EXHIBIT 13


Management's Discussion and Analysis 

GENERAL

      Granite State Bankshares, Inc. ("Granite State" or the "Company") is a 
single-bank holding company which owns all of the stock of the Granite Bank 
(the "subsidiary bank"), a New Hampshire chartered commercial bank. The 
Company has grown profitably over the past several years through several 
strategic acquisitions and by leveraging its capital. This activity 
strengthened the franchise and assisted in the transition from a thrift 
institution into a full-service 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 nineteen full service offices and an additional twenty 
one remote automatic teller locations. The subsidiary bank is a full service 
community bank with a diversified lending operation that services Cheshire, 
Hillsborough, Merrimack, 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 6.3% of total deposits at December 31, 1998) 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 areas.

Forward-Looking Statements 

      Certain statements contained herein are not based on historical facts 
and are "forward-looking statements" within the meaning of Section 27A of 
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 
1934. Forward-looking statements which are based on various assumptions 
(some of which are beyond the Company's control), are subject to numerous 
risks and uncertainties and statements for periods subsequent to December 
31, 1998 are subject to greater uncertainty because of the increased 
likelihood of changes in underlying factors and assumptions. Such forward-
looking statements may be identified by reference to a future period or 
periods, or by the use of forward-looking terminology, such as "may," 
"will," "believe," "expect," "estimate," "anticipate," "continue," or 
similar terms or variations on those terms, or the negative of these terms. 
Actual results could differ materially from those set forth in forward-
looking statements due to a variety of factors, including, but not limited 
to, those related to the economic environment, particularly in the market 
areas in which the Company operates, competitive products and pricing, the 
ability of the Company and its competitors, vendors and customers to respond 
effectively to issues related to the Year 2000, fiscal and monetary policies 
of the U.S. Government, changes in government regulations affecting 
financial institutions, including regulatory fees and capital requirements, 
changes in prevailing interest rates, acquisitions and the integration of 
acquired businesses, credit risk management, asset-liability management, the 
financial and securities markets and the availability of and costs 
associated with sources of liquidity. 
      The Company does not undertake, and specifically disclaims any 
obligation, to publicly release the result of any revisions which may be 
made to any forward-looking statements to reflect the occurrence of 
anticipated or unanticipated events or circumstances after the date of such 
statements. 

Acquisition 

      Effective after the close of business October 31, 1997, the Company 
completed its merger with  Primary Bank. Each of Primary Bank's 2,194,685 
outstanding shares of common stock were converted into 1.1483 shares of the 
Company's common stock resulting in the issuance of 2,520,157 shares of the 
Company's common stock to Primary Bank stockholders. Primary Bank was a 
state-chartered guaranty (stock) savings bank with total assets of $388 
million, headquartered in Peterborough, New Hampshire. Primary Bank was 
merged into Granite Bank, the Company's wholly-owned subsidiary, as part of 
the transaction.
      The transaction was accounted for by the pooling-of-interests method 
of accounting, and, accordingly, the consolidated financial statements for 
all periods presented prior to the merger


<PAGE>  11


have been restated to present the combined financial condition and results
of operations as if the combination had been in effect for all periods 
presented. The acquisition provided an expanded penetration of the Company 
into commercial and industrial lending and served to connect existing branch 
facilities in southwestern, central and southeastern New Hampshire. Expenses 
directly attributable to the merger were charged to earnings at the date of 
combination and are described in detail in the noninterest expense portion of 
the results of operations section of this Management's Discussion and 
Analysis.  
 
FINANCIAL CONDITION 

      Consolidated assets at December 31, 1998 were $878.1 million, up $64.4 
million or 7.9% from $813.7 million at December 31, 1997. 
 
Interest Bearing Deposits in other banks 

      Interest bearing deposits in other banks, which primarily consist of 
deposits with the Federal Home Loan Bank of Boston ("FHLBB"), were $19.5 
million at December 31, 1998 and $27.5 million at December 31, 1997. Such 
investments are short-term overnight investments and the level of the 
Company's investment in these instruments fluctuates as investments are made 
in other interest earning assets such as loans, securities held to maturity 
and securities available for sale, and as balances of interest bearing 
liabilities such as deposits, securities sold under agreements to repurchase 
and other borrowings fluctuate. These instruments are also used to fund cash 
and due from bank requirements. 
 
Securities Held to Maturity and  
 Securities Available for Sale 

      The Company classifies its investments in debt and equity securities 
as securities held to maturity, securities available for sale or trading 
securities. Securities held to maturity are carried at amortized cost, 
securities available for sale are carried at market value with unrealized 
gains and losses shown in accumulated other comprehensive income as a 
separate component of stockholders' equity, net of related tax effects, and 
trading securities are carried at market value with unrealized gains and 
losses reflected in earnings. The Company had no securities classified as 
trading securities during 1998, 1997 or 1996.  

      At December 31, 1998 and 1997, the carrying values of securities held 
to maturity and securities available for sale consisted of the following: 

<TABLE>
<CAPTION>
                                                  December 31,
                                              -------------------
                                                1998         1997
                                                ----         ----
                                                 (In Thousands)

<S>                                           <C>          <C>
Securities held to maturity
  US Government agency obligations            $ 17,265     $ 33,910
  Other corporate obligations                    5,012
                                              ---------------------
      Total securities held to maturity       $ 22,277     $ 33,910
                                              =====================

Securities available for sale
  US Treasury obligations                     $ 83,716     $ 82,969
  US Government agency obligations              55,998       44,199
  Other corporate obligations                   46,457        8,508
  Mortgage-backed securities                    11,698       21,508
  Mutual funds                                   6,402        6,113
  Marketable equity securities                  15,494       15,383
                                              ---------------------
      Total securities available for sale     $219,765     $178,680
                                              =====================
</TABLE>


      At December 31, 1998 the net unrealized gains on securities available 
for sale, net of related tax effects were $1.6 million, compared to $5.7 
million at December 31, 1997. These net unrealized gains are shown in 
accumulated other comprehensive income as a separate component of 
stockholders' equity.
      As a result of the Company's acquisition of Primary Bank after the 
close of business October 31, 1997, and to be consistent with the Company's 
existing interest rate risk profile, securities held to maturity, with an 
amortized cost of $22.2 million and a net unrealized loss of $156 thousand, 
were transferred to securities available for sale in the fourth quarter of 
1997. 
      The weighted average maturity for all debt securities held to maturity 
and available for sale, excluding mortgage-backed securities, is 48 months. 
Actual maturities may differ from contractual maturities because certain 
issuers have the right to call obligations without call penalties. The 
weighted average maturity of mortgage-backed securities available for sale 
is 281 months, based upon their final maturities. However, normal principal 
repayments and prepayments of mortgage-backed securities are received 
regularly, substantially reducing their weighted-average maturities. 
       The decrease in securities held to maturity were primarily used to 
fund increases in net loans and securities available for sale, while the 
increase in securities available for sale was attributable to the increased 
level of other borrowings with the FHLBB, as well as reductions in the level 
of cash and due from banks and interest bearing deposits in other banks.


<PAGE>  12


Loans 

      At December 31, 1998 and 1997 the Company's loan portfolio consisted 
of the following: 

<TABLE>
<CAPTION>
                                      December 31,
                                  ---------------------
                                    1998         1997
                                    ----         ----
                                     (In Thousands)

<S>                               <C>          <C>
Commercial, financial and 
 agricultural                     $ 48,418     $ 68,513
Real estate-residential            328,243      245,577
Real estate-commercial             146,093      151,474
Real estate-construction
 and land development                2,281        6,000
Installment                          7,809       11,588
Other                               22,855       26,013
                                  ---------------------
      Total loans                  555,699      509,165
Less:
  Unearned income                   (1,506)      (1,432)
  Allowance for possible loan
   losses                           (7,122)      (7,651)
                                  ---------------------
      Net loans                   $547,071     $500,082
                                  =====================
</TABLE>


      Loans outstanding before deductions for unearned income and the 
allowance for possible loan losses increased $46.5 million or 9.14% to 
$555.7 million at December 31, 1998 from $509.2 million at December 31, 
1997.  
      Residential real estate loans increased $82.7 million or 33.66% to 
$328.2 million at December 31, 1998 from $245.6 million at December 31, 
1997. The increase in residential real estate loans occurred throughout 1998 
as the low interest rate environment during 1997 continued throughout 1998 
and encouraged borrowers to refinance their loans. New home purchases were 
also stronger in 1998 than during 1997.  
      As shown in the table above, commercial, financial and agricultural 
loans decreased $20.1 million, or 29.33%, commercial real estate loans 
decreased $5.4 million, or 3.55% and real estate construction and land 
development loans decreased $3.7 million or 61.98% in 1998 compared to 1997. 
The decrease in commercial, financial and agricultural loans and commercial 
real estate loans related primarily to the pace of loan repayments as a 
result of the continued low interest rate environment prevalent in 1998 and 
the highly competitive environment for attracting loans amongst financial 
institutions in the Company's market areas, coupled with borrowers of 
certain loans, assumed in the merger with Primary Bank in October 1997, 
refinancing their loans with other financial institutions during 1998. The 
decrease in real estate construction and land development loans related 
primarily to the pace of loan repayments, coupled with the Company's general 
determination not to originate new land development loans. 
      Decreases in installment loans of $3.8 million, or 32.61% and other 
loans of $3.2 million, or 12.14% were due to the competitive, low interest 
rate environment that was prevalent during 1998, which allowed borrowers to 
find alternative forms of financing for consumer purchases at lower rates, 
coupled with the ability of borrowers refinancing their residential real 
estate loans to include other borrowings in the refinanced loans. 
      Total loan originations during 1998 and 1997, were $238.8 million and 
$248.1 million, respectively. Loan originations for portfolio, excluding 
loans originated for sale in the secondary mortgage market during 1998 and 
1997 were $198.7 million and $221.7 million, respectively. Loan repayments 
for 1998 and 1997, were $149.4 million and $153.1 million, respectively. 
Loans charged off, net during 1998 and 1997 were $1.7 million and $1.0 
million, respectively. Loans transferred to other real estate owned during 
1998 and 1997 amounted to $724 thousand and $732 thousand, respectively. 
      The subsidiary bank originates fixed rate residential loans for sale 
in the secondary mortgage market. Mortgage loans held for sale at December 
31, 1998 and 1997 were $1.8 million and $1.1 million, respectively. Loans 
originated for sale in the secondary mortgage market during 1998 and 1997 
were $40.1 million and $26.4 million, respectively. Loans sold in the 
secondary mortgage market during 1998 and 1997 were $39.3 million and $26.4 
million, respectively. The Company began originating fifteen year fixed rate 
residential real estate 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 residential real estate loans for 
sale in the secondary mortgage market. At December 31, 1998 and 1997 the 
Company serviced residential real estate loans for others totaling $148.0 
million and $163.9 million, respectively. 
 
Risk Elements 

      The Company's management believes that New Hampshire has witnessed 
steady economic growth since 1992. There can be no assurance that this will 
continue to be the case, however, and the economies and real estate markets 
in the Company's primary market areas will continue to be significant 
determinants of the quality of the Company's assets in future periods, and 
thus 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 


<PAGE>  13


therefore considered nonperforming, with the exception of $146 thousand of 
loans at December 31, 1998, $535 thousand of loans at December 31, 1997, and 
$93 thousand of loans at December 31, 1996, all of which were in the process 
of collection at those dates. 

<TABLE>
<CAPTION>
                                            December 31,
                                    ----------------------------
                                     1998       1997       1996
                                     ----       ----       ----
                                          ($ In Thousands)

<S>                                 <C>        <C>        <C>
Nonperforming loans:
  Residential real estate           $1,347     $1,489     $2,707
  Commercial real estate               592      4,261      1,032
  Construction and land
   development real estate             378         92        102
  Commercial, financial and
   agricultural                        678        956        204
  Installment and other                 18        347         41
                                    ----------------------------
      Total nonperforming 
       loans                         3,013      7,145      4,086
      Total other real estate
       owned                         1,601      1,905      3,492
                                    ----------------------------
      Total nonperforming
       assets                       $4,614     $9,050     $7,578
                                    ============================
Ratios:
      Total nonperforming loans
       to total loans                 0.54%      1.40%      0.92%
                                    ============================

      Total nonperforming assets
       to total assets                0.53%      1.11%      0.95%
                                    ============================
</TABLE>
 
      The Company's nonperforming assets decreased $4.4 million or 49.02% 
from $9.0 million at December 31, 1997 to $4.6 million at December 31, 1998. 
The decrease in nonperforming assets relates primarily to decreases in 
nonperforming commercial real estate loans of $3.7 million, a decrease in 
nonperforming installment and other loans of $329 thousand, a decrease in 
nonperforming commercial, financial and agricultural loans of $278 thousand, 
a decrease in nonperforming residential real estate loans of $142 thousand, 
and a decrease in other real estate owned of $304 thousand, partially offset 
by an increase in nonperforming construction and land development loans of 
$286 thousand. The decrease in nonperforming assets relates to the Company's 
continued focus on asset quality issues and the significant resources 
allocated to the asset quality control functions of credit policy and 
administration and loan review. The asset workout and collection functions 
focus on reducing nonperforming assets. Despite the continued focus on asset 
quality and reduction of nonperforming asset levels, there can be no 
assurance that adverse changes in economic conditions and the real estate 
markets in the Company's primary market areas will not result in higher 
levels of nonperforming assets in the future and negatively impact the 
Company's operations through higher provisions for possible loan losses, 
decreases in accruals of interest income and increased noninterest expenses 
relating to the collection and workout of nonperforming assets.
      The Company has identified loans as impaired in accordance with 
Statement of Financial Accounting Standards ("SFAS") No. 114, when it is 
probable that interest and principal will not be collected according to the 
terms of the loan agreements. The balance of impaired loans was $1.6 million 
and $4.6 million, respectively, at December 31, 1998 and 1997. The average 
recorded investment in impaired loans was $3.5 million, $3.0 million and 
$3.9 million, respectively, in 1998, 1997 and 1996. No income was recognized 
on impaired loans during 1998 and 1997 and  $4 thousand of income was 
recognized during 1996. Total cash collected on impaired loans during 1998, 
1997 and 1996 was $710 thousand, $779 thousand and $2.4 million, 
respectively, all of which with the exception of $4 thousand recognized as 
income during 1996, was credited to the principal balance outstanding on 
such loans. 
      The portion of the allowance for possible loan losses applicable to 
impaired loans amounted to $233 thousand, $1.1 million, $457 thousand and 
$1.1 million, respectively, at December 31, 1998, 1997, 1996 and 1995. 
During 1998, 1997 and 1996, provisions for possible loan losses applicable 
to impaired loans were $201 thousand, $1.0 million and $499 thousand, 
respectively. Impaired loans charged off during 1998, 1997 and 1996 were 
$1.0 million, $386 thousand and $1.2 million, respectively. At December 31, 
1998, 1997 and 1996, there were no impaired loans which did not have an 
allowance for possible loan losses determined in accordance with SFAS No. 
114.
      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 is 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 


<PAGE>  14


real estate owned amounted to $1.6 million and $1.9 million at December 31, 
1998 and 1997, respectively. See note 11 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 
earnings 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.
      Management's evaluation of the allowance is based on a continuing 
review of the loan portfolio. The methodology for determining the amount of 
the allowance for possible loan losses consists of several elements. 
Nonperforming, impaired and delinquent loans are reviewed individually and 
the value of any underlying collateral is considered in determining 
estimates of possible  losses associated with those loans. Another element 
involves estimating losses inherent in categories of loans, based primarily 
on historical experience, industry trends and trends in the real estate 
market and the current economic environment in the Company's primary market 
areas. The last element is based on management's evaluation of various 
conditions, and involves a higher degree of uncertainty because they are not 
identified with specific problem credits or portfolio segments. The 
conditions evaluated in connection with this element include the following: 
industry and regional conditions; seasoning of the loan portfolio and 
changes in the composition of and growth in the loan portfolio; the strength 
and duration of the current business cycle; existing general economic and 
business conditions in the lending areas; credit quality trends, including 
trends in nonperforming loans expected to result from changes in existing 
conditions; historical loan charge-off experience; and the results of bank 
regulatory examinations. 
      At December 31, 1998, 1997 and 1996, the allowance for possible loan 
losses was $7.1 million, $7.7 million and $6.3 million, respectively, and 
the ratio of the allowance to total loans outstanding was 1.28%, 1.50% and 
1.41%, respectively. At December 31, 1998, 1997 and 1996, the allowance for 
possible loan losses represented 236.4%, 107.1% and 153.0%, respectively, of 
nonperforming loans. The amount of the allowance for possible loan losses 
decreased at December 31, 1998 compared to December 31, 1997, primarily as a 
result of decreases in nonperforming and impaired loans and a change in the 
composition of the loan portfolio which was more predominantly residential 
real estate in 1998, partially offset by the overall growth of the loan 
portfolio. The amount of the allowance for possible loan losses increased at 
December 31, 1997 compared to December 31, 1996, primarily as a result of 
increases in nonperforming and impaired loans, and an increase in the total 
loan portfolio, including growth in commercial business loans and commercial 
real estate loans.
      While management believes that the allowance for possible loan losses 
at December 31, 1998 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 

      A summary of deposits at December 31, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                              December 31,
                                          ---------------------
                                            1998         1997
                                            ----         ----
                                             (In Thousands)

<S>                                       <C>          <C>
NOW accounts                              $203,068     $166,773
Savings accounts                            87,150       89,278
Money market deposit accounts               19,659       31,486
Time certificates                          266,901      290,176
                                          ---------------------
      Total interest bearing deposits      576,778      577,713
Noninterest bearing deposits                73,709       71,270
                                          ---------------------
      Total deposits                      $650,487     $648,983
                                          =====================
</TABLE>


      Total deposits remained relatively stable increasing $1.5 million, or 
0.23% during 1998. The decrease in time certificates of $23.3 million and a 
portion of the $11.8 million decrease in money market deposit accounts 
related primarily to depositors looking to achieve higher yields by 
investing their funds in alternate sources outside of traditional bank 
products, while the continued success of the NOW account product introduced 
by the subsidiary bank in 1995 contributed to the $36.3 million increase in 
NOW accounts and the decrease in a portion of the money market deposit 
accounts, as some money market deposit accounts shifted into the NOW account 
product. Noninterest bearing deposits increased $2.4 million, while savings 
accounts decreased $2.1 million during 1998.
      Time certificates with minimum balances of $100 thousand decreased 
$3.9 million, from $37.4 million at December 31, 1997 to $33.5 million at 
December 31, 1998. The Company does not use brokers to solicit deposits. 
 
Securities Sold Under Agreements to Repurchase  

      Securities sold under agreements to repurchase increased $4.9 million 
or 7.4% to $70.9 million at December 31, 1998 from 


<PAGE>  15


$66.0 million at December 31, 1997. The increase in securities sold under 
agreements to repurchase was used to fund loan growth. These short-term 
borrowings are instruments which are used by municipalities and businesses 
to invest their excess cash and are collateralized by US Treasury and US 
Government Agency obligations. 

Other Borrowings 

      Other borrowings which consists of borrowings from the FHLBB increased 
$54.7 million from $25.9 million at December 31, 1997 to $80.6 million at 
December 31, 1998. Proceeds of new borrowings from the FHLBB during 1998 
were $80.0 million and repayments were $25.3 million. FHLBB borrowings 
increased because the growth in interest earning assets, primarily loans and 
to a lesser extent securities available for sale exceeded the growth in 
deposits and securities sold under agreements to repurchase. 
 
