessarily represent future cash requirements. 
The Company evaluates each customer's creditworthiness on a case-by-case 
basis. The amount of collateral obtained, if deemed necessary by the 
Company upon extension of credit, is based upon management's credit 
evaluation of the borrower.

      Standby letters of credit are conditional commitments issued by the 
Company to guarantee the performance by a customer to a third party. The 
credit risk involved in issuing letters of credit is essentially the same 
as that involved in extending loan facilities to customers.

Lease Commitments

      The Company, through its subsidiary bank, leases a branch office and 
various parcels of land on which it has constructed automatic teller 
machines. The leases are classified as operating leases and expire at 
various dates through 1999. Most of the leases have renewal options. 
Minimum lease payments through 1999 are not significant. Rent expense for 
the years ending December 31, 1996, 1995 and 1994 was $88,000, $91,000 and 
$83,000, respectively.

Employment Agreements

      The subsidiary bank and the Company have entered into employment 
agreements with five of its senior officers, one of which provides for a 
specified minimum annual compensation and the reimbursement by the Company 
for any excise taxes relating to a change in control. However, such 
employment may be terminated for cause without incurring any continuing 
obligations. All of the agreements generally provide for certain lump sum 
severance payments following a "change in control" as defined in the 
agreements.

Legal Proceedings

      The Company is a defendant in ordinary and routine pending legal 
actions incident to its business, none of which is believed by management 
to be material to the financial condition of the Company.

NOTE M--Income Taxes

      The Company and its subsidiary file a consolidated Federal income 
tax return on the accrual basis for taxable years ending December 31.

      Income taxes (benefits) reflected in the consolidated statements of 
earnings for years ended December 31, are as follows:

<TABLE>
<CAPTION>

                    1996       1995       1994
                   -------    -------    -------
                          (In Thousands)

<S>                <C>        <C>        <C>
Federal:
  Current          $ 1,693    $ 1,980    $ 1,391
  Deferred             107       (107)      (139)

State:
  Current              145
                   -----------------------------
                   $ 1,945    $ 1,873    $ 1,252
                   =============================

</TABLE>

      The above amounts reflect a tax provision on securities transactions 
of $237,000, $111,000 and $66,000, in 1996, 1995 and 1994, respectively.

<PAGE> 40

      The income tax benefit related to the exercise of non-statutory 
stock options reduces taxes currently payable and is credited to 
additional paid-in capital. Such amounts were $126,000 in 1996 and $0 in 
1995 and 1994.

      The Company received tax credits from the Community Development 
Finance Authority ("CDFA"), a state agency, in exchange for contributions 
made by the Company to the CDFA, of property in 1992 and cash in 1994. The 
amount of tax credits used to offset state income tax expense in 1996, 
1995 and 1994 amounted to $30,000, $82,000 and $126,000, respectively. The 
tax credits used in 1995 and 1994 offset all state income tax expense in 
those years.

      The difference between the total expected income tax expense 
computed by applying the Federal income tax rate to earnings before income 
tax expense and the reported income tax expense for years ended December 
31, is as follows:

<TABLE>
<CAPTION>
                                                    1996       1995       1994
                                                    -------    -------    -------
                                                           (In Thousands)

<S>                                                <C>        <C>        <C>
Computed "expected" Federal income tax expense 
 at statutory rate                                  $ 1,947    $ 1,805    $ 1,386
Increase (decrease) resulting from:
  State income tax, net of Federal tax benefit           96
  Other                                                 (98)        68       (134)
                                                    -----------------------------
                                                    $ 1,945    $ 1,873    $ 1,252
                                                    =============================
</TABLE>

      Significant components of the Company's deferred tax assets and 
liabilities are as follows:

<TABLE>
<CAPTION>
                                                             December 31,
                                                          ------------------
                                                           1996       1995
                                                          -------    -------
                                                            (In Thousands)

<S>                                                       <C>        <C> 
Deferred tax assets:
  Writedown of marketable equity securities               $   101    $   101
  Writedowns of other real estate owned                        54         50
  Core deposit intangibles                                    125        135
  Provision for loan losses                                    67        115
  Deferred loan fees                                           64         58
  Capitalized interest                                         43         45
  Mortgage servicing rights                                    91         94
  Supplemental retirement                                                 62
  Other                                                        32         39
                                                          ------------------
                                                              577        699
  Less:  Valuation allowance                                    0          0
                                                          ------------------
      Total deferred tax assets                               577        699
                                                          ------------------

