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 is 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 has a diversified lending operation that
services Cheshire, Hillsborough, Merrimack, Strafford and Rockingham
counties, New Hampshire. The subsidiary bank also originates residential
real estate loans for sale in the secondary mortgage market. The subsidiary
bank has nineteen full service offices and an additional twenty-four remote
automatic teller locations. The subsidiary bank offers its products and
services online through its internet banking branch, GRANITe-bank.

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 6.0%
of total deposits at December 31, 2001) 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. 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. 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 those terms. Forward-looking statements are subject to numerous risks
and uncertainties, 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, 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 wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect
the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current
statements. The Company does not undertake and specifically declines any
obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.

Acquisition of Branches

Effective at year end 2000, the Company completed its acquisition of two
branch offices of Olde Port Bank, a division of Webster Bank. Webster Bank
is the subsidiary of Webster Financial Corporation. The acquired branches
are located in the city of Portsmouth and the town of Hampton, both in
Rockingham County, New Hampshire. The acquisition provided an expanded
penetration of the Company in the Seacoast region of New Hampshire where
the Company now has five full service banking offices. The acquisition has
been accounted for using the purchase method of accounting. The core
deposit intangible is being amortized over ten years on an accelerated
method. Through December 31, 2001, goodwill has been amortized on the
straight line basis over 15 years. Beginning January 1, 2002, in accordance
with SFAS No. 142, goodwill will no longer be amortized, but will be tested
for impairment annually or whenever there is an impairment indicator. Since
the acquisition was effective at year end 2000, results of


<PAGE>  13


operations relating to the acquired branches are reflected in earnings
commencing January 1, 2001.

The acquisition was allocated as follows:

<TABLE>
<CAPTION>

Description                                            Amount
-----------                                            ------
                                                   (In Thousands)


                                                   <c>
Loans, net of allowance for possible loan
 losses of $606,000                                   $42,514
Bank premises and equipment                             1,952
Core deposit intangible                                   882
Goodwill                                                5,146
Other assets                                              256
                                                      -------
      Assets acquired                                  50,750
Deposits                                               39,368
Securities sold under agreements
 to repurchase                                          1,163
Other liabilities                                         306
                                                      -------
         Liabilities assumed                           40,837
                                                      -------
      Total consideration for acquisition, net
       of cash acquired of $2,214,000                 $ 9,913
                                                      =======
</TABLE>

Of the consideration of $9,913,000, net of cash acquired, $6,581,000 was
paid in December of 2000 and $3,332,000 was paid in February 2001. At
December 31, 2000, the $3,332,000 due to Webster Bank is included in other
liabilities in the Consolidated Statements of Financial Condition.

Financial Condition

Consolidated assets at December 31, 2001 were $1.0 billion, up $63.9
million or 6.7% from $955.0 million at December 31, 2000.

Cash and Due from Banks

Cash and due from banks decreased $5.3 million from $26.4 million at
December 31, 2000 to $21.1 million at December 31, 2001. The decrease
related primarily to a decrease in the amount of items processed through
the Company's depository bank accounts that settled subsequent to the end
of the reporting period.

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 $4.5
million at December 31, 2001 and $8.9 million at December 31, 2000. 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 (loss) 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 2001, 2000 or 1999.

At December 31, 2001 and 2000, the carrying values of securities held to
maturity and securities available for sale consisted of the following:

<TABLE>
<CAPTION>

                                         December 31,
                                     ---------------------
                                       2001         2000
                                       ----         ----
                                        (In Thousands)


                                  <c>          <c>
Securities held to maturity
   US Government agency
    obligations                                   $ 13,003
   Other corporate obligations       $  5,006        5,008
                                     ---------------------
      Total securities held to
        maturity                     $  5,006     $ 18,011
                                     =====================

Securities available for sale
   US Government agency
    obligations                      $146,389     $100,050
   Other corporate obligations        105,713       83,142
   Mortgage-backed securities          17,820        6,269
   Mutual funds                         1,047          977
   Marketable equity securities         3,232        6,084
                                     ---------------------
      Total securities available
       for sale                      $274,201     $196,522
                                     =====================
</TABLE>

At December 31, 2001, the net unrealized gains on securities available for
sale, net of related tax effects, were $1.6 million, compared to net
unrealized losses of $1.1 million at December 31, 2000. These net
unrealized gains/losses are shown in accumulated other comprehensive income
(loss) as a separate component of stockholders' equity.

At December 31, 2001, the weighted average maturity for all debt securities
held to maturity and available for sale, excluding mortgage-backed
securities, is 80 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 278 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.


<PAGE>  14


The total amortized cost of securities held to maturity and securities
available for sale, which excludes net unrealized gains and losses on
securities available for sale, was $276.6 million at December 31, 2001
compared to $216.3 million at December 31, 2000. The decrease in securities
held to maturity was primarily used to fund increases in securities
available for sale, while the increase in securities available for sale was
attributable to the investment of proceeds from the increased levels of
other borrowings with the FHLBB and deposits, as well as decreases in the
level of cash and due from banks and interest bearing deposits in other
banks.