Stockholders' Equity 

      Stockholders' equity was $72.6 million at December 31, 1998, an 
increase of $5.7 million from $66.9 million at December 31, 1997. Book value 
per share was $12.31 at December 31, 1998, up $0.30 or 2.5% from $12.01 at 
December 31, 1997. See "Capital Resources and Liquidity" for further 
information on stockholders' equity. 
 
Risk Management 

      In the normal course of business, the Company is subject to various 
risks, the most significant of which are credit, liquidity and market risk, 
which includes interest rate risk. Although the Company cannot eliminate 
these risks, it has risk management processes designed to provide for risk 
indentification, measurement, monitoring and control. The Board of Directors 
establishes policies with respect to risk management, lending, investment, 
asset/liability management and interest rate risk and reviews and approves 
these policies annually. The Board of Directors delegates the responsibility 
for carrying out these policies to management.
      Credit risk represents the possibility that a customer or counterparty 
may not perform in accordance with contractual terms. Credit risk results 
from extending credit to customers, purchasing securities and entering into 
certain off-balance-sheet financial transactions (which are primarily 
commitments to originate loans, unused lines and standby letters of credit 
or unadvanced portions of construction loans). Risk associated with the 
extension of credit (including off-balance-sheet items) includes general 
risk, which is inherent in the lending business, and risk specific to 
individual borrowers. Risk associated with purchasing securities primarily 
centers around the credit quality of the issuer of the security. The Company 
seeks to manage credit risk through portfolio diversification, investments 
in highly rated securities, loan underwriting policies and procedures and 
loan monitoring practices.
      Liquidity represents an institution's ability to generate cash or 
otherwise obtain funds at reasonable rates to satisfy commitments to 
borrowers and demands of depositors and to invest in strategic initiatives. 
Liquidity risk represents the likelihood the Company would be unable to 
generate cash or otherwise obtain funds at reasonable rates for such 
purposes. Liquidity is managed through the coordination of the relative 
maturities of assets, liabilities and off-balance sheet positions and is 
enhanced by the ability to raise funds with direct borrowings.
      Market risk reflects the risk of economic loss resulting from adverse 
changes in market prices and interest rates. The risk of loss can be 
reflected in diminished current values and/or reduced potential net interest 
income in future periods. The Company's market risk arises primarily from 
interest rate risk. The Company is also exposed to market price risk through 
its investments in marketable equity securities. 
 
Asset/Liability Management, Interest Rate Sensitivity 
 and Market Risk 

      The Company's primary objective regarding asset/liability management 
is to position the Company so that changes in interest rates do not have a 
material adverse impact upon net earnings (through changes in net interest 
and dividend income) and the estimated net present value of equity of the 
Company. The Company's primary strategy for accomplishing its 
asset/liability management objective is achieved by managing the weighted 
average maturities of assets, liabilities and off-balance-sheet items 
(duration matching). At December 31, 1998, approximately 65.6% of the 
Company's loan portfolio was comprised of adjustable rate loans. 
Approximately 69.2% of its securities available for sale and securities held 
to maturity portfolios are debt securities maturing in less than five years. 
With regard to deposit liabilities, only 41.0% of total deposits and 46.3% 
of interest bearing deposits are comprised of time certificates. Unlike 
other deposit products such as NOW, money market deposit and savings 
accounts, time certificates carry a high degree of interest rate sensitivity 
and therefore their renewal will vary based on the competitiveness of the 
Company's interest rates. The Company has also entered into interest rate 
cap agreements to manage its exposure to interest rate risk. At December 31, 
1998 the Company had interest rate cap agreements in effect with notional 
amounts of $20.0 million with a weighted average strike rate of 7.77%, which 
mature in the year 2004. The Company receives an interest payment if the 
three-


<PAGE>  16


month London Interbank Offer Rate ("LIBOR") increases above the strike rate. 
      To measure the impact of interest rate changes, the Company utilizes a 
comprehensive financial planning model that recalculates the estimated net 
present value of equity and net interest and dividend income of the Company 
assuming instantaneous, permanent parallel shifts in the yield curve of both 
up and down 100 and 200 basis points. Larger increases or decreases in 
estimated net interest and dividend income and the estimated net present 
value of equity of the Company as a result of these interest rate changes 
represent greater interest rate risk than do smaller increases or decreases.
      The results of the financial planning model are highly dependent on 
numerous assumptions. These assumptions generally fall into two categories: 
those relating to the interest rate environment and those relating to 
general business and economic factors. Assumptions related to the interest 
rate environment include the prepayment speeds on mortgage-related assets 
and the cash flows and maturities of financial instruments. Assumptions 
related to general business and economic factors include changes in market 
conditions, loan volumes and pricing, deposit sensitivity, customer 
preferences, competition, and management's financial and capital plans. The 
assumptions are developed based on current business and asset/liability 
management strategies, historical experience, the current economic 
environment, forecasted economic conditions and other analyses. These 
assumptions are inherently uncertain and subject to change as time passes. 
The Company endeavors to maintain a position where it experiences no 
material changes in estimated net present value of equity and no material 
fluctuation in estimated net interest and dividend income as a result of 
assumed 100 and 200 basis point increases and decreases in interest rates. 
However, there can be no assurances that the Company's forecasts in this 
regard will be achieved.
      Management believes that the above method of measuring and managing 
interest rate risk is consistent with the FDIC regulation regarding an 
interest rate risk component of regulatory capital.
      The following table summarizes the timing of the Company's anticipated 
maturities or repricing of and interest rates applicable to rate-sensitive 
assets and rate-sensitive liabilities as of December 31, 1998. This table 
has been generated using certain assumptions which the Company believes 
fairly and accurately represent repricing volumes in a dynamic interest rate 
environment. Adjustable rate loans are reflected in periods in which they 
reprice, and fixed rate loans are shown in accordance with their contractual 
maturities (scheduled amortization). The earlier of contractual maturities 
or the next repricing date are used on all securities. Certain marketable 
equity securities and stock in the FHLBB totaling $20.7 million, are not 
susceptible to interest rate sensitivity and have therefore been excluded 
from this analysis. The gap maturity categories for savings deposits 
(including NOW, savings, and money market deposit accounts) are allocated 
based on the Company's historical experience in retaining such deposits in 
changing interest rate environments, as well as management's philosophy of 
repricing core deposits in reaction to changes in the interest rate 
environment. Time deposits are reflected at the earlier of contractual 
maturities or their next repricing date. Repricing frequencies will vary at 
different points in the interest cycle and as supply and demand for credit 
change.
      Nonperforming loans totaling $3.0 million have been excluded from this 
analysis.


<PAGE>  17


                   INTEREST RATE SENSITIVITY GAP ANALYSIS 
                            at December 31, 1998

<TABLE>
<CAPTION>
                                                                           Sensitivity Period
                                                  -------------------------------------------------------------------
                                                   0-6        6 Months-      1-3         3-5         Over
                                                  Months       1 Year       Years       Years      5 Years      Total
                                                  ------       --------     -----       -----      -------      -----
                                                                            ($ In Thousands)

<S>                                       <S>    <C>          <C>          <C>         <C>         <C>         <C>
Rate-sensitive Assets:
  Interest bearing deposits in other 
   banks.....................................$   $ 19,532                                                      $ 19,532
                                          Rate       4.84%                                                         4.84%
  Securities.................................$     33,788     $ 37,180     $ 52,563    $ 65,082    $ 39,935     228,548
                                          Rate       5.75%        5.88%        5.97%       5.92%       6.32%       5.97%
  Loans and loans held for sale..............$    152,978       78,387       87,906      82,831     150,906     553,008
                                          Rate       8.87%        8.47%        8.21%       8.32%       6.99%       8.11%
                                                 ----------------------------------------------------------------------
      Total...................................   $206,298     $115,567     $140,469    $147,913    $190,841    $801,088
                                                 ======================================================================

Rate-sensitive Liabilities:
  Money Market Deposit 
   Accounts..................................$   $  3,932     $  5,898     $  9,829                            $ 19,659
                                          Rate       2.56%        2.56%        2.56%                               2.56%
  Savings and NOW Accounts...................$     23,217       34,826      116,087    $ 58,044    $ 58,044     290,218
                                          Rate       2.32%        2.32%        2.32%       2.32%       2.32%       2.32%
  Time certificates..........................$    103,301      122,849       34,221       6,218         312     266,901
                                          Rate       5.13%        5.52%        5.77%       5.68%       5.55%       5.41%
  Securities sold under 
   agreements to repurchase and 
   other borrowings..........................$     70,583          367           99      30,112      50,352     151,513
                                          Rate       4.29%        4.71%        6.06%       5.87%       4.69%       4.74%
                                                 ----------------------------------------------------------------------
      Total...................................   $201,033     $163,940     $160,236    $ 94,374    $108,708    $728,291
                                                 ======================================================================
Period Sensitivity Gap........................   $  5,265     $(48,373)    $(19,767)   $ 53,539    $ 82,133    $ 72,797
Cumulative Sensitivity Gap....................   $  5,265     $(43,108)    $(62,875)   $ (9,336)   $ 72,797
Cumulative Sensitivity Gap as a
 Percent of Total Rate-sensitive Assets.......       0.66%       (5.38)%      (7.85)%     (1.17)%      9.09%
</TABLE>


      The ability to assess interest rate risk using gap analysis is 
limited. Gap analysis does not capture the impact of cash flow or balance 
sheet mix changes over a forecasted future period and it does not measure 
the amount of price change expected to occur in the various asset and 
liability categories. Thus, management does not use gap analysis exclusively 
in its assessment of interest rate risk. The Company's interest rate risk 
exposure is also measured by the estimated net interest and dividend income 
and discounted cash flow market value sensitivities referred to above.
      The Company's limits on interest rate risk specify that if interest 
rates were to shift immediately up or down 200 basis points, hypothetical 
net interest and dividend income should decline by less than 8%. The change 
in hypothetical net interest and dividend income would not differ materially 
from the change in pretax earnings. Additionally, the Company's limits on 
interest rate risk also specify that if interest rates were to shift 
immediately up or down 200 basis points, the change in the estimated net 
present value of equity should decline by less than 15%. The following table 
presents as of December 31, 1998, the Company's interest rate risk as 
measured by the changes in the estimated net present value of equity and 
hypothetical net interest and dividend income for instantaneous and 
sustained parallel shifts of 100 and 200 basis points in market interest 
rates.


<PAGE>  18


<TABLE>
<CAPTION>
                                                                         $ Change in          % Change in
                   $ Change in Estimated     % Change in Estimated     Hypothetical Net     Hypothetical Net
  Change in             Net Present               Net Present            Interest and         Interest and
Interest Rates        Value of Equity           Value of Equity        Dividend Income      Dividend Income
--------------     ---------------------     ---------------------     ----------------     ----------------
(Basis Points)        (In Thousands)                                    (In Thousands)

  <S>                    <C>                        <C>                     <C>                 <C>
    +200                 $(3,503)                   (3.21)%                 $(567)              (1.72)%
    +100                      18                     0.02                     140                0.43
  Flat Rate                    0                        0                       0                0
    -100                  (3,509)                   (3.21)                    261                0.79
    -200                  (8,196)                   (7.50)                    (84)              (0.26)
</TABLE>

      Management also believes that the assumptions utilized in evaluating 
the vulnerability of the Company's net interest and dividend income and 
estimated net present value of equity to changes in interest rates 
approximate actual experience. However, the interest rate sensitivity of the 
Company's assets and liabilities as well as the estimated effect of changes 
in interest rates on the estimated net present value of equity or estimated 
net interest and dividend income, could vary substantially if different 
assumptions are used or actual experience differs from the experience on 
which the assumptions were based.
      In the event the Company should experience a mismatch in its desired 
GAP ranges or an excessive decline in its estimated net present value of 
equity or estimated net interest and dividend income subsequent to an 
immediate and sustained change in interest rates, it has a number of options 
which it could utilize to remedy such mismatch. The Company could 
restructure its available for sale securities portfolio through sale or 
purchase of securities with more favorable repricing attributes. It could 
also emphasize loan products with appropriate maturities or repricing 
attributes, or it could attract deposits or obtain borrowings with desired 
maturities.
      The Company maintains a portfolio of marketable equity securities, 
which are included in securities available for sale, and had estimated fair 
values of $15.5 million and an original cost of $14.1 million at December 
31, 1998. Such securities are recorded at estimated fair market value, and 
are subject to market price risk. The risk is the potential loss in 
estimated fair value resulting from adverse changes in prices quoted by 
stock markets. The Company manages its market price risk by closely 
monitoring market developments and reviewing current financial statements 
and other reports published by the issuers of the equity securities.
      Within the Company's portfolio of marketable equity securities, an 
analysis of significant quarterly movements in stock prices over the last 
three years, or since the stock was initially offered for purchase if less 
than three years, indicated a 10-20% movement in prices in 26% of the 
quarters, a 20-25% movement in prices in 10% of the quarters and a 25-35% 
movement in prices in 12% of the quarters. The market price risk in the 
Company's marketable equity securities portfolio, assuming hypothetical 
decreases in quoted stock prices of 10%, 25% and 35%, would amount to $1.5 
million, $3.9 million and $5.4 milllion, respectively. The after tax impact 
on capital relating to these hypothetical decreases in stock prices would be 
$1.0 million, $2.4 million and $3.3 million, respectively. 

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, 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, noninterest 
expense, and income taxes. 
 
Comparison of Operating Results for the Years 
 Ended December 31, 1998 and 1997 
 
Net Earnings 

      Operations in 1998 resulted in net earnings of $9.6 million, an 
increase of $7.3 million over net earnings of $2.3 million for 1997. Basic 
earnings per share was $1.64 in 1998 compared to $.42 in 1997. Diluted 
earnings per share was $1.60 in 1998 compared to $.40 in 1997.
      Earnings before income taxes were $14.7 million in 1998, an increase 
of $11.7 million compared to earnings before income taxes of $3.0 million in 
1997. Earnings before income taxes increased in 1998 compared to 1997, 
primarily as a result of increases in net interest and dividend income and 
noninterest income and decreases in the provision for possible loan losses 
and noninterest expense. 


<PAGE>  19


Net Interest and Dividend Income 

      Net interest and dividend income was $31.0 million and $30.1 million 
in 1998 and 1997, respectively. The increase of $862 thousand in 1998 
compared to 1997 relates to an increase of $11.1 million or 1.50% in average 
interest earning assets to $751.3 million in 1998 from $740.2 million in 
1997 and a decrease in average interest bearing liabilities of $4.9 million, 
or 0.73%, to $669.2 million in 1998 from $674.1 million in 1997, while the 
interest rate spread was fairly stable at 3.67% in 1998 compared to 3.68% in 
1997.
      Interest income on loans increased $3.5 million to $45.8 million in 
1998 from $42.3 million in 1997. The increase was primarily the result of an 
increase in the average loan balances of $61.8 million, or 13.00%, to $536.6 
million in 1998 from $474.8 million in 1997, partially offset by a decrease 
in average loan yields to 8.54% in 1998 from 8.91% in 1997. The increase in 
average balances in the loan portfolio reflects strong loan demand in the 
residential real estate market during 1998 as a result of the continued low 
interest rate environment which encouraged refinancing, as well as new home 
purchases in the subsidiary bank's market areas. Competition for loans 
amongst financial institutions and the continued low interest rate 
environment sparked loan demand and also contributed to the slightly lower 
yields realized in 1998 compared to 1997. The competitive loan environment 
also resulted in a decrease in the Company's commercial, financial and 
agricultural loans and commercial real estate loans, which also contributed 
to the lower yields realized on loans in 1998 compared to 1997. 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.
      Interest and dividend income on securities, including stock in FHLBB 
decreased $4.1 million to $11.8 million in 1998 from $15.9 million in 1997. 
The decrease relates primarily to a decrease in the average balances of 
securities, including stock in FHLBB of $55.7 million to $195.1 million in 
1998 from $250.8 million in 1997, coupled with a decrease in yields to 6.03% 
in 1998 from 6.35% in 1997. The decrease in average balances of securities 
is due to a change in mix of assets to higher yielding loans from lower 
yielding securities during 1998. The decrease in yields was primarily the 
result of the continued low interest rate environment that was prevalent 
during 1998.
      Interest expense on deposits decreased $768 thousand to $22.6 million 
in 1998 from $23.3 million in 1997, with interest on time deposits 
decreasing $1.0 million, partially offset by an increase in interest on 
savings deposits of $255 thousand. The decrease related primarily to a 
decrease in the average cost of deposits to 4.00% during 1998 compared to 
4.11% during 1997, coupled with a decrease in the average balances of 
deposits of $2.6 million to $564.4 million in 1998 from $567.0 million in 
1997. Average balances of time certificates decreased $15.7 million to 
$267.8 million during 1998 from $283.5 million during 1997 which was 
partially offset by an increase in average balances of savings deposits of 
$13.1 million to $296.6 million during 1998 from $283.5 million during 1997. 
The decrease in the average balances of time certificates related primarily 
to depositors looking to achieve higher yields by investing their funds in 
alternate sources outside of traditional bank products, while the continued 
success of the NOW account product introduced by the subsidiary bank in 1995 
was the primary reason for the increase in the average balances of savings 
deposits.
      Interest expense on securities sold under agreements to repurchase and 
other borrowings decreased $479 thousand to $5.1 million in 1998 from $5.6 
million in 1997. The decrease was primarily related to a decrease in the 
cost of these borrowings to 4.87% in 1998 compared to 5.21% in 1997, coupled 
with a decrease in the average balances of $2.3 million to $104.8 million in 
1998 from $107.1 million in 1997. The decrease in average balances related 
to a decrease in average balances of other borrowings of $10.0 million, 
partially offset by an increase in the average balances on securities sold 
under agreements to repurchase of $7.7 million. The increase of $7.7 million 
was primarily the result of local municipalities and commercial accounts 
making greater use of securities sold under agreements to repurchase in 
investing their excess funds. The cost of securities sold under agreements 
to repurchase was 4.36% and 4.76% in 1998 and 1997, respectively, while the 
cost of other borrowings was relatively stable, at 5.79% during 1998 and 
5.78% during 1997. 