Deferred tax liabilities:
  Unearned income                                             564        559
  Book over tax basis of premises and equipment               428        412
  Unrealized gains on securities available for sale         1,033        840
  Other                                                                   36
                                                          ------------------
      Total deferred tax liabilities                        2,025      1,847
                                                          ------------------
      Net deferred tax liability                          $ 1,448    $ 1,148
                                                          ==================
</TABLE>

      At December 31, 1996 and 1995, net deferred tax liabilities includes 
$1,033,000 and $840,000, respectively, in deferred tax liabilities which 
are attributable to the tax effects of net unrealized gains on securities 
available for sale. Pursuant to SFAS No. 115 and SFAS No. 109, the 
corresponding charge has been made directly to stockholders' equity.

      Based upon management's evaluation of the likelihood of realization, 
no valuation allowance on deferred tax assets has been provided.

<PAGE> 41

NOTE N--Pension Plans

Defined Benefit Pension Plan

      The following table sets forth the funded status of the Company's 
defined benefit pension plan as of September 30, 1996 and 1995 (the most 
recent actuarial valuations):

<TABLE>
<CAPTION>
                                                                      1996       1995
                                                                     -------    -------
                                                                       (In Thousands)

<S>                                                                  <C>        <C>
Actuarial present value of benefit obligations:
  Accumulated benefit obligation, including vested benefits 
   of $1,800,000 and $1,653,000, respectively                        $ 1,942    $ 1,810
                                                                     ==================

  Projected benefit obligation for service rendered to date          $ 2,458    $ 2,281
  Plan assets at fair value, primarily fixed income and 
   equity securities                                                   2,662      2,331
                                                                     ------------------
    Plan assets in excess of projected benefit obligation                204         50
  Unrecognized net gain from past experience different from 
   that assumed and effects of changes in assumptions                   (669)      (493)
  Unrecognized net liability being recognized over 
   approximately 12 years                                                246        301
                                                                     ------------------
    Accrued pension cost                                             $  (219)   $  (142)
                                                                     ==================
</TABLE>

      Net periodic pension expense included the following components:

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     -----------------------
                                                     1996     1995     1994
                                                     -----    -----    -----
                                                         (In Thousands)

<S>                                                  <C>      <C>      <C>
Service cost--benefits earned during the period      $ 144    $ 129    $ 146
Interest cost on projected benefit obligation          171      156      152
Actual return on plan assets                          (296)    (378)    (169)
Net amortization and deferral                          142      251       52
                                                     -----------------------
Net periodic pension expense                         $ 161    $ 158    $ 181
                                                     =======================
</TABLE>

      The weighted average discount rate of 7.75% in 1996, 7.50% in 1995 
and 8.25% in 1994, and the rate of increase in future compensation levels 
of 5.50% in 1996, 5.50% in 1995 and 6.00% in 1994, were used in 
determining the actuarial present value of the projected benefit 
obligation. The expected long-term rate of return on assets was 8.00% for 
each year.

Supplemental Executive Retirement Plan

      Effective January 1, 1993, the Company established a SERP. In August 
of 1996, the Company established a Rabbi Trust, which purchased life 
insurance policies to satisfy its benefit obligations thereunder. The cash 
surrender value of the life insurance policies was $1,294,000 at December 
31, 1996 and is carried in Other Assets in the Consolidated Statement of 
Financial Condition. Amounts accrued to August of 1996 were paid to and 
subsequent annual accruals for expense will be paid annually to trusts for 
the benefit of the participants. The present value of future benefits is 
being accrued over the term of employment. SERP expense for the years 
ended December 31, 1996, 1995 and 1994 amounted to $176,000, $90,000 and 
$49,000, respectively. 

NOTE O--Employee Stock Ownership Plan (ESOP)

      On August 19, 1986, the Company's ESOP purchased 102,900 shares of 
the common stock issued in the Company's initial public offering for 
$858,000. These funds were obtained by the ESOP through a loan from a 
third party lender and repayment of the loan was guaranteed by the 
Company. Borrowings under this loan agreement were repaid in full during 
1995. Prior to repayment, principal was payable in quarterly installments 
of $21,500, with interest at approximately 80% of the prime rate. Company 
contributions were the primary source of funds for the ESOP's repayment of 
the loan. There were no outstanding borrowings under this loan agreement 
at December 31, 1996 and 1995.