<PAGE>  20


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,
                                                     --------------------------------------------------------------------------
                                                               1998                     1997                     1996
                                                     ------------------------ ------------------------ ------------------------
                                                     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>                $536,596 $45,832  8.54%  $474,844 $42,307  8.91%  $423,421 $37,969  8.97%
    Interest bearing deposits in other banks           19,634   1,029  5.24     14,570     781  5.36     16,956     857  5.05
    Securities, including stock in FHLBB<F2>          195,051  11,765  6.03    250,783  15,923  6.35    254,599  15,604  6.13
                                                     -------- -------         -------- -------         -------- -------
      Total interest earning assets                   751,281  58,626  7.80    740,197  59,011  7.97    694,976  54,430  7.83
                                                              -------                  -------                  -------
  Non-interest earning assets                          70,690                   72,400                   66,828
  Allowance for possible loan losses                   (7,557)                  (6,594)                  (6,702)
                                                     --------                 --------                 --------
      Total assets                                   $814,414                 $806,003                 $755,102
                                                     ========                 ========                 ========

Liabilities and Stockholders' Equity
  Interest bearing liabilities
    Savings deposits                                 $296,639   7,684  2.59   $283,512   7,429  2.62   $274,136   7,212  2.63
    Time deposits                                     267,764  14,870  5.55    283,514  15,893  5.61    262,165  14,787  5.64
                                                     -------- -------         -------- -------         -------- -------
      Total interest bearing deposits                 564,403  22,554  4.00    567,026  23,322  4.11    536,301  21,999  4.10
    Securities sold under agreements to repurchase
     and other borrowings                             104,784   5,099  4.87    107,062   5,578  5.21    100,304   5,244  5.23
                                                     -------- -------         -------- -------         -------- -------
      Total interest bearing liabilities              669,187  27,653  4.13    674,088  28,900  4.29    636,605  27,243  4.28
                                                              -------                  -------                  -------
  Non-interest bearing liabilities
    Demand deposits                                    69,575                   63,870                   58,935
    Other liabilities                                   3,784                    3,368                    3,669
                                                     --------                 --------                 --------
      Total non-interest bearing liabilities           73,359                   67,238                   62,604
  Stockholders' equity                                 71,868                   64,677                   55,893
                                                     --------                 --------                 --------
      Total liabilities and stockholders' equity     $814,414                 $806,003                 $755,102
                                                     ========                 ========                 ========

  Net interest and dividend income/interest rate
   spread                                                     $30,973  3.67%           $30,111  3.68%           $27,187  3.55%
                                                              =======  ====            =======  ====            =======  ====

  Net earning balance/net yield on interest earning
   assets                                            $ 82,094          4.12%  $ 66,109          4.07%  $ 58,371          3.91%
                                                     ========          ====   ========          ====   ========          ====

<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 and dividend income divided by the average balance of the 
      amortized historical cost. 
</FN>
</TABLE>


<PAGE>  21


Rate Volume Analysis 

      The following table presents the dollar amount of changes in interest 
and dividend income, interest expense and net interest and dividend income 
which are attributable to changes in the average amounts of interest earning 
assets and interest bearing liabilities and/or changes in rates earned or 
paid thereon. The net changes attributable to both volume and rate have been 
allocated proportionately. 

<TABLE>
<CAPTION>
                                                                  Year Ended December 31, 1998 vs. 1997
                                                                       Increase (Decrease) Due To
                                                                  -------------------------------------
                                                                    Volume       Rate         Total
                                                                    ------       ----         -----
                                                                             (In Thousands)

<S>                                                                 <C>         <C>          <C>
Interest income on loans                                            $ 5,179     $(1,654)     $ 3,525
Interest income on interest bearing deposits in other banks             265         (17)         248 
Interest and dividend income on securities and stock in FHLBB        (3,389)       (769)      (4,158)
                                                                    --------------------------------
      Total interest and dividend income                              2,055      (2,440)        (385)
                                                                    --------------------------------
Interest expense on deposits                                           (113)       (655)        (768) 
Interest expense on securities sold under agreements to 
 repurchase and other borrowings                                       (118)       (361)        (479)
                                                                    --------------------------------
      Total interest expense                                           (231)     (1,016)      (1,247)
                                                                    --------------------------------
      Net interest and dividend income                              $ 2,286     $(1,424)     $   862
                                                                    ================================

<CAPTION>
                                                                  Year Ended December 31, 1997 vs. 1996
                                                                       Increase (Decrease) Due To
                                                                  -------------------------------------
                                                                    Volume       Rate         Total
                                                                    ------       ----         -----
                                                                             (In Thousands)

<S>                                                                 <C>         <C>          <C>
Interest income on loans                                            $ 4,591     $  (253)     $ 4,338
Interest income on interest bearing deposits in other banks            (136)         60          (76)
Interest and dividend income on securities and stock in FHLBB          (229)        548          319
                                                                    --------------------------------
      Total interest and dividend income                              4,226         355        4,581 
                                                                    --------------------------------
Interest expense on deposits                                          1,269          54        1,323 
Interest expense on securities sold under agreements to 
 repurchase and other borrowings                                        354         (20)         334
                                                                    --------------------------------
      Total interest expense                                          1,623          34        1,657
                                                                    --------------------------------
      Net interest and dividend income                              $ 2,603     $   321      $ 2,924
                                                                    ================================
</TABLE>

Provision for Possible Loan Losses 

      The provision for possible loan losses was $1.1 million in 1998, 
representing a $1.3 million or 53.6% decrease from the provision of $2.4 
million in 1997. The decrease in the provision resulted primarily from a 
change in the mix of loans to residential real estate loans, which accounted 
for 59.1% of the total loan portfolio at December 31, 1998 compared to 48.2% 
at December 31, 1997, while commercial real estate and commercial and 
industrial loans accounted for 35.0% of the total loan portfolio in 1998 
compared to 43.2% in 1997. Also contributing to the decrease in the 
provision was a decrease of $4.1 million in nonperforming loans to $3.0 
million at December 31, 1998 from $7.1 million at December 31, 1997, and 
management's overall evaluation of the loan portfolio and the adequacy of 
the level of the allowance for possible loan losses. Loans charged off in 
1998 were $2.1 million compared to $1.2 million in 1997. Recoveries of loans 
previously charged off were $459 thousand in 1998 compared to $178 thousand 
in 1997. Net loans charged off were $1.7 million in 1998 compared to $1.0 
million in 1997. 
 
Noninterest Income 

      Noninterest income was $9.1 million in 1998, an increase of $2.0 
million or 27.48% compared to $7.1 million in 1997. The increase in 1998 
over 1997, was primarily attributable to increases in net gains on sales of 
securities available for sale of $2.0 million, net gains on sales of loans 
into the secondary mortgage market of $310 thousand and other noninterest 
income of $397 thousand, partially offset by decreases in customer account 
fees and service charges of $686 thousand and mortgage service fees of $68 
thousand. The increase in net gains on sales of securi-


<PAGE>  22


ties available for sale was a result of the Company continuing to closely 
monitor the equity markets in light of their continued volatility in 1998. 
The increase in net gains on sales of loans in the secondary mortgage market 
was as a result of an increase in loans originated for and sold into the 
secondary mortgage market in 1998 compared to 1997, because of the continued 
low interest rate environment during 1998, which kept demand for residential 
real estate loans at a very high level. The increase in other noninterest 
income was primarily as a result of gains on sales of other assets during 
1998. The decrease in customer account fees and service charges related to 
the elimination of and/or restructuring of certain deposit programs which the 
Company assumed in its merger with Primary Bank in 1997. The elimination 
and/or restructuring of these deposit programs provided efficiencies through 
the reduction of noninterest expense. 
 
Noninterest Expense 

      Noninterest expense was $24.2 million in 1998, a decrease of $7.6 
million compared to $31.8 million in 1997. The decrease was primarily 
attributable to a decrease in salaries and benefit expenses of $1.4 million 
to $12.4 million in 1998 compared to $13.8 million in 1997 and a decrease in 
merger-related costs from $5.9 million in 1997 to $34 thousand in 1998.
      The decrease in salaries and benefits expense of $1.4 million was 
primarily attributable to a decrease in salaries, related to personnel 
efficiencies realized from the merger with Primary Bank, which were 
partially offset by normal salary increases, increased costs for commissions 
to loan originators and nondeposit product sales staff and $760 thousand 
relating to the cost of termination of certain officers. Additionally, 
decreases in employee benefits related primarily to merger efficiencies and 
a $1.1 million expense incurred in 1997 associated with the vesting of 
performance based stock options assumed in the merger with Primary Bank, for 
which there was no related expense in 1998, partially offset by an increase 
of $362,000 in expense related to the 1998 restricted stock grants.
      Occupancy and equipment expense increased $761 thousand from $4.2 
million in 1997 to $5.0 million in 1998. The increase is primarily 
attributable to the Company recording a $712 thousand writedown on bank 
buildings based upon an appraisal on property used as a branch office which 
is being closed.
      Other real estate owned expense increased $294 thousand from $63 
thousand in 1997 to $357 thousand in 1998 as a result of an increase in 
foreclosure activity related to nonperforming loans and costs related to the 
disposition of foreclosed properties.
      In connection with the completion of the merger with Primary Bank, 
effective after the close of business October 31, 1997, the Company incurred 
merger-related charges of $5.9 million which were recorded at the date of 
combination. Merger-related charges associated with the Primary Bank merger 
in 1998 were $34 thousand.
      Other expenses decreased $1.4 million primarily as a result of 
efficiencies realized in the merger with Primary Bank in the following 
areas: advertising and marketing expenses decreased $643 thousand, data 
processing and transmission costs decreased $614 thousand, general liability 
insurance decreased $154 thousand and directors fees decreased $167 
thousand. These efficiencies were offset by increases in amortization 
expense of $56 thousand, an increase in Year 2000 expenses of $101 thousand 
from $0 in 1997 to $101 thousand in 1998 and an increase in telephone 
expense of $119 thousand. The increase in amortization expense was primarily 
attributable to increases in originated mortgage servicing rights, while the 
increase in telephone expense relates to increased data transmission and 
call volume amongst the branch network as  well as higher customer call 
volume for account activity through the subsidiary bank's telephone banking 
system  in 1998 as compared with 1997.  
 
Income Taxes 

      Income tax expense increased $4.4 million to $5.1 million in 1998 
compared to $704 thousand in 1997 and represented effective tax rates of 
35.0% and 23.4%, respectively, of pretax income. The reason the tax rate is 
lower in 1997 compared to 1998, relates primarily to the reversal in 1997 of 
the remainder of the valuation allowance on deferred tax assets established 
for net operating losses as a result of current and projected earnings, 
partially offset by nondeductible merger related charges and nondeductible 
performance based stock option charges incurred in 1997.  
 
Comparison of Operating Results for the Years 
 Ended December 31, 1997 and 1996 
 
Net Earnings 

      Operations in 1997 resulted in net earnings of $2.3 million, a 
decrease of $4.9 million over net earnings of $7.2 million for 1996. Basic 
earnings per share was $.42 in 1997 compared to $1.35 in 1996. Diluted 
earnings per share was $.40 in 1997 compared to $1.28 in 1996.
      Earnings before income taxes were $3.0 million in 1997, a decrease of 
$5.9 million compared to earnings before income taxes of $8.9 million in 
1996. Earnings before income taxes decreased in 1997 compared to 1996, 
primarily as a result of increases in noninterest expense (including merger-
related charges of $5.9 million) and the provision for possible loan losses, 
partially offset by increases in net interest and dividend income and 
noninterest income.  


<PAGE>  23


Net Interest and Dividend Income 

      Net interest and dividend income was $30.1 million and $27.2 million 
in 1997 and 1996, respectively. The increase of $2.9 million in 1997 
compared to 1996 relates to an increase of $45.2 million or 6.51% in average 
interest earning assets to $740.2 million in 1997 from $695.0 million in 
1996, coupled with an increase in the interest rate spread to 3.68% in 1997 
from 3.55% in 1996.
      Interest income on loans increased $4.3 million to $42.3 million in 
1997 from $38.0 million in 1996.  The increase was primarily the result of 
an increase in the average loan balances of $51.4 million, or 12.14%, to 
$474.8 million in 1997 from $423.4 million in 1996, partially offset by a 
slight decrease in average loan yields to 8.91% in 1997 from 8.97% in 1996.  
The increase in average balances in the loan portfolio reflects the strong 
demand during 1997, particularly with respect to residential and commercial 
real estate loans. Competition for loans amongst financial institutions and 
the continued low interest rate environment sparked loan demand and also 
contributed to the slightly lower yields realized in 1997 compared to 1996. 
      Interest and dividend income on securities, including stock in FHLBB 
increased $319 thousand to $15.9 million in 1997 from $15.6 million in 1996. 
The increase related primarily to an increase in average yields to 6.35% in 
1997 from 6.13% in 1996, partially offset by a decrease in average balances 
of $3.8 million to $250.8 million in 1997 from $254.6 million in 1996. The 
increase in yields was primarily the result of investing in securities with 
longer weighted average maturities during 1996, thereby increasing yields in 
1997, coupled with increased prepayment activity on mortgage-backed 
securities in 1996, requiring an acceleration of the amortization of 
premiums paid for such securities during 1996.
      Interest expense on deposits increased $1.3 million to $23.3 million 
in 1997 from $22.0 million in 1996, with interest on savings deposits 
increasing $217 thousand and interest on time deposits increasing $1.1 
million. The increase related primarily to an increase in average balances 
of deposits of $30.7 million to $567.0 million in 1997 from $536.3 million 
in 1996. Of this increase, average balances of savings deposits increased 
$9.4 million and average balances of time deposits increased $21.3 million. 
The average cost of deposits remained stable at 4.11% during 1997 compared 
to 4.10% during 1996. The Company's subsidiary bank continued to offer 
competitive rates during 1997 on time deposits and that coupled with the 
continued success of a NOW account product which was first introduced by the 
subsidiary bank in 1995 were the primary reasons for the increases in the 
average balances of time and savings deposits during 1997.
      Interest expense on securities sold under agreements to repurchase and 
other borrowings increased $334 thousand to $5.6 million in 1997 from $5.2 
million in 1996. The increase was primarily related to an increase in 
average balances of $6.8 million to $107.1 million in 1997 from $100.3 
million in 1996, while the cost of these borrowings remained relatively 
stable at 5.21% in 1997 compared to 5.23% in 1996. The increase in average 
balances related to an increase in average balances on securities sold under 
agreements to repurchase of $8.6 million, while average balances of other 
borrowings decreased by $1.8 million. The increase of $8.6 million was 
primarily the result of local municipalities and commercial accounts making 
greater use of securities sold under agreements to repurchase in investing 
their excess funds. The cost of securities sold under agreements to 
repurchase was 4.76% in both 1997 and 1996, and the cost of other borrowings 
was relatively stable, at 5.78% during 1997 and 5.72% during 1996. 
 
Provision for Possible Loan Losses 

      The provision for possible loan losses was $2.4 million in 1997, 
representing a $1.0 million or 76.75% increase from the provision of $1.4 
million in 1996. The increase in the provision resulted primarily from the 
increase in the loan portfolio as well as the increase in nonperforming 
loans, and management's overall evaluation of the loan portfolio and the 
adequacy of the level of the allowance for possible loan losses. Loans 
charged off in 1997 were $1.2 million compared to $3.0 million in 1996. 
Recoveries of loans previously charged off were $178 thousand in 1997 
compared to $750 thousand in 1996. Net loans charged off were $1.0 million 
in 1997 compared to $2.3 million in 1996. 
 
Noninterest Income 

      Noninterest income was $7.1 million in 1997, an increase of $1.4 
million or 23.87% compared to $5.7 million in 1996. The increase in 1997 
over 1996, was primarily attributable to an increase in net gains on sales 
of securities available for sale of $1.5 million and an increase in other 
noninterest income of $321 thousand, partially offset by a decrease in net 
gains on sales of loans of $383 thousand. The increase in net gains on sales 
of available for sale securities was primarily the result of the Company 
selling certain of its equity securities available for sale during the first 
quarter of 1997, based on a perceived volatility in the stock markets. The 
increase in other noninterest income related primarily to increases in fees 
associated with nondeposit product sales and income from increases in the 
cash surrender values of life insurance. The decrease in net gains on sales 
of loans was the result of an increase in the competitive environment for 
residential mortgage products, resulting in the pricing of loans at lower 
rates, thereby reducing gains on sales, as well as a decrease in loans sold 
in the secondary mortgage market as a result of the Company originating 
fifteen year fixed rate loans for its own portfolio 


<PAGE>  24


beginning July 1, 1996, which previously were being sold in the secondary 
mortgage market. 

Noninterest Expense 

      Noninterest expense was $31.8 million in 1997, an increase of $9.2 
million compared to $22.6 million in 1996. The increase was primarily 
attributable to an increase in salaries and benefit expenses of $2.8 million 
to $13.8 million in 1997 compared to $11.0 million in 1996 and merger 
related costs of $5.9 million in 1997 compared to $0 in 1996.
      The increase in salaries and benefits of $2.8 million was primarily 
attributable to $1.1 million relating to compensation expense associated 
with the vesting of performance based stock options in 1997, normal salary 
increases of approximately 4.5%, additional staffing requirements, increased 
costs associated with health insurance and retirement plans, increased costs 
for commissions to loan originators and nondeposit product sales staff and 
increases in bonuses paid to officers. The additional staffing requirements 
in 1997 were: for commercial lending and mortgage loan origination staff to 
penetrate newer market areas, as well as to handle the significant loan 
demand; for the Merrimack branch office opened in February of 1997; to 
bolster the Company's information technology area; and for the human 
resource and employee training areas.
      In conjunction with the acquisition of Primary Bank after the close of 
business October 31, 1997, the Company incurred costs of $5.9 million. These 
charges were comprised of personnel costs of $1.5 million, data processing 
costs of $1.3 million, facilities and equipment costs of $1.3 million and 
other costs of $1.8 million. Personnel costs related primarily to the costs 
of employee severance, data processing costs related primarily to the 
termination of data processing contracts with outside service bureaus, 
facilities and equipment costs related to the consolidation of certain back-
office operations and consist of writedowns of properties owned and 
writedowns and the disposition of equipment which was unusable. Other merger 
expenses include investment banking fees, legal and accounting fees, due 
diligence costs, proxy registration/filing fees and mailing costs.  
 
Income Taxes 

      Income tax expense decreased $1.0 million to $704 thousand in 1997 
compared to $1.7 million in 1996 and represented effective tax rates of 
23.4% and 19.1%, respectively, of pretax income. The reason the tax rate is 
lower than the statutory tax rate of 34% in 1997, relates primarily to the 
reversal of the remainder of the valuation allowance on deferred tax assets 
established for net operating losses as a result of current and projected 
earnings, partially offset by nondeductible merger related charges and 
nondeductible performance based stock option charges. The reason the tax 
rate in 1996 is lower than the statutory tax rate of 34% relates primarily 
to the reversal of a portion of the valuation allowance on deferred tax 
assets established for net operating losses as a result of current and 
projected earnings. 
 
Capital Resources and Liquidity 
 
Capital Resources 

      The Company's capital base totaled $72.6 million or 8.27% of total 
assets at December 31, 1998 compared to $66.9 million, or 8.22% of total 
assets at December 31,1997. Stockholders' equity increased $5.7 million, 
primarily related to net earnings of $9.6 million and transactions related 
to stock options of $3.2 million, partially offset by a decrease in 
unrealized gains on securities available for sale net of related tax effects 
of $4.1 million and dividends declared of $2.9 million. 
      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). As of December 
31, 1998, the Company and subsidiary bank meet all capital adequacy 
requirements to which they are subject.
      As of December 31, 1998, 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.


<PAGE>  25


      The Company's and the subsidiary bank's actual capital amounts and 
ratios as of December 31, 1998 and 1997 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
                                                ------      -----      ------       -----       ------        -----
                                                                          ($ In Thousands)

<S>                                             <C>         <C>        <C>         <C>          <C>         <C>
As of December 31, 1998: 
  Total Capital (to Risk Weighted Assets): 
    Consolidated                                $75,971     14.42%     $42,145     >/=8.00%     N/A
    Subsidiary Bank                             $72,961     13.85%     $42,145     >/=8.00%     $52,681     >/=10.00%
  Tier I Capital (to Risk Weighted Assets): 
    Consolidated                                $69,379     13.17%     $21,072     >/=4.00%     N/A 
    Subsidiary Bank                             $66,369     12.60%     $21,072     >/=4.00%     $31,609      >/=6.00%
  Tier I Capital (to Average Assets): 
    Consolidated                                $69,379      8.18%     $33,944     >/=4.00%     N/A   
    Subsidiary Bank                             $66,369      7.82%     $33,944     >/=4.00%     $42,430      >/=5.00% 

As of December 31, 1997: 
  Total Capital (to Risk Weighted Assets): 
    Consolidated                                $65,688     12.87%     $40,836     >/=8.00%     N/A   
    Subsidiary Bank                             $63,737     12.49%     $40,830     >/=8.00%     $51,038     >/=10.00% 
  Tier I Capital (to Risk Weighted Assets): 
    Consolidated                                $59,292     11.62%     $20,418     >/=4.00%     N/A   
    Subsidiary Bank                             $57,342     11.24%     $20,415     >/=4.00%     $30,623      >/=6.00% 
  Tier I Capital (to Average Assets): 
    Consolidated                                $59,292      7.47%     $31,730     >/=4.00%     N/A   
    Subsidiary Bank                             $57,342      7.23%     $31,723     >/=4.00%     $39,654      >/=5.00%
</TABLE>

      On August 13, 1996, the Company announced a Stock Repurchase Program 
("1996 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 1996 Program may be held in treasury, retired 
or used for general corporate purposes. As of March 31, 1997, the Company 
had repurchased 72,549 shares under the 1996 Program. No shares were 
repurchased under the 1996 Program after March of 1997, and, as a result of 
the merger agreement entered into with Primary Bank in April of 1997, the 
1996 Program was terminated.
      On August 11, 1998, the Company announced a new Stock Repurchase 
Program ("1998 Program"), whereby the Company's Board of Directors 
authorized the repurchase of up to 5% of its outstanding common shares from 
time to time. Any shares repurchased may be held in treasury, retired or 
used for general corporate purposes. As of December 31, 1998, 14,700 shares 
had been repurchased under the 1998 Program. 
 
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 1998, 1997 and 1996 were $2.3 million, $3.0 million and 
$2.0 million, respectively. The primary source of liquidity in the Company 
is its interest bearing deposit with its subsidiary bank of $3.9 million at 
December 31, 1998.  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 


<PAGE>  26


liquidity, risk and return. The major sources of liquidity are deposits, 
securities available for sale, maturities of securities held to maturity, 
interest bearing deposits in other banks, amortization, prepayments and 
maturities of outstanding loans and other borrowings from the FHLBB. While 
maturities and scheduled amortization of loans are a predictable source of 
funds, deposit flows and mortgage prepayments are greatly influenced by 
interest rate trends, economic conditions and competition.
      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,
                                                                 ----------------------------------
                                                                   1998         1997         1996
                                                                   ----         ----         ----
                                                                           (In Thousands)

<S>                                                              <C>          <C>          <C>
Cash and due from banks at beginning of year                     $ 28,677     $ 30,559     $ 28,811

Operating activities:
  Net earnings                                                      9,557        2,307        7,201
  Adjustments to reconcile net earnings to net cash provided 
   by operating activities                                         (1,411)       4,496          175
                                                                 ----------------------------------
Net cash provided by operating activities                           8,146        6,803        7,376 
Net cash used in investing activities                             (73,132)     (15,609)     (67,418)
Net cash provided by financing activities                          59,815        6,924       61,790
                                                                 ----------------------------------
Cash and due from banks at end of year                           $ 23,506     $ 28,677     $ 30,559
                                                                 ==================================
</TABLE>


      Operating activities provided positive cash flows in 1998, 1997 and 
1996 and were primarily comprised of net earnings and net noncash items 
included in earnings which negatively affected cash flows in 1998 and 
positively affected cash flows in 1997 and 1996.
      Investing activities used cash in 1998, 1997 and 1996. The primary 
investing activities of the Company and the subsidiary bank, are originating 
loans and purchasing securities available for sale and securities held to 
maturity. In 1998, 1997 and 1996, loan originations net of repayments were 
$48.9 million, $68.6 million and $41.3 million, respectively. Purchases of 
securities available for sale and securities held to maturity were $124.6 
million, $154.3 million and $205.6 million, respectively, in 1998, 1997 and 
1996. A substantial portion of the net loan originations and purchases of 
securities available for sale and securities held to maturity in 1998, 1997 
and 1996, were funded by maturities and calls of securities held to maturity 
and maturities, calls and sales of securities available for sale in each of 
those years, increases in securities sold under agreements to repurchase in 
each of those years, increases in other borrowings in 1998 and 1996 and 
increases in deposits in 1997 and 1996.
      Financing activities provided cash in 1998, 1997 and 1996. The primary 
financing activities of the Company and the subsidiary bank are deposits, 
short-term borrowings in the form of securities sold under agreements to 
repurchase and other borrowings. In 1998, 1997 and 1996, deposits increased 
by $1.5 million, $39.3 million and $18.5 million, respectively. Securities 
sold under agreements to repurchase increased $4.9 million, $1.1 million and 
$15.0 million, respectively in 1998, 1997 and 1996. In 1998 and 1996, 
proceeds from other borrowings exceeded repayments, which increased other 
borrowings by $54.7 million and $30.7 million, respectively, while other 
borrowings decreased by $33.3 million in 1997, as repayments exceeded 
proceeds of other borrowings. Net cash provided by financing activities in 
1998, 1997 and 1996 was used to fund investing activities.
      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. In addition to assets in cash on hand and due from 
banks of $23.5 million at December 31, 1998, the Company through its 
subsidiary bank has interest bearing deposits in other banks, primarily with 
FHLBB of $19.5 million and securities available for sale of $219.8 million. 
In addition to these liquidity sources the Company has significant cash flow 
from the repayments of loans through its subsidiary bank. 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, 1998, the subsidiary bank had $80.6 million of outstanding 
borrowings with the FHLBB, with an additional borrowing capacity of 
approximately $251.8 million.
      The Company anticipates that the subsidiary bank will have sufficient 
funds available to meet its current loan commitments. At December 31, 1998, 
the subsidiary bank had outstanding loan commitments of $59.1 million. For 
additional informa-


<PAGE>  27


tion as to loan commitments, see note 15 of Notes to Consolidated Financial 
Statements. Time deposits which are scheduled to mature in one year or less 
at December 31, 1998, totaled $226.2 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 21 
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 

      During 1998, the Company adopted SFAS No. 130, "Reporting 
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an 
Enterprise and Related Information". The Company's adoption of these 
accounting pronouncements did not have a material impact on its financial 
condition or results of operations. 
      The Company adopted SFAS No. 132, "Employers' Disclosures about 
Pensions and Other Postretirement Benefits" an amendment of Financial 
Accounting Standards Board ("FASB") Statements Nos. 87, 88, and 106, 
effective January 1, 1998. SFAS No. 132 revises employers' disclosures about 
pension and other postretirement benefit plans. It does not change the 
measurement or recognition of costs or obligations under those plans. SFAS 
No. 132 requires a reconciliation of both the fair values of plan assets and 
of benefit obligations. The Company has made the required disclosures under 
SFAS No. 132 for all years presented.
      In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative 
Instruments and Hedging Activities", which is effective for fiscal years 
beginning after June 15, 1999. SFAS No. 133 must be adopted prospectively 
and retroactive application is not permitted. SFAS No. 133 will require the 
Company to record all derivatives on the balance sheet at fair value. 
Changes in derivative fair values will either be recognized in earnings as 
offsets to the changes in fair value of related hedged assets, liabilities 
and firm commitments or for forecasted transactions, deferred and recorded 
as a component of accumulated other comprehensive income in stockholders' 
equity until the hedged transactions occur and are recognized in earnings. 
The ineffective portion of a hedging derivative's change in fair value will 
be immediately recognized in earnings. The Company does not believe the 
effect of adopting SFAS No. 133 will have any material effect on its 
consolidated financial position or results of operations.  
 
Year 2000 

      The Company is aware of the issues associated with the programming 
code in existing computer systems and non-computer related embedded 
technology as the millennium ("Year 2000") approaches. The Year 2000 problem 
is pervasive and complex as virtually every computer operation will be 
affected in some way by the rollover of the two digit year value to 00. The 
issue is whether computer systems will properly recognize date sensitive 
information when the year changes to 2000. Systems that do not properly 
recognize such information could generate erroneous data or cause a system 
to fail.
      The Company has developed a Year 2000 Policy Statement which was 
approved by the Company's Board of Directors and is utilizing both internal 
and external resources to identify, correct and test the systems for Year 
2000 compliance. The Year 2000 Policy Statement contains a phases approach 
which includes the following phases: awareness, inventory, assessment, 
renovation, validation, implementation and post implementation. As of 
December 31, 1998, the Company has substantially completed the assessment, 
renovation, validation and implementation phases and is actively working on 
the Year 2000 remediation and business resumption contingency plans. The 
Company has substantially completed any necessary corrections, vendor 
reprogramming and testing efforts as of December 31, 1998, allowing adequate 
time for any potential modifications in 1999. After December 31, 1998, the 
Company will be in the post-implementation phase, which will utilize and 
test the contingency plans to enhance back-


<PAGE>  28


up steps and procedures to prepare for worst case scenarios. The Company's 
contingency plans are expected to be completed by the second quarter of 1999. 
To date, the Company has received a warranty of compliance from its processing 
vendor for loans, deposits and related products. Additionally, letters have 
been received from the Company's remaining vendors that plans are being 
developed to address the Year 2000 issue. All of these efforts are being 
coordinated through a Year 2000 committee which is chaired by the Company's 
Chief Operations Officer and includes a representative from the subsidiary 
bank's Board of Directors. The Chief Operations Officer reports periodically 
to the Company's and the subsidiary bank's Boards of Directors with respect 
to the Year 2000 committee's efforts. Management's estimate of the costs 
related to the Year 2000 compliance are approximately $300,000, of which 
approximately $101,000 has been incurred as of December 31, 1998. The 
remaining Year 2000 costs are expected to be substantially incurred in the 
first two quarters of 1999.
      The Company reviewed its loan relationships over $250,000 and assessed 
a Year 2000 compliance risk for each customer. The risk assessment consisted 
of a detailed questionnaire relating to the customer's Year 2000 efforts and 
resulted in the assignment of risk levels of low, medium and high risk for 
noncompliance with the Year 2000. The review of borrowers included the 
respective borrower's customer base and the likelihood of their 
noncompliance. As of December 31, 1998, no relationships were assessed a 
high risk of noncompliance with Year 2000. In the first quarter of 1999, the 
Company will review all medium risk borrowing relationships and assess any 
exposure, which may exist at that time. The Company has also incorporated 
this review into the approval process for all new borrowing relationships. 
In addition to the analyses of the loan relationships, the Company's 
subsidiary bank has also identified deposit customers and customers from 
whom the Company borrows short-term funds in the form of securities sold 
under agreements to repurchase with balances greater than $250,000 and 
identified large community employers in communities where branches are 
located in order to determine an estimate of additional liquidity that may 
be needed as a result of the Year 2000 project. Although no assurances can 
be given, based on the Company's review of significant deposit and borrowing 
relationships through December 31, 1998, management believes these 
relationships will not have a material adverse affect on the Company's 
liquidity, financial condition or results of operations. 
      The most significant risk anticipated by the Company is the 
possibility of interruption to its customer account processing systems. Due 
to the progress described above, the Company does not presently foresee any 
interruptions to these systems, but cannot predict consequences of 
interruptions to these systems from outside factors, such as the loss of 
telecommunication and electrical power (worst case scenario). The Company's 
business resumption contingency plan will address resumption of business 
should the Company lose its telecommunications or electrical power.  


<PAGE>  29


Management's Responsibility for Financial Reporting

      The consolidated financial statements of Granite State Bankshares, 
Inc. and subsidiary have been prepared by management, which is responsible 
for their content and accuracy. The statements present the results of 
operations, cash flows, and financial position of the Company in conformity 
with generally accepted accounting principles and, accordingly, include 
amounts based on management's judgments and estimates. Information in other 
sections of this annual report is consistent with that included in the 
financial statements.

      Granite State Bankshares, Inc. and its subsidiary have established and 
maintain an internal control structure designed to provide reasonable 
assurance that assets are safeguarded and that transactions are properly 
authorized by management and recorded in conformity with generally accepted 
accounting principles. This structure includes accounting controls, written 
policies and procedures, and a code of corporate conduct which stresses the 
highest ethical standards and is routinely communicated to all employees.

      The Audit Committee of the Board of Directors, which is composed 
solely of outside directors, meets periodically with management, the 
internal auditor, and the independent auditors to review audit findings, 
adherence to corporate policies and other financial matters.

      The firm of Grant Thornton LLP, Certified Public Accountants, has been 
engaged to audit and report on the Company's consolidated financial 
statements. Its audit was conducted in accordance with generally accepted 
auditing standards and included a review of internal accounting controls to 
the extent deemed necessary for the purpose of its report, which follows.




/s/ Charles W. Smith                   /s/ William G. Pike

Charles W. Smith                       William G. Pike
Chairman and Chief Executive Officer   Executive Vice President and
                                       Chief Financial Officer
                                       (principal accounting officer)


<PAGE>  30


                                           [FORM OF GRANT THORNTON LETTERHEAD]


             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,
1998 and 1997, and the related consolidated statements of earnings, 
comprehensive income, stockholders' equity and cash flows for each of the 
three years in the period ended December 31, 1998. 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.

      The consolidated financial statements for the year ended December 31, 
1996 reflect the pooling of interests with Primary Bank as described in note 
2 of notes to consolidated financial statements. We did not audit the 1996 
financial statements of Primary Bank, which statements reflect net interest 
and dividend income of $13,479,000 for the year ended December 31, 1996. 
Those financial statements were audited by other auditors whose report has 
been furnished to us, and our opinion, insofar as it relates to the amounts 
included for Primary Bank for the year ended December 31, 1996, is based 
solely on the report of such other auditors.

      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 and the report 
of the other auditors provide a reasonable basis for our opinion.

      In our opinion, based on our audits and the report of the other 
auditors, the consolidated financial statements referred to above, present 
fairly, in all material respects, the financial position of Granite State 
Bankshares, Inc. and subsidiary as of December 31, 1998 and 1997 and the 
results of their operations and their consolidated cash flows for each of 
the three years in the period ended December 31, 1998, in conformity with 
generally accepted accounting principles.


                                       /s/ Grant Thornton LLP


Boston, Massachusetts
January 11, 1999


<PAGE>  31


Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                                 ---------------------
                                                                                                   1998         1997
                                                                                                   ----         ----
                                                                                                    (In Thousands)

<S>                                                                                              <C>          <C>
                                           ASSETS

Cash and due from banks                                                                          $ 23,506     $ 28,677
Interest bearing deposits in other banks, at cost, which approximates market value                 19,532       27,452
Securities available for sale (amortized cost $217,186,000 in 1998 and $169,373,000 in 1997)      219,765      178,680
Securities held to maturity (market value $22,548,000 in 1998 and $34,170,000 in 1997)             22,277       33,910
Stock in Federal Home Loan Bank of Boston                                                           7,201        7,201
Loans held for sale                                                                                 1,828        1,068

Loans                                                                                             555,699      509,165
  Less:  Unearned income                                                                           (1,506)      (1,432)
         Allowance for possible loan losses                                                        (7,122)      (7,651)
                                                                                                 ---------------------
Net loans                                                                                         547,071      500,082

Premises and equipment                                                                             17,700       18,863
Other real estate owned                                                                             1,601        1,905
Other assets                                                                                       17,666       15,832
                                                                                                 ---------------------
      Total assets                                                                               $878,147     $813,670
                                                                                                 =====================

                            LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Interest bearing deposits                                                                        $576,778     $577,713
Noninterest bearing deposits                                                                       73,709       71,270
                                                                                                 ---------------------
      Total deposits                                                                              650,487      648,983

Securities sold under agreements to repurchase                                                     70,905       66,025
Other borrowings                                                                                   80,608       25,877
Other liabilities                                                                                   3,547        5,871
                                                                                                 ---------------------
      Total liabilities                                                                           805,547      746,756

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; 6,789,582 and 6,493,640
 shares issued at December 31, 1998 and 1997, respectively                                          6,790        6,494
Additional paid-in capital                                                                         38,018       34,730
                                                                                                 ---------------------
                                                                                                   44,808       41,224
Retained earnings                                                                                  32,998       26,389
Accumulated other comprehensive income                                                              1,583        5,713
                                                                                                 ---------------------
                                                                                                   79,389       73,326
  Less:  Treasury stock, at cost, 889,759 and 920,305 shares at December 31, 1998 and
          1997, respectively                                                                       (6,065)      (6,305)
         Unallocated common stock acquired by the ESOP                                                (71)        (107)
         Unearned restricted stock                                                                   (653)
                                                                                                 ---------------------
         Total stockholders' equity                                                                72,600       66,914
                                                                                                 ---------------------
         Total liabilities and stockholders' equity                                              $878,147     $813,670
                                                                                                 =====================
</TABLE>

      The accompanying notes are an integral part of these statements.


<PAGE>  32


Consolidated Statements of Earnings

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                                     -------------------------------------
                                                                                       1998          1997          1996
                                                                                       ----          ----          ----
                                                                                    ($ In Thousands, except per share data)

<S>                                                                                  <C>           <C>           <C>
Interest and dividend income
  Loans                                                                              $  45,832     $  42,307     $  37,969
  Debt securities available for sale                                                     9,110         9,771        10,270
  Marketable equity securities available for sale                                          725           586           294
  Securities held to maturity                                                            1,469         5,110         4,622
  Interest bearing deposits in other banks                                               1,029           781           857
  Dividends on Federal Home Loan Bank of Boston stock                                      461           456           418
                                                                                     -------------------------------------
      Total interest and dividend income                                                58,626        59,011        54,430
                                                                                     -------------------------------------

Interest expense
  Deposits                                                                              22,554        23,322        21,999
  Securities sold under agreements to repurchase                                         2,945         2,847         2,438
  Other borrowings                                                                       2,154         2,731         2,806
                                                                                     -------------------------------------
      Total interest expense                                                            27,653        28,900        27,243
                                                                                     -------------------------------------
      Net interest and dividend income                                                  30,973        30,111        27,187
Provision for possible loan losses                                                       1,125         2,425         1,372
                                                                                     -------------------------------------
      Net interest and dividend income after provision for possible loan losses         29,848        27,686        25,815
Noninterest income
  Customer account fees and service charges                                              2,283         2,969         3,033
  Mortgage service fees                                                                    566           634           677
  Net gains on sales of securities available for sale                                    4,185         2,187           650
  Net gains on sales of loans                                                              725           415           798
  Other                                                                                  1,291           894           573
                                                                                     -------------------------------------
      Total noninterest income                                                           9,050         7,099         5,731

Noninterest expense
  Salaries and benefits                                                                 12,444        13,822        11,036
  Occupancy and equipment                                                                4,958         4,197         3,927
  Other real estate owned                                                                  357            63           (52)
  Merger-related charges                                                                    34         5,917
  Other                                                                                  6,412         7,775         7,729
                                                                                     -------------------------------------
      Total noninterest expense                                                         24,205        31,774        22,640
                                                                                     -------------------------------------
      Earnings before income taxes                                                      14,693         3,011         8,906
Income taxes                                                                             5,136           704         1,705
                                                                                     -------------------------------------
      NET EARNINGS                                                                   $   9,557     $   2,307     $   7,201
                                                                                     =====================================

Net earnings per share-basic                                                         $    1.64     $     .42     $    1.35
                                                                                     =====================================

Net earnings per share-diluted                                                       $    1.60     $     .40     $    1.28
                                                                                     =====================================

Shares used in computing net earnings per share-basic                                5,818,856     5,444,350     5,323,480
Shares used in computing net earnings per share-diluted                              5,990,745     5,751,262     5,614,554
</TABLE>


      The accompanying notes are an integral part of these statements.