      Interest expense incurred on ESOP debt was $0, $2,000 and $6,000, 
respectively, for the years ended December 31, 1996, 1995 and 1994.

      Compensation expense related to the ESOP amounted to $175,000, 
$114,000 and $136,000, respectively, for the years ended December 31, 
1996, 1995 and 1994 and included additional contributions in excess of 
amounts required to service the ESOP debt of $175,000 in 1996 and $50,000 
in 1995 and 1994.

      Dividends on unallocated shares were insignificant during 1995 and 
1994 and there were no unallocated shares in 1996.

<PAGE> 42

      At December 31, 1996 and 1995, the total shares of the Company's 
common stock owned by the ESOP, all of which were allocated shares, was 
188,614 shares and 172,694 shares, respectively.

NOTE P--Stockholders' Equity

Stock Option Plan

      On March 18, 1986, the Company adopted an Incentive Stock Option 
Plan, whereby incentive or non-statutory options may be granted to certain 
key employees of the Company or its subsidiary bank to purchase up to an 
aggregate of 210,000 shares of common stock of the Company at a price not 
less than fair market value at the date of grant. Effective April 24, 
1992, options to purchase 189,000 shares of the Company's common stock 
were granted. Such options vested 100% one year after the date of grant 
and are exercisable over a period not to exceed 10 years from the date of 
grant.

      The following summarizes the stock option transactions:

<TABLE>
<CAPTION>
                                                 Option Shares
                                         -----------------------------
                                          1996       1995       1994
                                         -------    -------    -------

<S>                                      <C>        <C>        <C>
Outstanding at beginning of year         168,800    168,800    168,800
Granted                                        0          0          0
Cancelled                                      0          0          0
Exercised                                 43,300          0          0
Outstanding at end of year               125,500    168,800    168,800
Exercisable at end of year               125,500    168,800    168,800

Price range of options
  Outstanding                              $5.00      $5.00      $5.00
  Exercised                                $5.00         --         --
Average price of options outstanding       $5.00      $5.00      $5.00

</TABLE>

Stock Repurchase Programs

      On June 14, 1994, the Company announced a Stock Repurchase Plan 
("Plan"), whereby the Company's Board of Directors authorized the 
repurchase of up to 9% of its outstanding common shares from time to time. 
Shares repurchased under the Plan may be held in treasury, retired or used 
for general corporate purposes. As of August 13, 1996, the Company 
completed the repurchase of its stock under this Plan.

      On August 13, 1996, the Company announced another Stock Repurchase 
Program ("Program"), whereby the Company's Board of Directors authorized 
the repurchase of up to 10% of its outstanding common shares from time to 
time. Shares repurchased under the Program may be held in treasury, 
retired or used for general corporate purposes. As of December 31, 1996, 
the Company has repurchased 34,989 shares under the Program, representing 
1.77% of common shares outstanding at August 13, 1996.

Liquidation Account

      Pursuant to certain bank conversion regulations, the subsidiary bank 
established a liquidation account in an amount equal to its net worth of 
$5,603,000 as of February 28, 1986, for the benefit of eligible account 
holders who maintain their savings accounts in the subsidiary bank after 
conversion. In the event of a complete liquidation of the subsidiary bank, 
and only in such event, eligible account holders would be entitled to 
their interest in the liquidation account before any liquidiation 
distribution may be made to stockholders. Their interest as to each 
savings account will be in the same proportion of the total liquidation 
amount as the balance of their savings account on February 28, 1986 was to 
the balance in all savings accounts in the subsidiary bank on that date. 
However, if the amount in the savings account on any annual closing date 
of the subsidiary bank is less than the amount in such account on February 
28, 1986, then their interest in the liquidation account will be reduced 
by an amount proportionate to any such reduction and their interest will 
cease to exist if such savings accounts are closed. Their interest in the 
liquidation account will never be increased despite any increase in the 
related savings account after February 28, 1986. The balance in the 
liquidation account at December 31, 1996 was approximately $674,000 
(unaudited).

Capital Requirements

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

      Quantitative measures established by regulation to ensure capital 
adequacy require the Company and subsid-

<PAGE> 43

iary bank to maintain minimum amounts and ratios (set forth in the table 
below) of total and Tier I capital (as defined in the regulations) to risk 
weighted assets (as defined), and of Tier I capital (as defined) to average 
assets (as defined). Management believes, as of December 31, 1996, that the 
Company and the subsidiary bank meet all capital adequacy requirements to 
which they are subject.