<PAGE>  33


Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                                     ------------------------------
                                                                                       1998        1997        1996
                                                                                       ----        ----        ----
                                                                                             (In Thousands)

<S>                                                                                  <C>         <C>         <C>
Net earnings                                                                         $ 9,557     $ 2,307     $7,201
  Other comprehensive income (loss):
    Unrealized holding gains (losses) arising during the period                       (2,543)      9,086        361
    Related income tax effects                                                           982      (3,620)      (217)
                                                                                     ------------------------------
      Net unrealized holding gains (losses), net of related income tax effects        (1,561)      5,466        144
                                                                                     ------------------------------

  Less: reclassification adjustment for (gains) losses realized in net earnings:
    Realized gains                                                                    (4,185)     (2,187)      (650)
    Related income tax effects                                                         1,616         845        237
                                                                                     ------------------------------
      Net reclassification adjustment                                                 (2,569)     (1,342)      (413)
                                                                                     ------------------------------

      Total other comprehensive income (loss)                                         (4,130)      4,124       (269)
                                                                                     ------------------------------

Comprehensive Income                                                                 $ 5,427     $ 6,431     $6,932
                                                                                     ==============================
</TABLE>


      The accompanying notes are an integral part of these statements.


<PAGE>  34


Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                Accumulated    Unallocated
                                               Additional                          Other          Common       Unearned
                                       Common   Paid-in    Retained  Treasury  Comprehensive  Stock Acquired  Restricted
                                       Stock    Capital    Earnings   Stock       Income       by the ESOP      Stock      Total
                                       ------  ----------  --------  --------  -------------  --------------  ----------   -----
                                                                             (In Thousands)

<S>                                    <C>     <C>         <C>       <C>          <C>             <C>          <C>        <C>
Balance as of December 31, 1995        $6,055  $31,526     $19,619   $(4,124)     $ 1,858         $(179)                  $54,755
Net earnings                                                 7,201                                                          7,201
Payment of Employee Stock Ownership
 Plan Indebtedness                                                                                   36                        36
Employee Stock Ownership Plan
 distribution                                       25                                                                         25
Stock dividend                            104     (104)
Cash dividends declared on common 
 stock, $.20 per share                                      (1,116)                                                        (1,116)
Change in unrealized gain (loss) on 
 securities available for sale, net 
 of income taxes                                                                     (269)                                   (269)
Issuance of common stock upon 
 exercise of stock options, including
 related tax effects                      105      568                                                                        673
Purchase of common stock for treasury                                 (1,876)                                              (1,876)
                                       ------------------------------------------------------------------------------------------
Balance as of December 31, 1996         6,264   32,015      25,704    (6,000)       1,589          (143)                   59,429

Net earnings                                                 2,307                                                          2,307
Payment of Employee Stock Ownership 
 Plan Indebtedness                                                                                   36                        36
Employee Stock Ownership Plan 
 distribution                                       94                                                                         94
Cash dividends declared on common 
 stock, $.29 per share                                      (1,622)                                                        (1,622)
Change in unrealized gain (loss) on 
 securities available for sale, net 
 of income taxes                                                                    4,124                                   4,124
Issuance of common stock upon 
 exercise of stock options, including
 related tax effects                      230    2,621                                                                      2,851
Purchase of common stock for treasury                                   (305)                                                (305)
                                       ------------------------------------------------------------------------------------------
Balance as of December 31, 1997         6,494   34,730      26,389    (6,305)       5,713          (107)                   66,914

Net earnings                                                 9,557                                                          9,557
Payment of Employee Stock Ownership 
 Plan Indebtedness                                                                                   36                        36
Employee Stock Ownership Plan 
 distribution                                       97                                                                         97
Cash dividends declared on common 
 stock, $.50 per share                                      (2,948)                                                        (2,948)
Change in unrealized gain (loss) on 
 securities available for sale, net 
 of income taxes                                                                   (4,130)                                 (4,130)
Issuance of common stock upon 
 exercise of stock options, including
 related tax effects                      296    2,898                                                                      3,194
Restricted stock awards                            313                   421                                   $(1,015)      (281)
Restricted stock award amortization                                                                                362        362
Reissuance of common stock from 
 treasury upon exercise of stock
 options                                           (20)                  108                                                   88
Purchase of common stock for treasury                                   (289)                                                (289)
                                       ------------------------------------------------------------------------------------------
Balance as of December 31, 1998        $6,790  $38,018    $32,998    $(6,065)     $ 1,583         $ (71)       $  (653)   $72,600
                                       ==========================================================================================
</TABLE>

      The accompanying notes are an integral part of these statements.


<PAGE>  35


Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
                                                                                         ----------------------------------
                                                                                           1998          1997          1996
                                                                                           ----          ----          ----
                                                                                                    (In Thousands)

<S>                                                                                      <C>           <C>           <C>
Increase (decrease) in cash and due from banks
Cash flows from operating activities
  Net earnings                                                                           $   9,557     $   2,307     $   7,201
  Adjustments to reconcile net earnings to net cash provided by operating activities
    Provision for possible loan losses                                                       1,125         2,425         1,372
    Provision for depreciation and amortization                                              2,468         2,329         2,312
    Net (accretion) amortization of security discounts and premiums                             30            24          (107)
    Provision for loss (recovery) on other real estate owned                                    53            25          (383)
    Earned compensation-performance-based stock options                                                    1,078
    Deferred income tax benefits                                                               (43)       (1,243)         (133)
    Realized gains on sales of securities available for sale, net                           (4,185)       (2,187)         (650)
    Writedown of premises and equipment                                                        712         1,305
    Loans originated for sale                                                              (40,082)      (26,435)      (27,205)
    Proceeds from sale of loans originated for sale                                         40,047        26,807        28,719
    (Increase) decrease in other assets                                                        316         3,509        (2,647)
    Decrease in other liabilities                                                           (1,285)       (2,270)         (130)
    Allocation of common stock by the ESOP                                                     133            36            36
    Decrease in unearned restricted stock                                                      362
    Realized gains on sales of loans                                                          (725)         (415)         (798)
    Gains on sales of other assets                                                            (465)
    Increase (decrease) in unearned income                                                      74          (428)          (62)
    Realized (gains) losses on sales of other real estate owned                                 54           (64)         (149)
                                                                                         -------------------------------------
      Net cash provided by operating activities                                              8,146         6,803         7,376
                                                                                         -------------------------------------

Cash flows from investing activities
  Proceeds from sales of securities available for sale                                       5,462       116,531        71,485
  Proceeds from maturities and calls of securities available for sale                       50,750        52,500        50,948
  Principal payments received on securities available for sale                               9,596        13,294         7,469
  Purchase of securities available for sale                                               (109,586)     (147,266)     (146,853)
  Purchase of securities held to maturity                                                  (15,012)       (7,000)      (58,767)
  Proceeds from maturities and calls of securities held to maturity                         26,765        33,150        17,814
  Principal payments received on securities held to maturity                                               2,129         4,525
  Purchase of Federal Home Loan Bank of Boston stock                                                        (836)         (150)
  Redemption of Federal Home Loan Bank of Boston stock                                                                   1,343
  Loan originations, net of repayments                                                     (48,912)      (68,627)      (41,275)
  Proceeds from sale of loans                                                                                           17,638
  Purchase of premises and equipment                                                        (1,533)       (2,489)       (2,394)
  Proceeds from sales of other assets                                                          465
  Net (increase) decrease in interest-bearing deposits in other banks                        7,920        (9,459)        6,246
  Proceeds from sales of other real estate owned                                               921         2,376         4,752
  Other                                                                                         32            88          (199)
                                                                                         -------------------------------------
      Net cash used in investing activities                                                (73,132)      (15,609)      (67,418)
                                                                                         -------------------------------------
Cash flows from financing activities
  Net increase in demand, NOW, money market deposit and savings accounts                    24,779        19,865         6,217
  Net increase (decrease) in time certificates                                             (23,275)       19,451        12,327
  Net increase in securities sold under agreements to repurchase                             4,880         1,064        15,003
  Increase (decrease) in other borrowings                                                   54,731       (33,313)       30,691
  Repayment on liability relating to ESOP                                                      (36)          (36)          (36)
  Dividends paid on common stock                                                            (2,824)       (1,285)       (1,083)
  Proceeds from issuance of common stock                                                     2,042         1,483           547
  Reissuance of common stock from treasury                                                      88
  Purchase of common stock for treasury                                                       (289)         (305)       (1,876)
  Purchase of common stock relating to restricted stock awards                                (281)
                                                                                         -------------------------------------
      Net cash provided by financing activities                                             59,815         6,924        61,790
                                                                                         -------------------------------------
      Net increase (decrease) in cash and due from banks                                    (5,171)       (1,882)        1,748
Cash and due from banks at beginning of year                                                28,677        30,559        28,811
                                                                                         -------------------------------------
Cash and due from banks at end of year                                                   $  23,506     $  28,677     $  30,559
                                                                                         =====================================
</TABLE>

      The accompanying notes are an integral part of these statements.


<PAGE>  36


Notes to Consolidated Financial Statements

NOTE 1-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 originating 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 nineteen full service offices and an additional twenty 
one remote automatic teller locations. The subsidiary bank is a full service 
community bank with a diversified lending operation that services Cheshire, 
Hillsborough, Merrimack, 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. In connection with the determination of the allowance for possible 
loan losses, management obtains independent appraisals for significant 
properties which collateralize loans.
      A substantial portion of the Company's loans are secured by real 
estate in New Hampshire. Accordingly, the ultimate collectibility of a 
substantial portion of the Company's loan portfolio is susceptible to 
changing conditions in New Hampshire.
      The following is a description of the significant accounting policies.

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.

Reclassifications 

      Certain amounts in the 1997 and 1996 consolidated financial statements 
have been reclassified to conform to the 1998 presentation.

Securities

      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 in accumulated other comprehensive income as a 
separate component of stockholders' equity, net of estimated income taxes. 
During 1998, 1997 and 1996, the Company had no securities classified as 
trading securities.
      Premiums and discounts on securities are amortized or accreted into 
earnings 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 available for sale are recognized at the time of sale on 
a specific identification basis.

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.
      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 


<PAGE>  37


principal or recorded as income according to management's judgment as to the 
collectibility of principal.
      The Company measures loan impairment on commercial and commercial real 
estate loans in excess of $75,000 based on the present value of expected 
future cash flows discounted at the loan's effective interest rate, or on a 
loan's observable market price, or the fair value of the collateral if the 
loan is collateral dependent. When the Company determines that foreclosure 
is probable, it measures impairment based on the fair value of the 
collateral. Loans that experience insignificant payment delays and 
insignificant shortfalls in payment amounts generally are not classified as 
impaired. Management determines the significance of payment delays and 
payment shortfalls on a case-by-case basis, taking into consideration all of 
the circumstances surrounding the loan and the borrower, including the 
length of the delay, the reasons for the delay, the borrower's prior payment 
record, and the amount of the shortfall in relation to the principal and 
interest owed. Commercial and commercial real estate loans of $75,000 or 
less are collectively evaluated for impairment. Additionally, large groups 
of smaller balance homogeneous loans, such as residential real estate and 
consumer loans are collectively evaluated for impairment.
      Loan origination and commitment fees, certain direct loan origination 
costs and discounts on acquired loans are being deferred and amortized as an 
adjustment of the related loan yield over the contractual life of the loans.

Allowance for Possible Loan Losses

      The adequacy of the allowance for possible loan losses is evaluated on 
a regular basis by management. The methodology for determining the amount of 
the allowance for possible loan losses consists of several elements. 
Nonperforming, impaired and delinquent loans are reviewed individually and 
the value of any underlying collateral is considered in determining 
estimates of possible losses associated with those loans. Another element 
involves estimating losses inherent in categories of loans, based primarily 
on historical experience, industry trends and trends in the real estate 
market and the current economic environment in the Company's primary market 
areas. The last element is based on management's evaluation of various 
conditions, and involves a higher degree of uncertainty because they are not 
identified with specific problem credits or portfolio segments. The 
conditions evaluated in connection with this element include the following: 
industry and regional conditions; seasoning of the loan portfolio and 
changes in the composition of and growth in the loan portfolio; the strength 
and duration of the current business cycle; existing general economic and 
business conditions in the lending areas; credit quality trends, including 
trends in nonperforming loans expected to result from changes in existing 
conditions; historical loan charge-off experience; and the results of bank 
regulatory examinations.
      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.

Mortgage Loans Held For Sale

      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.
      The Company recognizes 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  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. 
      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.


<PAGE>  38


      During 1997 the Company prospectively adopted Statement of Financial 
Accounting Standards ("SFAS")  No. 125, "Accounting for Transfers and 
Servicing of Financial Assets and Extinguishments of Liabilities," as 
required by the Financial Accounting Standards Board ("FASB"). SFAS No. 125 
superceded SFAS No. 122, "Accounting for Mortgage Servicing Rights," an 
Amendment of FASB Statement No. 65. The adoption of SFAS No. 125 had no 
significant impact on the Company's consolidated financial position or 
consolidated results of operations.

Premises and Equipment

      Premises and equipment are stated at cost less accumulated 
depreciation and amortization. Depreciation and amortization is computed 
using the straight-line method over the estimated useful lives of the assets 
or the remaining lease terms, if shorter. Useful lives are 15-50 years for 
bank buildings, 3-20 years for leasehold improvements and 2-10 years for 
furniture and equipment.
      The Company reviews for impairment of long-lived assets, certain 
identifiable intangibles and goodwill, whenever events or changes in 
circumstances indicate that the carrying amount of an asset may not be 
recoverable.
      Gains or losses on routine dispositions are credited or charged to 
earnings. Maintenance and repairs are charged to expense as incurred, and 
improvements are capitalized.

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.

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.
      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.

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 23 of Notes to Consolidated 
Financial Statements.

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.

Retirement and Benefit Plans

      The Company and its subsidiary bank have a non-contributory defined 
benefit Pension Plan covering substantially 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 adopted SFAS No. 132, "Employers' Disclosures about 
Pensions and Other Postretirement Benefits" an amendment of FASB Statements 
Nos. 87, 88 and 106, effective January 1, 1998. SFAS No. 132 revises 
employers' disclosures about pension and other postretirement benefit plans. 
It does not change the measurement or recognition of costs or obligations 
under those plans. SFAS No. 132 requires a reconciliation of both the fair 
values of plan assets and of benefit obligations. The Company has made the 
required disclosures under SFAS No. 132 for all years presented.
      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.
      The Company has an Employee Stock Ownership Plan ("ESOP"), covering 
eligible employees with one year of service as defined by the ESOP. The 
Company records compensation expense in an amount equal to the fair value of 
shares committed to be released from the ESOP to employees.


<PAGE>  39


Stock-Based Compensation

      SFAS No. 123, "Accounting for Stock-Based Compensation", 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 did 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 Company continues to account for stock-based compensation under the 
intrinsic value based method under Opinion 25, as allowed by SFAS No. 123, 
and includes presentation of the appropriate required pro forma disclosures 
in the notes to the consolidated financial statements.

Earnings Per Share

      Basic earnings per share is computed by dividing net earnings by the 
weighted average number of common shares outstanding for the period. Diluted 
earnings per share reflects the potential dilution that could occur if 
securities or other contracts to issue common stock were exercised or 
converted into common stock or resulted in the issuance of common stock that 
then shared in the earnings of the Company.

Derivative Financial Instruments

      The Company utilizes interest rate cap agreements to manage exposure 
to interest rate risk. The Company does not purchase derivative financial 
instruments for trading purposes. The Company receives an interest payment 
if the three-month London Interbank Offered Rate ("LIBOR") increases above a 
predetermined rate. This payment would be based upon the rate difference 
between current LIBOR and the predetermined rate accrued on the notional 
value of the instrument. The amounts received on the interest rate cap 
agreements are accounted for as an adjustment to the yield or cost of the 
hedged financial instruments. The transaction fee paid on the interest rate 
cap is amortized over the life of the contract.

Comprehensive Income

      The Company adopted SFAS  No. 130, "Reporting Comprehensive Income", 
effective January 1, 1998. SFAS No. 130 establishes standards for reporting 
comprehensive income and its components (revenues, expenses, gains and 
losses). Components of comprehensive income are net earnings and all other 
non-owner changes in equity. SFAS No. 130 requires that an enterprise (a) 
classify items of other comprehensive income by their nature in a financial 
statement and (b) display the accumulated balance of other comprehensive 
income separately from retained earnings and additional paid-in capital in 
the equity section of a statement of financial position. Reclassification of 
financial statements for earlier periods provided for comparative purposes 
is required. The Company's accumulated other comprehensive income included 
in stockholders' equity is comprised exclusively of net unrealized gains on 
securities available for sale, net of related tax effects.
      The Company has chosen to disclose comprehensive income in a separate 
statement of comprehensive income. 

Disclosure about Segments

      The Company adopted SFAS No. 131, "Disclosures About Segments of an 
Enterprise and Related Information",  effective January 1, 1998. SFAS No. 
131 establishes standards for reporting information about segments in annual 
and interim financial statements. SFAS No. 131 introduces a new model for 
segment reporting called the "management approach".  The management approach 
is based on the way the chief operating decision-makers organize segments 
within the company for making operating decisions and assessing performance. 
Reportable segments are based on products and services, geography, legal 
structure, management structure and any other manner in which management 
disaggregates a company. Based on the "management approach" model, the 
Company has determined that its business is comprised of a single operating 
segment and that SFAS No. 131 has no impact on its financial statements.

Recent Accounting Developments

      In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative 
Instruments and Hedging Activities", which is effective for fiscal years 
beginning after June 15, 1999. SFAS No. 133 must be adopted prospectively 
and retroactive application is not permitted. SFAS No. 133 will require the 
Company to record all derivatives on the balance sheet at fair value. 
Changes in derivative fair values will either be recognized in earnings as 
offsets to the changes in fair value of related hedged assets, liabilities 
and firm commitments or for forecasted transactions, deferred and recorded 
as a component of accumulated other comprehensive 


<PAGE>  40


income in stockholders' equity until the hedged transactions occur and are 
recognized in earnings. The ineffective portion of a hedging derivative's 
change in fair value will be immediately recognized in earnings. The Company 
does not believe the effect of adopting SFAS No. 133 will have any material 
effect on its consolidated  financial position or results of operations. 

NOTE 2-Mergers and Acquisitions

      Effective after the close of business October 31, 1997, the Company 
completed its merger with Primary Bank, which was accounted for under the 
pooling-of-interests method. Accordingly, the consolidated financial 
statements of the Company have been restated to reflect the acquistion at 
the beginning of each period presented. In connection with the merger, each 
share of Primary Bank's common stock was converted into 1.1483 shares of the 
Company's common stock, resulting in the issuance of 2,520,157 shares of the 
Company's common stock to Primary Bank stockholders. 

      Expenses directly attributable to the merger during the years ending 
December 31, 1998 and 1997 amounted to $34,000 and $5,917,000, respectively. 
The 1997 charges were recorded at the date of combination and were comprised 
of personnel costs of $1,462,000, data processing costs of $1,282,000, 
facilities and equipment costs of $1,305,000 and other costs of $1,868,000. 
Personnel costs related primarily to the costs of employee severance, data 
processing costs related primarily to the termination of data processing 
contracts with outside service bureaus, facilities and equipment costs 
related to the consolidation of certain back-office operations and consist 
of writedowns of properties owned and writedowns and disposition of 
equipment which was unusable. Other merger expenses include investment 
banking fees, legal and accounting fees, due diligence costs, proxy 
registration/filing fees and mailing costs. The 1998 charges were 
insignificant.
      The following table presents a summary of activity in 1998 and 1997 
with respect to the merger accrual:

<TABLE>
<CAPTION>
                                         December 31,
                                       -----------------
                                        1998       1997
                                        ----       ----
                                        (In Thousands)

<S>                                    <C>        <C>
Balance at beginning of year           $1,613     $    0
Provision charged against earnings         34      5,917
Cash outlays                            1,647      2,999
Non-cash writedowns                                1,305
                                       -----------------
Balance at end of year                 $    0     $1,613
                                       =================
</TABLE>


NOTE 3-Earnings Per Share

      Information regarding the computations of earnings per share is as 
follows:

<TABLE>
<CAPTION>
                                        Year Ended December 31,
                                 -------------------------------------
                                   1998          1997          1996
                                   ----          ----          ----
                                ($ in Thousands, except per share data)

<S>                              <C>           <C>           <C>
Net earnings                     $   9,557     $   2,307     $   7,201
                                 =====================================
Weighted average common
 shares outstanding-Basic        5,818,856     5,444,350     5,323,480
Dilutive effect of stock 
 options computed using
 the treasury stock method         171,889       306,912       291,074
                                 -------------------------------------
Weighted average common
 shares outstanding-Diluted      5,990,745     5,751,262     5,614,554
                                 =====================================
Net earnings per share-
 basic                               $1.64          $.42         $1.35
                                 =====================================
Net earnings per share-
 diluted                             $1.60          $.40         $1.28
                                 =====================================
</TABLE>

      Weighted average options to purchase 37,808 and 109,363 shares of 
common stock were outstanding at December 31, 1998  and 1996, respectively, 
but were not included in the computation of weighted average common shares 
outstanding for purposes of computing diluted earnings per share, because 
the effect would have been antidilutive. All options to purchase shares of 
common stock outstanding at December 31, 1997 were included in the 
computation of weighted average common shares outstanding for purposes of 
computing diluted earnings per share.

NOTE 4-Supplemental Cash Flow Disclosures

Supplemental Disclosures of Cash Flow Information

<TABLE>
<CAPTION>
                             Year Ended
                            December 31,
                   -------------------------------
                    1998        1997        1996
                    ----        ----        ----
                           (In Thousands)

<S>                <C>         <C>         <C>
Cash paid for
  Interest         $27,400     $29,010     $27,143
  Income taxes       3,924       2,500       1,650
</TABLE>


<PAGE>  41


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 $724,000, $732,000 and $2,933,000 
during the years ended December 31, 1998, 1997 and 1996, respectively.
      Dividends declared and unpaid on common stock at December 31, 1998, 
1997 and 1996 were $737,000, $613,000 and $277,000, respectively.

NOTE 5-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, 1998 was approximately $9,678,000.

NOTE 6-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, 1998
  US Government agency obligations            $ 17,265        $  230                      $ 17,495
  Other corporate obligations                    5,012            41                         5,053
                                              ----------------------------------------------------
      Total securities held to maturity       $ 22,277        $  271       $    0         $ 22,548
                                              ====================================================
Securities available for sale
 At December 31, 1998
  US Treasury obligations                     $ 82,521        $1,195                      $ 83,716
  US Government agency obligations              55,961           112       $   75           55,998
  Other corporate obligations                   46,593           150          286           46,457
  Mortgage-backed securities:
    FNMA                                         7,045            35           49            7,031
    FHLMC                                        2,876             2           25            2,853
    GNMA                                         1,190            59            3            1,246
    SBA                                            552            16                           568
                                              ----------------------------------------------------
      Total mortgage-backed securities          11,663           112           77           11,698
  Mutual Funds                                   6,326           105           29            6,402
  Marketable equity securities                  14,122         2,785        1,413           15,494
                                              ----------------------------------------------------
      Total securities available for sale     $217,186        $4,459       $1,880         $219,765
                                              ====================================================
Securities held to maturity
 At December 31, 1997
  US Government agency obligations            $ 33,910        $  285       $   25         $ 34,170
                                              ----------------------------------------------------
      Total securities held to maturity       $ 33,910        $  285       $   25         $ 34,170
                                              ====================================================
Securities available for sale
 At December 31, 1997
  US Treasury obligations                     $ 82,470        $  499                      $ 82,969
  US Government agency obligations              44,218            31       $   50           44,199
  Other corporate obligations                    8,493            16            1            8,508
  Mortgage-backed securities:
    FNMA                                        11,723            49           95           11,677
    FHLMC                                        6,562            26           41            6,547
    GNMA                                         2,418            84                         2,502
    SBA                                            765            17                           782
                                              ----------------------------------------------------
      Total mortgage-backed securities          21,468           176          136           21,508
  Mutual Funds                                   6,005           130           22            6,113
  Marketable equity securities                   6,719         8,664                        15,383
                                              ----------------------------------------------------
      Total securities available for sale     $169,373        $9,516       $  209         $178,680
                                              ====================================================
</TABLE>


<PAGE>  42


      In the fourth quarter of 1997, the acquisition of Primary Bank (see 
Note 2-"Mergers and Acquisitions") necessitated a transfer of securities 
held to maturity with an amortized cost of $22,226,000 and a net unrealized 
loss of $156,000 to securities available for sale in order to maintain the 
Company's existing interest rate risk profile.
      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, 1998 and 1997, the subsidiary bank had investments in 
FHLBB stock of $7,201,000. 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>
                                               1998                      1997                      1996
                                       ---------------------     ---------------------     ---------------------
                                       Realized     Realized     Realized     Realized     Realized     Realized
                                         Gain         Loss         Gain         Loss         Gain         Loss
                                       --------     --------     --------     --------     --------     --------
                                                               (In Thousands)

    <S>                                 <C>          <C>          <C>          <C>           <C>          <C>
    Securities
      Debt securities                   $   23                    $  166       $1,018        $212         $324
      Marketable equity securities       4,162                     3,039                      767            5
                                        ----------------------------------------------------------------------
                                        $4,185       $    0       $3,205       $1,018        $979         $329
                                        ======================================================================
</TABLE>


<PAGE>  43


      At December 31, 1998, U. S. Treasury and U. S. Government Agency 
Obligations with carrying values of $89,873,000 and estimated market values 
of $90,033,000 were pledged as collateral for securities sold under 
agreements to repurchase and for government deposit accounts.
      The following table sets forth the maturity distribution of debt 
securities held to maturity and available for sale at amortized cost and 
estimated market value at December 31, 1998. Actual maturities may differ 
from contractual maturities because certain issuers have the right to call 
or prepay obligations without penalties.

<TABLE>
<CAPTION>
                                                               Over 1 Year     Over 5 Years
                                                   Within        Through         Through          Over
                                                   1 Year        5 Years         10 Years       10 Years      Totals
                                                   ------      -----------     ------------     --------      ------
                                                                             (In Thousands)

<S>                                                <C>          <C>              <C>            <C>          <C>
Amortized Cost
At December 31, 1998
  Securities held to maturity
    US Government agency obligations                                             $17,265                     $ 17,265
    Other corporate obligations                                                    5,012                        5,012
                                                   ------------------------------------------------------------------
      Total debt securities held to maturity       $     0      $      0         $22,277        $     0      $ 22,277
                                                   ==================================================================
  Securities available for sale
    US Treasury obligations                        $49,980      $ 32,541                                     $ 82,521
    US Government agency obligations                              54,961         $ 1,000                       55,961
    Other corporate obligations                                   28,087          13,135        $ 5,371        46,593
    Mortgage-backed securities                          16           143           1,179         10,325        11,663
                                                   ------------------------------------------------------------------
      Total debt securities available for sale     $49,996      $115,732         $15,314        $15,696      $196,738
                                                   ==================================================================

Estimated Market Value
At December 31, 1998
  Securities held to maturity
    US Government agency obligations                                             $17,495                     $ 17,495
    Other corporate obligations                                                    5,053                        5,053
                                                   ------------------------------------------------------------------
      Total debt securities held to maturity       $     0      $      0         $22,548        $     0      $ 22,548
                                                   ==================================================================
  Securities available for sale
    US Treasury obligations                        $50,312      $ 33,404                                     $ 83,716
    US Government agency obligations                              55,000         $   998                       55,998
    Other corporate obligations                                   28,092          12,969        $ 5,396        46,457
    Mortgage-backed securities                          16           145           1,195         10,342        11,698
                                                   ------------------------------------------------------------------
      Total debt securities available for sale     $50,328      $116,641         $15,162        $15,738      $197,869
                                                   ==================================================================
</TABLE>


<PAGE>  44


NOTE 7-Loans

      Loans consist of the following at:

<TABLE>
<CAPTION>
                                      December 31,
                                  ---------------------
                                    1998         1997
                                    ----         ----
                                     (In Thousands)

<S>                               <C>          <C>
Commercial, financial and
 agricultural                     $ 48,418     $ 68,513
Real estate-residential            328,243      245,577
Real estate-commercial             146,093      151,474
Real estate-construction
 and land development                2,281        6,000
Installment                          7,809       11,588
Other                               22,855       26,013
                                  ---------------------
      Total loans                  555,699      509,165

Less:
  Unearned income                   (1,506)      (1,432)
  Allowance for possible loan
   losses                           (7,122)      (7,651)
                                  ---------------------
      Net loans                   $547,071     $500,082
                                  =====================
</TABLE>

      At December 31, 1998 and 1997, loans which were on nonaccrual status 
were $3,013,000 and $7,145,000, 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, 1998, 1997 
and 1996, was $441,000, $767,000 and $679,000, respectively. Interest income 
recognized on nonaccrual loans in 1998, 1997 and 1996 amounted to $145,000, 
$413,000 and $188,000, respectively.
      The Company has identified loans as impaired in accordance with SFAS 
No. 114, when it is probable that interest and principal will not be 
collected according to the terms of the loan agreements. The balance of 
impaired loans was $1,556,000 and $4,559,000, respectively, at December 31, 
1998 and 1997. The average recorded investment in impaired loans was 
$3,502,000, $3,001,000 and $3,933,000, respectively, in 1998, 1997 and 1996. 
No income was recognized on impaired loans during 1998 and 1997 and  $4,000 
of income was recognized during 1996. Total cash collected on impaired loans 
during 1998, 1997 and 1996 was $710,000, $779,000 and $2,427,000, 
respectively, of which $710,000, $779,000 and $2,423,000, respectively, was 
credited to the principal balance outstanding on such loans.
      Changes in the allowance for possible loan losses allocated to 
impaired loans, which is included in the allowance for possible loan losses 
(see Note 8), are as follows:

<TABLE>
<CAPTION>
                               Year Ended December 31,
                            ------------------------------
                             1998        1997       1996
                             ----        ----       ----
                                    (In Thousands)

<S>                         <C>         <C>        <C>
Balance at beginning of
 year                       $ 1,054     $  457     $ 1,114
Provision for possible
 loan losses                    201        983         499
Loans charged off            (1,022)      (386)     (1,156)
                            ------------------------------
Balance at end of year      $   233     $1,054     $   457
                            ==============================
</TABLE>

      At December 31, 1998 and 1997, there were no impaired loans which did 
not have an allowance for possible loan losses determined in accordance with 
SFAS No. 114.
      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.
      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, 1998 and 1997, the subsidiary bank serviced real 
estate loans sold to others in the amounts of $148,024,000 and $163,943,000, 
respectively.


<PAGE>  45


NOTE 8-Allowance for Possible Loan Losses

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

<TABLE>
<CAPTION>
                                       Year Ended December 31,
                                   -------------------------------
                                    1998        1997        1996
                                    ----        ----        ----
                                           (In Thousands)

<S>                                <C>         <C>         <C>
Balance at beginning of year       $ 7,651     $ 6,253     $ 7,151
Provision for possible loan 
 losses                              1,125       2,425       1,372
Loans charged off                   (2,113)     (1,205)     (3,020)
Recoveries of loans previously 
 charged off                           459         178         750
                                   -------------------------------
Balance at end of year             $ 7,122     $ 7,651     $ 6,253
                                   ===============================
</TABLE>

NOTE 9-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 $9,622,000 and $6,864,000 at December 31, 1998 and 
1997, respectively. During 1998, $6,436,000 of new loans were made and 
repayments totaled $3,678,000. 

NOTE 10-Premises and Equipment

      The following is a summary of premises and equipment:

<TABLE>
<CAPTION>
                                   December 31,
                                -------------------
                                 1998        1997
                                 ----        ----
                                  (In Thousands)

<S>                             <C>         <C>
Bank buildings                  $15,496     $16,082
Leasehold improvements            1,697       1,808
Furniture and equipment          11,077      10,155
                                -------------------
                                 28,270      28,045
  Less: Accumulated depre-
   ciation and amortization      13,528      11,972
                                -------------------
                                 14,742      16,073
Land                              2,791       2,785
Construction  in progress           167           5
                                -------------------
                                $17,700     $18,863
                                ===================
</TABLE>

      Depreciation and amortization expense for the years ended December 31, 
1998, 1997 and 1996 was $1,994,000, $1,911,000 and  $1,889,000, 
respectively.
      For the year ended December 31, 1998, the Company recorded a $712,000 
writedown on bank buildings based upon an appraisal performed on property 
used as a branch office which is being closed. The charge to earnings is 
reflected in occupancy and equipment expense. 

NOTE 11-Other Real Estate Owned

      A summary of other real estate owned follows:

<TABLE>
<CAPTION>
                                          December 31,
                                        -----------------
                                         1998       1997
                                         ----       ----
                                         (In Thousands)

<S>                                     <C>        <C>
Condominiums and apartment projects     $  131     $  371
Single family housing projects             739        792
Non-retail commercial                      756        773
Residential                                451        437
                                        -----------------
                                         2,077      2,373
  Less:Valuation allowance                 476        468
                                        -----------------
                                        $1,601     $1,905
                                        =================
</TABLE>

      An analysis of other real estate owned follows:

<TABLE>
<CAPTION>
                                      Year Ended December 31,
                                   ------------------------------
                                    1998       1997        1996
                                    ----       ----        ----
                                           (In Thousands)

<S>                                <C>        <C>         <C>
Balance at beginning of year       $1,905     $ 3,492     $ 4,779
Other real estate owned
 acquired                             724         732       2,933
Advances for construction 
 and other                                         18
Sales proceeds                       (921)     (2,376)     (4,752)
Gains (losses) on sales, net          (54)         64         149
Provisions for (loss) recovery 
 subsequent to foreclosure            (53)        (25)        383
                                   ------------------------------
Balance at end of year             $1,601      $1,905      $3,492
                                   ==============================
</TABLE>

      An analysis of other real estate owned expense follows:

<TABLE>
<CAPTION>
                                       Year Ended December 31,
                                       -----------------------
                                       1998     1997     1996
                                       ----     ----     ----
                                           (In Thousands)

<S>                                    <C>      <C>      <C>
Foreclosure and holding costs, net     $250     $102     $ 480
Provision for loss (recovery)
 subsequent to foreclosure               53       25      (383)
(Gains) losses on sales, net             54      (64)     (149)
                                       -----------------------
                                       $357     $ 63     $ (52)
                                       =======================
</TABLE>


<PAGE>  46


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

<TABLE>
<CAPTION>
                                  Year Ended December 31,
                                  -----------------------
                                  1998     1997      1996
                                  ----     ----      ----
                                       (In Thousands)

<S>                               <C>      <C>      <C>
Balance at beginning of year      $468     $528     $1,605
Provision for loss (recovery)       53       25       (383)
Charge offs, net                   (45)     (85)      (694)
                                  ------------------------
Balance at end of year            $476     $468     $  528
                                  ========================
</TABLE>

NOTE 12-Other Assets

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

<TABLE>
<CAPTION>
                                              1998
                              ------------------------------------
                                                             Net
                              Original     Accumulated       Book
                               Amount      Amortization     Value
                              --------     ------------     -----
                                         (In Thousands)

<S>                            <C>            <C>           <C>
Goodwill                       $3,682         $2,044        $1,638
                               ===================================
Mortgage servicing rights      $1,377         $  987        $  390
                               ===================================

<CAPTION>
                                              1997
                              ------------------------------------
                                                             Net
                              Original     Accumulated       Book
                               Amount      Amortization     Value
                              --------     ------------     -----
                                         (In Thousands)

<S>                            <C>            <C>           <C>
Goodwill                       $3,682         $1,799        $1,883
                               ===================================
Mortgage servicing rights      $1,115         $  784        $  331
                               ===================================
</TABLE>

      Mortgage servicing rights of $262,000, $114,000 and $257,000, were 
capitalized during 1998, 1997 and 1996. 
      Amortization expense for the years ended December 31, 1998, 1997 and 
1996 was $474,000, $418,000 and  $423,000, respectively and included 
amortization on mortgage servicing rights of $203,000, $118,000 and $109,000 
in 1998, 1997 and 1996, respectively.

NOTE 13-Interest Bearing Deposits

      Interest bearing deposits consisted of the following:

<TABLE>
<CAPTION>
                                      December 31,
                                  ---------------------
                                    1998         1997
                                    ----         ----
                                     (In Thousands)

<S>                               <C>          <C>
NOW accounts                      $203,068     $166,773
Savings accounts                    87,150       89,278
Money market deposit accounts       19,659       31,486
Time certificates                  266,901      290,176
                                  ---------------------
                                  $576,778     $577,713
                                  =====================
</TABLE>

      Maturities of time certificates after December 31, 1998 are 
$226,150,000 in 1999, $25,272,000 in 2000, $8,949,000 in 2001, $3,751,000 in 
2002, $2,467,000 in 2003 and $312,000 in years thereafter.
      Time certificates with balances of $100,000 or more at December 31, 
1998 and 1997 totaled $33,545,000 and $37,360,000, respectively.

NOTE 14-Borrowings

Securities Sold Under Agreements to Repurchase

      Short-term borrowings in the form of securities sold under agreements 
to repurchase at December 31, 1998 and 1997, totaled $70,905,000 and 
$66,025,000, respectively. Such borrowings were collateralized at December 
31, 1998 by a portion of the Company's U.S. Treasury and U.S. Government 
agency securities with a carrying value of $87,348,000 and estimated market 
value of $87,467,000 (see note 6). 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 4.29% and 5.07%, respectively, at December 31, 1998 and 1997.
      The maximum amount of securities sold under agreements to repurchase 
at any month end during 1998, 1997 and 1996, were $73,392,000, $67,693,000 
and $64,961,000, respectively. The average amount of securities sold under 
agreements to repurchase in 1998, 1997 and 1996 were $67,562,000, 
$59,826,000 and $51,220,000, respectively. The average cost of securities 
sold under agreements to repurchase was 4.36%, 4.76% and 4.76% during 1998, 
1997 and 1996, respectively.