      As of December 31, 1996, the most recent notification from the 
Federal Deposit Insurance Corporation ("FDIC") categorized the Company's 
wholly-owned subsidiary bank as "well-capitalized" under the regulatory 
framework for prompt corrective action. To be categorized as well-
capitalized, the subsidiary bank must maintain minimum total risk-based, 
Tier I risk-based, and Tier I leverage ratios as set forth in the table. 
There have been no conditions or events since that notification that 
management believes would cause a change in the subsidiary bank's 
categorization.

      The Company's and the subsidiary bank's actual capital amounts and 
ratios as of December 31, 1996 and 1995 are presented in the following 
table.

<TABLE>
<CAPTION>
                                                                                            To Be Well
                                                                                         Capitalized Under
                                                                       For Capital       Prompt Corrective
                                                    Actual          Adequacy Purposes    Action Provisions
                                               -----------------    -----------------    -----------------
                                                Amount    Ratio      Amount    Ratio      Amount     Ratio
                                               --------   ------    --------   ------    --------   ------

<S>                                            <C>        <C>       <C>        <C>       <C>        <C>
As of December 31, 1996:
  Total Capital (to Risk Weighted Assets):
    Consolidated                               $ 29,791   14.23%    $ 16,748   >=8.00%        N/A
    Subsidiary Bank                            $ 29,128   14.14%    $ 16,485   >=8.00%   $ 20,607   >=10.00%

  Tier I Capital (to Risk Weighted Assets):
    Consolidated                               $ 27,161   13.14%    $  8,269   >=4.00%        N/A
    Subsidiary Bank                            $ 26,501   13.03%    $  8,138   >=4.00%   $ 12,206   >= 6.00%

  Tier I Capital (to Average Assets):
    Consolidated                               $ 27,161    7.50%    $ 14,494   >=4.00%        N/A
    Subsidiary Bank                            $ 26,501    7.32%    $ 14,485   >=4.00%   $ 18,106   >= 5.00%

As of December 31, 1995:
  Total Capital (to Risk Weighted Assets):
    Consolidated                               $ 27,992   15.85%    $ 14,132   >=8.00%        N/A
    Subsidiary Bank                            $ 26,572   15.06%    $ 14,114   >=8.00%   $ 17,642   >=10.00%

  Tier I Capital (to Risk Weighted Assets):
    Consolidated                               $ 25,739   14.76%    $  6,976   >=4.00%        N/A
    Subsidiary Bank                            $ 24,320   13.96%    $  6,967   >=4.00%   $ 10,450   >= 6.00%

  Tier I Capital (to Average Assets):
    Consolidated                               $ 25,739    7.47%    $ 13,788   >=4.00%        N/A
    Subsidiary Bank                            $ 24,320    7.08%    $ 13,750   >=4.00%   $ 17,187   >= 5.00%

</TABLE>

NOTE Q--Restrictions on Subsidiary's Loans, Advances and Dividends

      Bank regulatory authorities restrict the amounts available for the 
payment of dividends by the subsidiary bank to the Company if the effect 
thereof would cause the capital of the subsidiary bank to be reduced below 
applicable capital requirements. These restrictions indirectly restrict 
the Company's ability to pay common stock dividends.

      Federal laws and regulations prohibit the Company from borrowing 
from the subsidiary bank unless the loans are secured by specified amounts 
of collateral. In addition, such secured loans to the Company from the 
subsidiary bank generally are limited to 10 percent of the subsidiary 
bank's capital surplus. At December 31, 1996 and 

<PAGE> 44

1995, no such transactions existed between the Company and the subsidiary bank.

NOTE R--Other Noninterest Expense

      Components of other noninterest expense were as follows:

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                              -----------------------------
                                               1996       1995       1994
                                              -------    -------    -------
                                                      (In Thousands)

<S>                                           <C>        <C>        <C> 
Advertising                                   $   220    $   332    $   235
Amortization                                      385        403        468
FDIC deposit insurance assessments                 73        283        581
FDIC special assessment to recapitalize 
 Savings Association Insurance Fund               187
Legal fees                                        118        190        134
Postage and freight                               268        243        226
Printing and supplies                             263        247        185
Other                                           1,344      1,223      1,297
                                              -----------------------------
                                              $ 2,858    $ 2,921    $ 3,126
                                              =============================
</TABLE>

      Included in other noninterest expense for the year ended December 
31, 1996 is $187,000 relating to a special deposit insurance assessment by 
the FDIC on the Company's Savings Association Insurance Fund ("SAIF") 
assessable Oakar deposits, as a result of legislation signed by the 
President on September 30, 1996 to recapitalize the SAIF.

NOTE S--Supplemental Cash Flow Disclosures

Supplemental Disclosures of Cash Flow Information

<TABLE>
<CAPTION>
                            Year Ended December 31,
                        -------------------------------
                          1996        1995        1994
                        --------    --------    -------
                                (In Thousands)

<S>                     <C>         <C>         <C>
Cash paid for
  Interest              $ 11,818    $ 10,797    $ 7,710
  Income taxes             1,650       1,875      1,450

</TABLE>

Supplemental Schedule of Noncash Investing and Financing Activities

      The subsidiary bank acquired other real estate owned through 
foreclosure in settlement of loans or accepted deeds in lieu of 
foreclosures on real estate loans in the amount of $1,354,000, $1,774,000 
and $1,363,000 during the years ended December 31, 1996, 1995 and 1994, 
respectively.

      Dividends declared and unpaid on common stock at December 31, 1996, 
1995 and 1994 were $277,000, $244,000 and $253,000, respectively.

NOTE T--Fair Values of Financial Instruments

      Fair value estimates are made at a specific point in time, based on 
relevant market information and information about the financial 
instrument. These estimates do not reflect any premium or discount that 
could result from offering for sale at one time the subsidiary bank's 
entire holdings of a particular financial instrument. Because no market 
exists for a significant portion of the subsidiary bank's financial 
instruments, fair value estimates are based on judgments regarding future 
expected loss experience, current economic conditions, risk 
characteristics of various financial instruments, and other factors. These 
estimates are subjective in nature and involve uncertainties and matters 
of significant judgment and therefore, cannot be determined with 
precision. Changes in assumptions could significantly affect the 
estimates.

      Fair value estimates are based on existing on- and off-balance sheet 
financial instruments without attempting to estimate the value of 
anticipated future business and the value of assets and liabilities that 
are not considered financial instruments. Other significant assets and 
liabilities that are not considered financial assets or liabilities and 
therefore, are not valued pursuant to SFAS No. 107, include the mortgage 
banking operation, premises and equipment, other real estate owned, core 
deposit intangibles, mortgage servicing rights, and goodwill. In addition, 
the tax ramifications related to the realization of the unrealized gains 
and losses can have a significant effect on fair value estimates and have 
not been considered in many of the estimates.

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

Cash, due from banks and interest bearing deposits in Federal Home Loan 
Bank of Boston.

      For cash and short term investments having maturities of 90 days or 
less, the carrying amounts reported in the consolidated statements of 
financial condition approximate fair values.

<PAGE> 45

Securities held to maturity, securities available for sale and stock in 
Federal Home Loan Bank of Boston.

      The fair value of securities held to maturity and securities 
available for sale is estimated based on bid prices published in financial 
newspapers or bid quotations received from securities dealers. Ownership 
of stock in FHLBB is restricted to member banks; therefore, the stock is 
not traded. The estimated fair value of stock in FHLBB, which approximates 
carrying value, represents the price at which the subsidiary bank could 
liquidate its holdings.

Loans held for sale

      Loans actively traded in the secondary mortgage market have been 
valued using current investor yield requirements.

Loans

      Fair values are estimated for portfolios of loans with similar 
financial characteristics. Loans are segregated by type such as 
commercial, commercial real estate, residential mortgage, construction, 
and other consumer. Each loan category is further segmented into fixed and 
adjustable rate interest terms and by performing and nonperforming 
categories.

      The fair value of performing loans, except residential mortgage 
loans, is calculated by discounting scheduled cash flows through the 
estimated maturity using estimated market discount rates that reflect the 
credit and interest rate risk inherent in the loan. The estimate of 
maturity is based on the subsidiary bank's historical experience with 
repayments for each loan classification, modified, as required, by an 
estimate of the effect of current economic and lending conditions. For 
performing residential mortgage loans, fair value is estimated by 
discounting contractual cash flows adjusted for prepayment estimates using 
discount rates based on secondary market sources adjusted to reflect 
differences in servicing and credit costs.