Other Borrowings

      The Company's subsidiary bank maintains a line of credit with the 
FHLBB to meet short or long-term financing needs that 


<PAGE>  47


may arise. 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, 1998 and 1997.
      Based upon "qualifying" collateral held, the Company's subsidiary bank 
had a total borrowing capacity with the FHLBB as of December 31, 1998 of 
approximately $332,456,000, of which approximately $251,848,000 was still 
available.
      Other borrowings, all of which were with the FHLBB, consisted of the 
following:

<TABLE>
<CAPTION>
                                  December 31, 1998
                                ---------------------
                                            Range of
                                Amount      Rates (%)
                                ------      ---------
                                  ($ In Thousands)

<S>                             <C>         <C>
Due within one year             $    45     5.00-6.17
Due from one to three years          99     5.00-6.17
Due over three years             80,464     4.18-6.17
                                -------
                                $80,608
                                =======

<CAPTION>
                                  December 31, 1997
                                ---------------------
                                            Range of
                                Amount      Rates (%)
                                ------      ---------
                                  ($ In Thousands)

<S>                             <C>         <C>
Due within one year             $25,269     4.69-7.05
Due from one to three years          93     5.00-6.17
Due over three years                515     5.00-6.17
                                -------
                                $25,877
                                =======
</TABLE>

      Principal payments due on other borrowings after December 31, 1998 are 
$45,000 in 1999, $48,000 in 2000, $51,000 in 2001, $55,000 in 2002, 
$30,057,000 in 2003 and $50,352,000 in years thereafter. The FHLBB has the 
right to call and require the repayment of $20,000,000 of borrowings at an 
interest rate of 4.49% due in 2008 during 2001. Additionally, the FHLBB has 
the right to call and require the repayment of $20,000,000 of borrowings at 
an interest rate of 4.18% due in 2013 during 2000.

NOTE 15-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 and standby letters of credit. 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.
      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.
      Financial instruments with off-balance sheet credit risk at December 
31, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                             Contract or
                                           Notional Amount
                                         -------------------
                                          1998        1997
                                          ----        ----
                                           (In Thousands)

<S>                                      <C>         <C>
Financial instruments whose con-
 tract amounts represent credit risk
  Commitments to originate loans         $18,886     $16,673
  Unused lines and standby letters
   of credit                              38,490      46,263
  Unadvanced portions of construc-
   tion loans                              1,767       1,110
</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.


<PAGE>  48


Derivative Financial Instruments

      In 1997, the Company began using interest rate cap agreements in 
managing the interest rate risk included in the consolidated statement of 
financial condition.
      With respect to interest rate caps, the Company is not exposed to loss 
beyond its initial cash outlay to enter into the agreements. The cash paid 
to enter into these agreements is amortized over the terms of the 
agreements. The unamortized cost related to these agreements was $325,000 
and $384,000 at December 31, 1998 and 1997, respectively. The Company enters 
into these agreements with AAA-rated counterparties.
      Interest rate cap agreements provide for the receipt of interest to 
the extent that the three-month LIBOR is greater than the strike rate. No 
interest was received under these agreements during 1998 and 1997.
      At December 31, 1998 and 1997 the Company had the following interest 
rate cap agreements in effect:


<TABLE>
<CAPTION>
         Notional       Strike      Maturity
          Amount         Rate         Date
         --------       ------      --------
      (In Thousands)

         <C>            <C>         <C>
         $ 5,000        7.50%         2/7/04
           5,000        7.8125%       6/4/04
          10,000        7.875%      11/15/04
</TABLE>

      There were no interest rate cap agreements in effect at December 31, 
1996.

Investment in Limited Partnerships

      At December 31, 1998, the subsidiary bank was committed to invest an 
additional $1,254,000 in two real estate development limited partnerships 
related to low income housing. The investments will be $219,000 in 1999, 
$208,000 in 2000, $198,000 in 2001, $187,000 in 2002, $177,000 in 2003 and 
$265,000 thereafter. At December 31, 1998 and 1997, the Company had $400,000 
and $85,000, respectively, invested in such partnerships, which are included 
in other assets in the consolidated statements of financial condition.

Lease Commitments

      As of December 31, 1998, the Company was obligated under noncancelable 
operating leases for premises. Minimum future rentals under leases are as 
follows:

<TABLE>
<CAPTION>
                                           Amount
                                           ------
                                       (In Thousands)

<C>                                        <C>
Year Ending December 31,
  1999                                     $  469
  2000                                        388
  2001                                        243
  2002                                        197
  2003                                        190
  Thereafter                                1,060
                                           ------
                                           $2,547
                                           ======
</TABLE>

      Rent expense amounted to $537,000, $510,000 and $519,000 for the years 
ended December 31, 1998, 1997 and 1996, respectively.

Employment and Special Termination Agreements

      The subsidiary bank and the Company have entered into an employment 
agreement with a senior officer, which provides for a specified minimum 
annual compensation, certain lump sum severance payments following a "change 
in control" as defined in the agreement and for 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. The Company has also entered into Special Termination 
Agreements with four other senior officers which 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 16-Income Taxes

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


<PAGE>  49


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

<TABLE>
<CAPTION>
                            1998       1997        1996
                            ----       ----        ----
                                   (In Thousands)

<S>                        <C>        <C>         <C>
Federal:
  Current                  $4,476     $ 1,947     $ 1,693
  Deferred                    341          34       1,296
  Effect of change in 
   valuation allowance                 (1,277)     (1,429)

State:
  Current                     703                     145
  Deferred                   (384)
                           ------------------------------
                           $5,136     $   704     $ 1,705
                           ==============================
</TABLE>

      The above amounts include a tax provision on securities transactions 
of $1,616,000, $845,000 and $237,000, in 1998, 1997 and 1996, respectively.
      The income tax benefit related to the exercise of stock options 
reduces taxes currently payable and is credited to additional paid-in 
capital. Such amounts were $1,152,000 in 1998, $290,000 in 1997 and $126,000 
in 1996.
      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>
                                   1998       1997        1996
                                   ----       ----        ----
                                          (In Thousands)

<S>                               <C>        <C>         <C>
Computed "expected" Federal 
 income tax expense at 
 statutory rate                   $4,996     $ 1,024     $ 3,028
Increase (decrease) 
 resulting from:
  State income tax, net of 
   Federal tax benefit               211                      96
  Performance based stock
   options                                       367
  Nondeductible merger-
   related charges                               611
  Change in valuation
   allowance                                  (1,277)     (1,429)
  Change in base year reserve                                (43)
  Other                              (71)        (21)         53
                                  ------------------------------
                                  $5,136     $   704     $ 1,705
                                  ==============================
</TABLE>

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

<TABLE>
<CAPTION>
                                               December 31,
                                             -----------------
                                              1998       1997
                                              ----       ----
                                              (In Thousands)

<S>                                          <C>        <C>
Deferred tax assets:
  Allowance for possible loan losses         $2,428     $1,649
  Other real estate owned                        74         55
  Federal and state net operating loss 
   carryforwards                                580      1,509
  Tax credit carryforwards                                 218
  Accrued interest                              132         62
  Core deposit intangibles                      101        109
  Deferred compensation                          65        159
  Marketable equity securities                   49        101
  Other                                         153
                                             -----------------
                                              3,582      3,862
  Less: Valuation allowance                       0          0
                                             -----------------
      Total deferred tax assets               3,582      3,862
                                             -----------------
Deferred tax liabilities:
  Unearned income                               674        570
  Premises and equipment                                   260
  Deferred loan fees                            140        185
  Unrealized gains on securities
   available for sale                           996      3,594
  Other                                          71        193
                                             -----------------
      Total deferred tax liabilities          1,881      4,802
                                             -----------------
      Net deferred tax asset (liability)     $1,701     $ (940)
                                             =================
</TABLE>

      At December 31, 1998 and 1997, net deferred tax assets (liabilities) 
includes $996,000 and $3,594,000, 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.
      As of December 31, 1998 the Company has net operating loss 
carryforwards available for tax purposes of approximately $1,707,000, which 
expire at various dates from the year 2006 through 2010. The subsequent 
realization of net operating loss carryforwards is subject to limitation as 
defined in Internal Revenue Code Section 382 due to changes in ownership 
relating to acquisitions. Approximately $426,000 of these net operating loss 
carryforwards are available for use by the Company in 1999.
      SFAS No. 109 requires a valuation allowance against deferred tax 
assets, if based on the weight of available evidence, it is more likely than 
not that some or all of the deferred tax assets will not be realized. In 
1996 and prior years, management believed that uncertainty existed with 
respect to future realization of a portion of its net operating loss 
carryforwards and had estab-


<PAGE>  50


lished a valuation allowance. In view of taxable income generated during 
1996 and 1997, and upon management's evaluation of the likelihood of 
realization, a portion of the valuation allowance was reversed in 1996, 
with the remainder being reversed in 1997. There was no valuation allowance 
on deferred tax assets at December 31, 1998 or 1997.

NOTE 17-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, 1998 and 1997 (the most 
recent actuarial valuations):

<TABLE>
<CAPTION>
                                                  1998       1997
                                                  ----       ----
                                                  (In Thousands)

<S>                                              <C>        <C>
Actuarial present value of benefit 
 obligations:
  Accumulated benefit obligation,
   including vested benefits of
   $2,425,000 and $2,074,000,
   respectively                                  $2,502     $2,178
                                                 =================
Projected benefit obligation, beginning of 
 period                                          $2,800     $2,458
  Service costs - benefits earned during 
   the period                                       176        151
  Interest cost on projected benefit 
   obligation                                       194        184
  Actuarial loss recognized during the 
   period                                           187         88
  Annuity payments made during the 
   period                                           (76)       (74)
  Settlements occurring during the
   period                                           (64)        (7)
                                                 -----------------
Projected benefit obligation, end of period      $3,217     $2,800
                                                 -----------------

Plan assets at fair value, beginning of 
 period, primarily fixed income and equity
 securities                                      $3,221     $2,662
  Return on plan assets during the 
   period                                            44        515
  Employer contributions during the 
   period                                            42        125
  Annuity payments made during the
   period                                           (76)       (74)
  Settlements occurring during the period           (64)        (7)
                                                 -----------------
Plan assets at fair value, end of period,
 primarily fixed income and equity 
 securities                                      $3,167     $3,221
                                                 -----------------

Plan assets in excess of (less than)
 projected benefit obligation                    $  (50)    $  421
  Unrecognized net gain from past 
   experience different from that 
   assumed and effects of changes in 
   assumptions                                     (389)      (841)
  Unrecognized net liability being 
   recognized over approximately 
   12 years                                         134        190
                                                 -----------------
      Accrued pension cost                       $ (305)    $ (230)
                                                 =================
</TABLE>

      Net periodic pension expense included the following components:

<TABLE>
<CAPTION>
                                               Year Ended
                                              December 31,
                                        -------------------------
                                        1998      1997      1996
                                        ----      ----      ----
                                             (In Thousands)

<S>                                     <C>       <C>       <C>
Service cost-benefits earned during
 the period                             $ 176     $ 151     $ 144
Interest cost on projected benefit 
 obligation                               194       184       171
Expected return on plan assets           (254)     (217)     (186)
Net amortization and deferral               2        18        32
                                        -------------------------
      Net periodic pension expense      $ 118     $ 136     $ 161
                                        =========================
</TABLE>

      The weighted average discount rate of 6.50% in 1998, 7.25% in 1997 and 
7.75% in 1996, and the rate of increase in future compensation levels of 
4.50% in 1998, 5.00% in 1997 and 5.50% in 1996, 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 these life insurance policies was $1,430,000 and 
$1,360,000 at December 31, 1998 and 1997, respectively, and is carried in 
Other Assets in the Consolidated Statements of Financial Condition. Annual 
accruals for expense are paid 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, 1998, 1997 and 
1996 amounted to $257,000, $257,000 and $176,000, respectively. 


<PAGE>  51


NOTE 18-Employee Stock Ownership Plan (ESOP)

      On October 13, 1993, the Company's ESOP purchased 39,562 shares of 
common stock for $250,000. These funds were obtained by the ESOP through a 
loan from a third party lender and repayment of the loan is guaranteed by 
the Company. Annual principal payments are approximately $36,000 with 
interest at approximately the prime rate. Company contributions are the 
primary source of funds for the ESOP's repayment of the loan.
      Interest expense incurred on ESOP debt was $9,000, $17,000 and 
$19,000, respectively, for the years ended December 31, 1998, 1997 and 1996.
      Compensation expense related to the ESOP amounted to $308,000, 
$321,000 and $251,000, respectively, for the years ended December 31, 1998, 
1997 and 1996 and included additional contributions in excess of amounts 
required to service the ESOP debt of $175,000 in each of those years.
      Dividends on unallocated shares were insignificant during 1998, 1997 
and 1996.
      The total shares held by the ESOP were as follows:

<TABLE>
<CAPTION>
                               December 31,
                            -------------------
                             1998        1997
                             ----        ----

<S>                         <C>         <C>
Allocated shares            322,448     308,807
Unallocated shares           11,314      16,961
                            -------------------
      Total ESOP shares     333,762     325,768
                            ===================
</TABLE>

      The fair value of unallocated shares at December 31, 1998 and 1997 was 
$266,000 and $454,000, respectively. Unallocated shares are allocated to 
employees as the ESOP debt is repaid.

NOTE 19-Stock Compensation Plans

      The Company maintains the 1997 Long-Term Incentive Stock Benefit Plan. 
Under this plan, stock options have been granted to certain officers of the 
Company and its subsidiary bank. Under this plan, stock options have also 
been granted to each member of the Board of Directors who is not an officer 
or employee of the Company or the subsidiary bank. Options have been granted 
to certain officers and still remain outstanding under the Company's 1986 
stock option plan and stock options are still outstanding that relate to 
plans adopted by Primary Bank in 1993 and 1995, which plans were assumed by 
the Company in connection with the acquisition of Primary Bank. 
Additionally, stock options granted to members of the Board of Directors of 
Primary Bank, are still outstanding under plans adopted by Primary Bank in 
1993 and 1995, which plans were assumed by the Company in connection with 
the acquisition of Primary Bank. Each option entitles the holder to purchase 
one share of the Company's common stock at an exercise price equal to the 
fair market value of the stock at the date of grant. Options will be 
exercisable in whole or in part over the vesting period and expire 10 years 
following the date of grant. However, all options become 100% exercisable in 
the event that the employee or Director terminates their employment or 
service due to death, disability, normal retirement, or in the event of a 
change in control.
      The following is a description of activity in the stock compensation 
plans for the years ended December 31, 1998, 1997 and 1996: 


<PAGE>  52


Fixed Stock Option Plans

<TABLE>
<CAPTION>
                                              1998                       1997                       1996
                                    ------------------------   ------------------------   ------------------------
                                                  Weighted                   Weighted                   Weighted
                                    Number of     Average      Number of     Average      Number of     Average
                                     Options    Option Price    Options    Option Price    Options    Option Price
                                    ---------   ------------   ---------   ------------   ---------   ------------

<S>                                 <C>            <C>         <C>            <C>          <C>           <C>
Options at beginning of year         584,600       $11.39       490,331       $ 5.80       576,049       $5.52
Granted                              195,250        19.64       283,918        16.93         9,118        7.48
Exercised                           (257,880)        6.26      (189,024)        5.20       (93,909)       4.25
Canceled                              (1,502)        8.91          (625)        9.90          (927)       8.09
                                    --------                   --------                    -------
Options at end of year               520,468       $17.06       584,600       $11.39       490,331       $5.80
                                    ========       ======      ========       ======       =======       =====

Options exercisable at year end       82,861       $11.13       305,600       $ 6.28       426,225       $5.30
                                    ========       ======      ========       ======       =======       =====

<CAPTION>
                                              Options Outstanding                            Options Exercisable
                             -----------------------------------------------------     --------------------------------
                               Number        Weighted Average     Weighted Average       Number        Weighted Average
Range of Exercise Prices     Outstanding      Remaining Life       Exercise Price      Exercisable      Exercise Price
------------------------     -----------     ----------------     ----------------     -----------     ----------------

<S>                            <C>                 <C>                 <C>               <C>                <C>
$3.33                           16,500             3.3                 $ 3.33            16,500             $ 3.33
$6.33 to $7.52                  17,578             5.0                   6.72            17,578               6.72
$8.12 to $9.10                   6,160             6.5                   8.82             6,160               8.82
$11.09 to $11.41                 4,498             6.8                  11.40             4,498              11.40
$13.93                           1,482             8.0                  13.93             1,482              13.93
$17.00                         399,250             8.8                  17.00            36,643              17.00
$23.88                          75,000             9.0                  23.88
                               -------                                                   ------

$3.33 to $23.88                520,468             8.4                 $17.06            82,861             $11.13
                               =======             ===                 ======            ======             ======
</TABLE>

Performance-Based Stock Option Plans


<TABLE>
<CAPTION>
                                              1998                       1997                       1996
                                    ------------------------   ------------------------   ------------------------
                                                  Weighted                   Weighted                   Weighted
                                    Number of     Average      Number of     Average      Number of     Average
                                     Options    Option Price    Options    Option Price    Options    Option Price
                                    ---------   ------------   ---------   ------------   ---------   ------------

<S>                                  <C>           <C>          <C>           <C>         <C>            <C>
Options at beginning of year          66,787       $11.09       103,616       $11.06       47,023        $11.40
Granted                                                                                    56,593         10.78
Exercised                            (46,809)       11.02       (36,331)       11.01
Canceled                                (472)       10.82          (498)       10.78
                                     -------                    -------                   -------
Options at end of year                19,506       $11.23        66,787       $11.09      103,616        $11.06
                                     =======       ======       =======       ======      =======        ======
Options exercisable at year end       19,506       $11.23        66,787       $11.09            0           N/A
                                     =======       ======       =======       ======      =======        ======
</TABLE>


<PAGE>  53


      The range of exercise prices for the performance-based stock option 
plans are $10.78-$11.40, with a remaining weighted average life of 7.1 years 
at December 31, 1998.
      Under the 1995 Stock Option Plan for Outside Directors and the 1995 
Stock Option Plan for Officers, which options were assumed by the Company in 
connection with the acquisition of Primary Bank (the "Performance-Based 
Stock Options"), options vest in increments when the fair value of the stock 
exceeds certain target prices, as defined, at the date of grant. During 1997 
the fair market value of the stock exceeded the target prices and all such 
options fully vested. In connection with the Performance-Based Stock 
Options, the Company recorded compensation expense of $1,078,000 in 1997. 
The offsetting entry relating to this expense was credited to additional 
paid-in capital.
      The weighted average fair values of options at their grant date during 
1998, 1997 and 1996, were $8.64, $6.55 and $5.00 per option share, 
respectively. The fair values of the share grants were estimated on the date 
of grant using the Black-Scholes option-pricing model using the following 
assumptions:

<TABLE>
<CAPTION>
                                1998           1997         1996
                                ----           ----         ----

<S>                         <C>              <C>           <C>
Expected option lives         7 years        7.5 years     7 years
Expected volatility           37 - 48%          39%          40%
Risk free interest rate     4.99 - 5.49%       6.96%        6.10%
Expected dividend yield        2.10%           1.74%         N/A
</TABLE>

      Had compensation cost for the Company's stock-based compensation plans 
been determined consistent with SFAS No. 123 for awards made after July 1, 
1995, the Company's net earnings and net earnings per share would have been 
reduced to the pro forma amounts indicated below for the years ended 
December 31:

<TABLE>
<CAPTION>
                                 1998       1997       1996
                                 ----       ----       ----
                                  ($ In Thousands, except 
                                      per share data)

<S>             <S>             <C>        <C>        <C>
Net Earnings    As Reported     $9,557     $2,307     $7,201
                Pro forma       $8,370     $2,070     $6,888
Net Earnings
 Per Share:
  Basic         As Reported     $ 1.64     $  .42     $ 1.35
                Pro forma       $ 1.44     $  .38     $ 1.29
  Diluted       As Reported     $ 1.60     $  .40     $ 1.28
                Pro forma       $ 1.40     $  .36     $ 1.23
</TABLE>

      In 1998, 46,500 shares of restricted stock were awarded to certain 
officers under the 1997 Long-Term Incentive Stock Benefit Plan with a 
weighted average fair value at the dates of grant of $21.83 per share. At 
December 31, 1998, restricted stock awards totaled 46,500 shares of which 
6,500 shares were vested. Shares vest ratably over a period of five years. 
Compensation expense applicable to the stock awards was $362,000 in 1998. 

NOTE 20-Stockholders' Equity

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 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). As of December 
31, 1998, the Company and the subsidiary bank meet all capital adequacy 
requirements to which they are subject.
      As of December 31, 1998, 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, 1998 and 1997 are presented in the following 
table.


<PAGE>  54


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

<S>                                             <C>        <C>       <C>        <C>         <C>        <C>
As of December 31, 1998:
  Total Capital (to Risk Weighted Assets):
    Consolidated                                $75,971    14.42%    $42,145    >/=8.00%    N/A
    Subsidiary Bank                             $72,961    13.85%    $42,145    >/=8.00%    $52,681    >/=10.00%

  Tier I Capital (to Risk Weighted Assets):
    Consolidated                                $69,379    13.17%    $21,072    >/=4.00%    N/A
    Subsidiary Bank                             $66,369    12.60%    $21,072    >/=4.00%    $31,609     >/=6.00%

  Tier I Capital (to Average Assets):
    Consolidated                                $69,379     8.18%    $33,944    >/=4.00%    N/A
    Subsidiary Bank                             $66,369     7.82%    $33,944    >/=4.00%    $42,430     >/=5.00%

As of December 31, 1997:
  Total Capital (to Risk Weighted Assets):
    Consolidated                                $65,688    12.87%    $40,836    >/=8.00%    N/A
    Subsidiary Bank                             $63,737    12.49%    $40,830    >/=8.00%    $51,038    >/=10.00%

  Tier I Capital (to Risk Weighted Assets):
    Consolidated                                $59,292    11.62%    $20,418    >/=4.00%    N/A
    Subsidiary Bank                             $57,342    11.24%    $20,415    >/=4.00%    $30,623     >/=6.00%

  Tier I Capital (to Average Assets):
    Consolidated                                $59,292     7.47%    $31,730    >/=4.00%    N/A
    Subsidiary Bank                             $57,342     7.23%    $31,723    >/=4.00%    $39,654     >/=5.00%
</TABLE>


Stock Repurchase Program

      On August 13, 1996, the Company announced a Stock Repurchase Program 
("1996 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 1996 Program may be held in treasury, retired 
or used for general corporate purposes. The Company had repurchased 72,549 
shares under the 1996 Program. No shares were repurchased under the 1996 
Program after March of 1997, and, as a result of the merger agreement 
entered into with Primary Bank in April of 1997 (see note 2 of notes to 
consolidated financial statements), the Stock Repurchase Program was 
terminated.
      On August 11, 1998, the Company announced a new Stock Repurchase 
Program ("1998 Program"), whereby the Company's Board of Directors 
authorized the repurchase of up to 5% of its outstanding common shares from 
time to time. Any shares repurchased may be held in treasury, retired or 
used for general corporate purposes. As of December 31, 1998, 14,700 shares 
had been repurchased under the 1998 Program.

Liquidation Account

      Pursuant to certain bank conversion regulations, the subsidiary bank 
established a liquidation account 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 liquidation 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 at the date of conversion 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 


<PAGE>  55


in such account at the date of conversion, 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 conversion. The 
balance in the liquidation account at December 31, 1998 was approximately 
$1,958,000 (unaudited).

NOTE 21-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, 1998 and 1997, no such transactions existed 
between the Company and the subsidiary bank.

NOTE 22-Other Noninterest Expense

      Components of other noninterest expense were as follows:

<TABLE>
<CAPTION>
                                         Year Ended
                                        December 31,
                                ----------------------------
                                 1998       1997       1996
                                 ----       ----       ----
                                       (In Thousands)

<S>                             <C>        <C>        <C>
Advertising and marketing       $  567     $1,210     $1,026
Amortization                       474        418        423
Data processing                    487      1,101      1,438
FDIC deposit insurance
 assessments                        93         82        118
FDIC special assessment to 
 recapitalize Savings
 Association Insurance Fund                              187
Postage and freight                576        552        542
Professional fees                  856        817        791
Printing and supplies              640        726        570
Telephone                          552        433        383
Other                            2,167      2,436      2,251
                                ----------------------------
                                $6,412     $7,775     $7,729
                                ============================
</TABLE>

NOTE 23-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 premises and 
equipment, other real estate owned, core deposit intangibles 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 and due from banks and interest bearing deposits in other banks

      For cash and due from banks and short term investments in interest 
bearing deposits in other banks, having maturities of 90 days or less, the 
carrying amounts reported in the consolidated statements of financial 
condition approximate fair values.

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.


<PAGE>  56


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.

Mortgage Servicing Rights

      A valuation model that calculates the present value of future cash 
flows is used to estimate such fair values. 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.

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, 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 generally mature within 
ninety days and bear market interest rates.

Other Borrowings

      The fair value of other borrowings 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 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 are not material, at December 31, 1998 and 
1997, because most mature within one year, do not present any unanticipated 
credit concerns and bear market interest rates.
      The fair values of the interest rate cap agreements are based on 
dealer quotes.


<PAGE>  57


      The following presents the carrying value and estimated fair value of 
the Company's financial instruments at December 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                                       December 31,
                                                     --------------------------------------------------
                                                              1998                      1997
                                                     ----------------------    ------------------------
                                                                  Estimated                   Estimated
                                                      Carrying      Fair        Carrying        Fair
                                                       Value        Value        Value          Value
                                                      --------    ---------     --------      ---------
                                                                       (In Thousands)

<S>                                                   <C>         <C>           <C>           <C>
Financial Assets
  Cash and due from banks                             $ 23,506    $ 23,506      $ 28,677      $ 28,677
  Interest bearing deposits in other banks              19,532      19,532        27,452        27,452
  Securities held to maturity                           22,277      22,548        33,910        34,170
  Stock in Federal Home Loan Bank of Boston              7,201       7,201         7,201         7,201
  Securities available for sale                        219,765     219,765       178,680       178,680
  Net loans                                            547,071     554,886       500,082       506,317
  Loans held for sale                                    1,828       1,828         1,068         1,068
  Mortgage servicing rights                                390         643           331           679
  Accrued interest receivable                            5,722       5,722         5,627         5,627
Financial Liabilities
  Deposits (with no stated maturity)                   383,586     383,586       358,807       358,807
  Time deposits                                        266,901     269,129       290,176       290,772
  Securities sold under agreements to repurchase        70,905      70,905        66,025        66,025
  Other borrowings                                      80,608      80,579        25,877        25,883
  Accrued interest payable                               1,288       1,288         1,032         1,032

<CAPTION>
                                                     Contractual  Estimated    Contractual    Estimated
                                                     or Notional    Fair       or Notional      Fair
                                                       Amount       Value        Amount         Value
                                                     -----------  ---------    -----------    ---------
                                                                       (In Thousands)

<S>                                                   <C>         <C>           <C>           <C>
Off-balance sheet instruments
  Commitments to extend credit                        $ 59,143    $      0      $ 64,046      $      0
  Interest rate cap agreements                          20,000         122        20,000           242
</TABLE>


<PAGE>  58


NOTE 24-Condensed Parent Company Only Financial Information

      Condensed financial statements of Granite State Bankshares, Inc. (the 
"Parent Company"), as of December 31, 1998 and 1997, and for the years ended 
December 31, 1998, 1997 and 1996, are as follows:

Balance Sheets

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                          ------------------
                                                                                                           1998       1997
                                                                                                           ----       ----
                                                                                                            (In Thousands)

<S>                                                                                                       <C>        <C>
Assets
Interest bearing deposits in subsidiary bank                                                              $ 3,948    $ 2,500
Investment in subsidiary bank, at equity                                                                   69,590     65,070
Other assets                                                                                                    3         70
                                                                                                          ------------------
                                                                                                          $73,541    $67,640
                                                                                                          ==================

Liabilities                                                                                               $   941    $   726

Stockholders' equity                                                                                       72,600     66,914
                                                                                                          ------------------
                                                                                                          $73,541    $67,640
                                                                                                          ==================
</TABLE>

<TABLE>
<CAPTION>
Statements of Earnings

                                                                                                  Year Ended December 31,
                                                                                                ----------------------------
                                                                                                 1998      1997       1996
                                                                                                 ----      ----       ----
                                                                                                       (In Thousands)

<S>                                                                                             <C>       <C>        <C>
Revenues
  Interest income from subsidiary bank                                                          $   83    $    29    $    20
  Dividend income from subsidiary bank                                                           2,250      3,000      2,000
  Other revenues                                                                                   465
                                                                                                ----------------------------
      Total revenues                                                                             2,798      3,029      2,020
Operating expenses                                                                                  83        254         20
                                                                                                ----------------------------
Earnings before income taxes and equity in undistributed earnings (loss) of subsidiary bank      2,715      2,775      2,000
Income tax expense (benefit)                                                                       161        (68)
                                                                                                ----------------------------
Earnings before equity in undistributed earnings (loss) of subsidiary bank                       2,554      2,843      2,000
Equity in undistributed earnings (loss) of subsidiary bank                                       7,003       (536)     5,201
                                                                                                ----------------------------
      Net earnings                                                                              $9,557    $ 2,307    $ 7,201
                                                                                                ============================
</TABLE>

<PAGE>  59

<TABLE>
<CAPTION>
Statements of Cash Flows

                                                                                              Year Ended December 31,
                                                                                          -------------------------------
                                                                                           1998        1997        1996
                                                                                           ----        ----        ----
                                                                                                  (In Thousands)

<S>                                                                                       <C>         <C>         <C>
Cash flows from operating activities:
  Net earnings                                                                            $ 9,557     $ 2,307     $ 7,201
  Adjustments to reconcile net earnings to net cash provided by operating activities:
    Equity in undistributed (earnings) loss of subsidiary bank                             (7,003)        536      (5,201)
    Gains on sales of other assets                                                           (465)
    (Increase) decrease in other assets                                                        (1)        228           1
    Increase (decrease) in other liabilities                                                  127         (22)         (7)
    Deferred income tax expense (benefit)                                                      68         (68)
                                                                                          -------------------------------
      Net cash provided by operating activities                                             2,283       2,981       1,994
                                                                                          -------------------------------

Cash flows from investing activities:
  (Increase) decrease in interest bearing deposits with subsidiary bank                    (1,448)     (1,781)        748
  Proceeds from sales of other assets                                                         465
                                                                                          -------------------------------
      Net cash provided by (used in) investing activities                                    (983)     (1,781)        748
                                                                                          -------------------------------

Cash flows from financing activities:
  Dividends paid on common stock                                                           (2,824)     (1,285)     (1,083)
  Proceeds from issuance of common stock                                                    2,042         426         253
  Reissuance of common stock from treasury                                                     88
  Purchase of common stock for treasury                                                      (289)       (305)     (1,876)
  Repayment on liability relating to ESOP                                                     (36)        (36)        (36)
  Purchase of common stock relating to restricted stock awards                               (281)
                                                                                          -------------------------------
      Net cash used in financing activities                                                (1,300)     (1,200)     (2,742)
                                                                                          -------------------------------
      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>  60


NOTE 25-Summary of Quarterly Results (Unaudited)

The following is a summary of the quarterly results of operations for the 
years ended December 31, 1998 and 1997. 

<TABLE>
<CAPTION>
                                                                         1998                                1997
                                                          ----------------------------------  ----------------------------------
                                                          Fourth    Third   Second    First   Fourth    Third   Second    First
                                                          Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter
                                                          -------  -------  -------  -------  -------  -------  -------  -------
                                                                         ($ In Thousands, except per share data)

<S>                                                       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Interest and dividend income
  Loans                                                   $11,447  $11,515  $11,595  $11,275  $11,233  $10,913  $10,370  $ 9,791
  Securities available for sale                             2,739    2,542    2,099    2,455    2,337    2,389    2,907    2,724
  Securities held to maturity                                 380      321      248      520      896    1,313    1,415    1,486
  Interest bearing deposits in other banks                    373      349      226       81      302      162      140      177
  Dividends on Federal Home Loan Bank 
   of Boston stock                                            116      115      114      116      119      117      116      104
                                                          ----------------------------------------------------------------------
      Total interest and dividend income                   15,055   14,842   14,282   14,447   14,887   14,894   14,948   14,282
                                                          ----------------------------------------------------------------------

Interest expense
  Deposits                                                  5,589    5,664    5,533    5,768    6,038    5,918    5,797    5,569
  Other borrowed funds                                      1,588    1,497    1,096      918    1,010    1,350    1,624    1,594
                                                          ----------------------------------------------------------------------
      Total interest expense                                7,177    7,161    6,629    6,686    7,048    7,268    7,421    7,163
                                                          ----------------------------------------------------------------------
      Net interest and dividend income                      7,878    7,681    7,653    7,761    7,839    7,626    7,527    7,119
Provision for possible loan losses                            350      250      225      300      800      700      700      225
                                                          ----------------------------------------------------------------------
      Net interest and dividend income after
       provision for possible loan losses                   7,528    7,431    7,428    7,461    7,039    6,926    6,827    6,894
Net gains (losses) on sales of securities available 
 for sale                                                   1,805      481      800    1,099       (1)     115       13    2,060
Other noninterest income                                    1,290    1,254    1,173    1,148    1,025    1,385    1,319    1,183
Noninterest expense<F1><F2>                                 7,221    5,560    5,565    5,859   12,681    6,163    6,803    6,127
                                                          ----------------------------------------------------------------------
  Earnings (loss) before income taxes                       3,402    3,606    3,836    3,849   (4,618)   2,263    1,356    4,010
Income tax expense (benefit)                                1,193    1,276    1,325    1,342   (1,592)     587      536    1,173
                                                          ----------------------------------------------------------------------

      NET EARNINGS (LOSS)<F1><F2>                         $ 2,209  $ 2,330  $ 2,511  $ 2,507  $(3,026)  $1,676  $   820  $ 2,837
                                                          ======================================================================

Net earnings (loss) per share-basic<F3>                   $   .38  $   .40  $   .43  $   .44  $  (.55)  $  .31  $   .15  $   .52

Net earnings (loss) per share-diluted<F3>                 $   .37  $   .39  $   .42  $   .42  $  (.55)  $  .29  $   .14  $   .50

Annualized Returns
  Return on average assets                                   1.03%    1.12%    1.27%    1.29%   (1.50)%    .82%     .40%    1.44%
  Return on average stockholders' equity                    11.93%   12.74%   14.02%   14.63%  (18.02)%  10.18%    5.29%   18.97%

<FN>
--------------------
<F1>  Included in noninterest expense during the fourth quarter of 1998 were 
      costs relating to the termination of certain officers. Additionally, a 
      writedown of premises in connection with a branch closing occured 
      during the fourth quarter of 1998. Noninterest expense associated with 
      these items amounted to $1,472,000 in the fourth quarter of 1998.
<F2>  The Company recorded $5,917,000 in merger-related charges in the 
      fourth quarter of 1997 in connection with the acquisition of Primary 
      Bank. The after-tax amount of these costs were $4,325,000.
<F3>  Net earnings (loss) per share is calculated by dividing net earnings 
      (loss) by the average common shares outstanding for each quarter. 
      Therefore, the sum of net earnings (loss) per share for the quarters 
      may not equal net earnings per share for the year.
</FN>
</TABLE>


<PAGE>  61


                    SELECTED CONSOLIDATED FINANCIAL DATA

Balance Sheet Data:

<TABLE>
<CAPTION>
                                                            At or for Years Ended December 31,
                                                   ----------------------------------------------------
                                                     1998       1997       1996       1995       1994
                                                     ----       ----       ----       ----       ----
                                                         ($ In Thousands, except per share data)

<S>                                                <C>        <C>        <C>        <C>        <C>
Total assets                                       $878,147   $813,670   $797,840   $728,724   $668,310
Net loans                                           547,071    500,082    434,184    416,979    400,742
Loans held for sale                                   1,828      1,068      1,025      1,985        834
Investments<F1>                                     249,243    219,791    273,230    218,229    205,792
Deposits                                            650,487    648,983    609,667    591,123    520,099
Securities sold under agreements to repurchase       70,905     66,025     64,961     49,958     39,113
Other borrowings                                     80,608     25,877     59,190     28,499     56,143
Stockholders' equity                                 72,600     66,914     59,429     54,755     48,636

Operating Data:
Interest and dividend income                       $ 58,626   $ 59,011   $ 54,430   $ 51,798   $ 43,583
Interest expense                                     27,653     28,900     27,243     25,018     18,721
                                                   ----------------------------------------------------
      Net interest and dividend income               30,973     30,111     27,187     26,780     24,862
Provision for possible loan losses                    1,125      2,425      1,372      3,337      1,032
Net gains (losses) on securities                      4,185      2,187        650        338       (127)
Other noninterest income                              4,865      4,912      5,081      4,703      4,561
Noninterest expense<F2>                              24,205     31,774     22,640     24,364     22,633
                                                   ----------------------------------------------------
Earnings before income taxes                         14,693      3,011      8,906      4,120      5,631
Applicable income taxes                               5,136        704      1,705      1,638        562
                                                   ----------------------------------------------------
      Net earnings<F2>                             $  9,557   $  2,307   $  7,201   $  2,482   $  5,069
                                                   ====================================================
Per share data:
Net earnings per share-basic                       $   1.64   $    .42   $   1.35   $    .46   $    .93
                                                   ====================================================
Net earnings per share-diluted                     $   1.60   $    .40   $   1.28   $    .44   $    .88
                                                   ====================================================

Cash dividends declared on common stock            $    .50   $    .29   $    .20   $    .18   $    .14
Financial Ratios:
  Return on average assets                             1.17%       .29%       .95%       .35%       .76%
  Return on average stockholders' equity              13.30%      3.57%     12.88%      4.56%     10.06%

<FN>
--------------------
<F1>  Investments include securities held to maturity, securities available 
      for sale and stock in the Federal Home Loan Bank of Boston.
<F2>  The Company recorded $5,917,000 in merger-related charges in 1997 
      associated with the acquisition of Primary Bank. The after-tax amount 
      of these costs was $4,325,000.
</FN>
</TABLE>


<PAGE>  62