      Fair value for significant nonperforming loans is based on recent 
external appraisals. If appraisals are not available, estimated cash flows 
are discounted using a rate commensurate with the risk associated with the 
estimated cash flows. Assumptions regarding credit risk, cash flows, and 
discount rates are judgmentally determined using available market 
information and specific borrower information.

Accrued interest receivable

      The carrying value of accrued interest receivable on securities and 
loans, included in other assets, approximates its fair value.

Deposits

      Under SFAS No. 107, the fair value of deposits with no stated 
maturity, such as non-interest bearing deposits, NOW, Super NOW, regular 
savings and money market deposit accounts, is equal to the amount payable 
on demand. The fair value estimates do not include the benefit that 
results from the low-cost funding provided by the deposit liabilities 
compared to the cost of borrowing funds in the market. The fair value 
estimate of time certificates is based on the discounted value of 
contractual cash flows. The discount rate is estimated using the rates 
currently offered for deposits of similar remaining maturities.

Securities sold under agreements to repurchase

      The fair value estimate of securities sold under agreements to 
repurchase approximates carrying value because they mature within ninety 
days and bear market interest rates.

Long-term debt

      The fair value of long-term debt is based upon the discounted value 
of contractual cash flows. The discount rate is estimated using the rates 
currently offered for borrowings of similar maturities.

Accrued interest payable

      The carrying value of accrued interest payable on deposits and 
borrowings, included in other liabilities, approximates its fair value.

Off-balance sheet instruments

      The fair value of commitments to extend credit is estimated using 
the fees currently charged to enter into similar agreements, taking into 
account the remaining terms of the agreements and the present 
creditworthiness of the counterparties. For fixed rate loan commitments, 
excluding those committed for sale to the secondary market, fair value 
also considers the difference between current levels of interest rates and 
the committed rates. The fair value of financial guarantees written and 
letters of credit is based on fees currently charged for similar 
agreements or on the 

<PAGE> 46

estimated cost to terminate them or otherwise settle the obligations with 
the counterparties. It is management's belief that the fair value estimate 
of commitments to extend credit approximates carrying value, which is $0, at 
December 31, 1996 and 1995, because most mature within one year, do not 
present any unanticipated credit concerns and bear market interest rates.

      The following presents the carrying value and estimated fair value 
of the Company's financial instruments at December 31, 1996 and 1995.

<TABLE>
<CAPTION>
                                                                     December 31,
                                                      ------------------------------------------------
                                                               1996                      1995
                                                      ----------------------    ----------------------
                                                                   Estimated                 Estimated
                                                      Carrying       Fair       Carrying       Fair
                                                        Value        Value        Value        Value
                                                      ---------    ---------    ---------    ---------
                                                                    (In Thousands)

<S>                                                   <C>          <C>          <C>          <C>
Financial Assets
  Cash and due from banks                             $  18,129    $  18,129    $  17,771    $  17,771
  Interest bearing deposits in Federal Home Loan
    Bank of Boston                                       17,993       17,993       24,239       24,239
  Securities held to maturity                             9,500        9,493
  Stock in Federal Home Loan Bank of Boston               3,215        3,215        3,215        3,215
  Securities available for sale                          99,423       99,423       95,016       95,016
  Net loans                                             200,803      206,279      184,309      190,710
  Loans held for sale                                     1,025        1,025        1,985        1,985
  Accrued interest receivable                             2,406        2,406        2,471        2,471
Financial Liabilities
  Deposits (with no stated maturity)                    188,557      188,557      181,766      181,766
  Time deposits                                         115,597      115,952      105,364      104,844
  Securities sold under agreements to repurchase         31,535       31,535       26,189       26,189
  Long-term debt                                            691          632          728          711
  Accrued interest payable                                  434          434          410          410

</TABLE>

NOTE U--Condensed Parent Company Only Financial Information

      Condensed financial statements of Granite State Bankshares, Inc. 
(the "Parent Company"), as of December 31, 1996 and 1995, and for the 
years ended December 31, 1996, 1995 and 1994, are as follows:

Balance Sheets

<TABLE>
<CAPTION>
                                                      December 31,
                                                  ---------------------
                                                    1996        1995
                                                  --------    ---------
                                                     (In Thousands)

<S>                                               <C>         <C> 
Assets
Interest bearing deposits in subsidiary bank      $    719    $   1,467
Investment in subsidiary bank, at equity            30,652       28,369
Other assets                                           230          231
                                                  ---------------------
                                                  $ 31,601     $ 30,067
                                                  =====================

Liabilities                                       $    305     $    278

Stockholders' equity                                31,296       29,789
                                                  ---------------------
                                                  $ 31,601     $ 30,067
                                                  =====================
</TABLE>

<PAGE> 47

Statements of Earnings

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                          ---------------------------
                                                           1996      1995      1994
                                                          -------   -------   -------
                                                                (In Thousands)

<S>                                                       <C>       <C>       <C>     
Revenues
  Interest income from subsidiary bank                    $    20   $    31   $    22
  Dividend income from subsidiary bank                      2,000     2,000     1,900
                                                          ---------------------------
      Total revenue                                         2,020     2,031     1,922
Operating expenses                                             20        31        22
                                                          ---------------------------
Earnings before equity in undistributed earnings of 
 subsidiary bank                                            2,000     2,000     1,900
Equity in undistributed earnings of subsidiary bank         1,780     1,435       923
                                                          ---------------------------
      Net earnings                                        $ 3,780   $ 3,435   $ 2,823
                                                          ===========================
</TABLE>

Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                                  -----------------------------
                                                                   1996       1995       1994
                                                                  -------    -------    -------
                                                                         (In Thousands)

<S>                                                               <C>        <C>        <C>
Cash flows from operating activities:
  Net earnings                                                    $ 3,780    $ 3,435    $ 2,823
  Adjustments to reconcile net earnings to net cash provided 
   by operating activities:
    Equity in undistributed earnings of subsidiary bank            (1,780)    (1,435)      (923)
    (Increase) decrease in other assets                                 1          3         (4)
    Increase (decrease) in other liabilities                           (7)        (1)        13
    Decrease in unearned compensation--ESOP                                       64         86
                                                                  -----------------------------
      Net cash provided by operating activities                     1,994      2,066      1,995
                                                                  -----------------------------

Cash flows from investing activities:
  (Increase) decrease in interest bearing deposits with 
   subsidiary bank                                                    748       (309)      (332)
                                                                  -----------------------------
      Net cash provided by (used in) investing activities             748       (309)      (332)
                                                                  -----------------------------

Cash flows from financing activities:
  Dividends paid on common stock                                   (1,083)      (998)      (688)
  Issuance of common stock in connection with exercise of 
   stock options                                                      217      
  Purchase of treasury stock                                       (1,876)      (695)      (889)
  Payments made on long-term debt                                                (64)       (86)
                                                                  -----------------------------
      Net cash used in financing activities                        (2,742)    (1,757)    (1,663)
                                                                  -----------------------------
      Net increase (decrease) in cash                                   0          0          0
Cash at beginning of year                                               0          0          0
                                                                  -----------------------------
Cash at end of year                                               $     0    $     0    $     0
                                                                  =============================
</TABLE>

      The Parent Company's Statements of Stockholders' Equity are 
identical to the Consolidated Statements of Stockholders' Equity and 
therefore, are not reprinted here.

      The Company has no material contingencies, commitments or long-term 
obligations other than those disclosed elsewhere in the accompanying Notes 
to Consolidated Financial Statements.

<PAGE> 48

                  SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

      The following is a summary of the quarterly results of operations 
for the years ended December 31, 1996 and 1995. 

<TABLE>
<CAPTION>
                                                                          1996
                                                        ----------------------------------------
                                                        Fourth      Third     Second      First
                                                        Quarter    Quarter    Quarter    Quarter
                                                        -------    -------    -------    -------
                                                        ($ In Thousands, except per share data)

<S>                                                     <C>        <C>        <C>        <C>
Interest and dividend income
  Loans                                                 $ 4,712    $ 4,558    $ 4,365    $ 4,438
  Securities available for sale                           1,451      1,536      1,651      1,472
  Securities held to maturity                               139        129        124          2
  Interest bearing deposits in Federal Home Loan 
   Bank of Boston                                           267        133         51        316
  Federal Home Loan Bank of Boston stock                     51         53         52         50
                                                        ----------------------------------------
      Total interest and dividend income                  6,620      6,409      6,243      6,278
                                                        ----------------------------------------

Interest expense
  Deposits                                                2,774      2,670      2,558      2,634
  Other borrowed funds                                      318        335        269        284
                                                        ----------------------------------------
      Total interest expense                              3,092      3,005      2,827      2,918
                                                        ----------------------------------------
      Net interest and dividend income                    3,528      3,404      3,416      3,360
Provision for possible loan losses                           50        150        225        225
                                                        ----------------------------------------
      Net interest and dividend income after 
       provision for possible loan losses                 3,478      3,254      3,191      3,135
Noninterest income <F1>                                     667        856        807        851
Noninterest expense                                       2,695      2,631      2,561      2,627
                                                        ----------------------------------------
  Earnings before income taxes                            1,450      1,479      1,437      1,359
Income taxes                                                475        504        488        478
                                                        ----------------------------------------

      NET EARNINGS                                      $   975    $   975    $   949    $   881
                                                        ========================================

Net earnings per common share--primary                  $  0.47    $  0.46    $  0.45    $  0.41

Net earnings per common share--fully diluted <F2>       $  0.47    $  0.46    $  0.45    $  0.41

Annualized Returns
  Return on average assets                                 1.06%      1.09%      1.11%      1.03%
  Return on average stockholders' equity                  12.74%     13.00%     12.67%     11.43%

---------------------
<FN>
<F1>  Included in noninterest income are net gains on sales of securities 
      available for sale of $212,000, $186,000, $100,000 and $189,000 in the 
      fourth quarter, third quarter, second quarter and first quarter, 
      respectively.

<F2>  Earnings per common share is calculated by dividing net earnings by 
      the average common shares outstanding for each quarter. Therefore, the sum 
      of earnings per common share for the quarters may not equal total earnings 
      per share for the year.
</FN>

</TABLE>

<PAGE> 49

<TABLE>
<CAPTION>
                                                                          1995
                                                        ----------------------------------------
                                                        Fourth      Third     Second      First
                                                        Quarter    Quarter    Quarter    Quarter
                                                        -------    -------    -------    -------
                                                        ($ In Thousands, except per share data)

<S>                                                     <C>        <C>        <C>        <C>
Interest and dividend income
  Loans                                                 $ 4,622    $ 4,622    $ 4,668    $ 4,415
  Securities available for sale                           1,260      1,146      1,128      1,153
  Securities held to maturity                                          124        199        210
  Interest bearing deposits in Federal Home Loan 
   Bank of Boston                                           455        334         23          2
  Federal Home Loan Bank of Boston stock                     53         54         57         57
                                                        ----------------------------------------
      Total interest and dividend income                  6,390      6,280      6,075      5,837
                                                        ----------------------------------------

Interest expense
  Deposits                                                2,700      2,597      2,367      1,814
  Other borrowed funds                                      284        322        300        589
                                                        ----------------------------------------
      Total interest expense                              2,984      2,919      2,667      2,403
                                                        ----------------------------------------
      Net interest and dividend income                    3,406      3,361      3,408      3,434

Provision for possible loan losses                          285        225        175         50
                                                        ----------------------------------------

      Net interest and dividend income after 
       provision for possible loan losses                 3,121      3,136      3,233      3,384

Noninterest income <F1>                                     632        616        743        524
Noninterest expense                                       2,445      2,430      2,620      2,586
                                                        ----------------------------------------

  Earnings before income taxes                            1,308      1,322      1,356      1,322
Income taxes                                                438        458        498        479
                                                        ----------------------------------------

      NET EARNINGS                                      $   870    $   864    $   858    $   843
                                                        ========================================

Net earnings per common share--primary                  $  0.40    $  0.40    $  0.39    $  0.39

Net earnings per common share--fully diluted <F2>       $  0.40    $  0.40    $  0.39    $  0.39

Annualized Returns
  Return on average assets                                 1.00%      1.02%      1.08%      1.10%
  Return on average stockholders' equity                  11.60%     11.91%     12.44%     13.09%

--------------------
<FN>
<F1>  Included in noninterest income are net gains on sales of securities 
      available for sale of $121,000, $0, $205,000 and $0 for the fourth 
      quarter, third quarter, second quarter and first quarter, respectively.

<F2>  Earnings per common share is calculated by dividing net earnings by 
      the average common shares outstanding for each quarter. Therefore, the sum 
      of earnings per common share for the quarters may not equal total earnings 
      per share for the year.
</FN>

</TABLE>

<PAGE> 50