At December 31, 2001, all of the U.S. Government Agency Obligations with
carrying values of $146,389,000 were callable at the discretion of the
issuer without penalty, of which $89,139,000 were callable during 2002 at a
weighted average yield of 5.37%; $49,030,000 were callable during 2003 at a
weighted average yield of 5.56% and $8,220,000 were callable during 2004 at
a weighted average yield of 5.89%. Should the issuers call these
obligations, the yields available on similar replacement securities are
likely to be lower.

Loans

At December 31, 2001 and 2000 the Company's loan portfolio consisted of the
following:

<TABLE>
<CAPTION>

                                      December 31,
                                  ---------------------
                                    2001         2000
                                    ----         ----
                                     (In Thousands)


                               <c>          <c>
Commercial, financial and
 agricultural                     $ 43,823     $ 50,750
Real estate-residential            335,632      351,146
Real estate-multifamily             49,579       43,140
Real estate-commercial             184,502      177,453
Real estate-construction and
 land development                    9,060        5,385
Installment                          5,932        6,547
Other                               26,472       22,964
                                  ---------------------
      Total loans                  655,000      657,385
Less:
  Unearned income                   (1,075)      (1,177)
  Allowance for possible loan
   losses                           (8,085)      (7,854)
                                  ---------------------
      Net loans                   $645,840     $648,354
                                  =====================
</TABLE>

Loans outstanding before deductions for unearned income and the allowance
for possible loan losses decreased $2.4 million to $655.0 million at
December 31, 2001 from $657.4 million at December 31, 2000. Residential
real estate loans decreased $15.5 million to $335.6 million at December 31,
2001 from $351.1 million at December 31, 2000. The decrease primarily
related to a lower interest rate environment in 2001 compared with 2000,
which encouraged residential real estate borrowers into fixed rate loans
which the Company primarily originates for sale in the secondary mortgage
market. Commercial real estate loans and multifamily real estate loans
increased $7.0 million and $6.4 million, respectively. The continued
success of the commercial loan officers' call program and the lower
interest rate environment were the primary reasons for the growth in
commercial real estate loans and multifamily real estate loans. Commercial,
financial and agricultural loans decreased $6.9 million to $43.8 million at
December 31, 2001 from $50.7 million at December 31, 2000, as net
repayments during the year exceeded loan originations. Other loans
increased $3.5 million to $26.5 million at December 31, 2001 from $23.0
million at December 31, 2000. The increase in other loans is primarily the
result of the lower interest rate environment which encouraged consumers
into home equity loans. The environment remained highly competitive for
attracting new loans amongst financial institutions in the Company's market
areas.

Total loan originations during 2001 and 2000, were $299.4 million and
$185.6 million, respectively. Loan originations for portfolio, excluding
loans originated for sale in the secondary mortgage market during 2001 and
2000 were $192.0 million and $167.2 million, respectively. Loan repayments
for 2001 and 2000, were $193.9 million and $121.1 million, respectively.
Loans charged off, net during 2001 and 2000 were $429 thousand and $114
thousand, respectively. Loans transferred to other real estate owned during
2001 and 2000 amounted to $160 thousand and $543 thousand, respectively.

The subsidiary bank originates certain residential real estate loans for
sale in the secondary mortgage market. Loans held for sale at December 31,
2001 and 2000 were $14.8 million and $657 thousand, respectively. Loans
originated for sale in the secondary mortgage market during 2001 and 2000
were $107.4 million and $18.4 million, respectively. Loans sold in the
secondary mortgage market during 2001 and 2000 were $93.3 million and $18.2
million, respectively. The large increase in loans originated for sale and
loans sold in the secondary mortgage market in 2001 compared to 2000,
related to the lower interest rate environment in 2001 as a result of
eleven reductions in short term interest rates by the Federal Reserve Board
totaling 475 basis points, which encouraged residential real estate
borrowers to refinance loans into fixed rate loans which the Company sells
in the secondary mortgage market. During 2001 and 2000, the Company
originated fifteen year fixed rate residential real estate loans for sale
in the secondary mortgage market. Prior to that, the Company had been
originating fifteen year fixed rate residential real estate loans for
portfolio. In the future, new originations of these loans may be retained
as portfolio loans or sold in the secondary mortgage market, depending upon
management's evaluation of the Company's interest rate risk objectives. The
Company continues to write thirty year fixed rate residential real estate
loans for sale in the secondary mortgage market. At December 31, 2001 and
2000 the Company serviced residential real estate loans for


<PAGE>  15


others totaling $190.4 million and $130.2 million, respectively.

Risk Elements

The Company's management believes that New Hampshire experienced steady
economic growth between 1992 and 2000; however, during 2001, the economy
appeared to experience a mild recession. 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 therefore considered nonperforming, with the exception of $165 thousand
of loans at December 31, 2001 and $4 thousand of loans at December 31,
1999, all of which were in the process of collection at those dates.

<TABLE>
<CAPTION>

                                          December 31,
                                  ----------------------------
                                   2001       2000       1999
                                   ----       ----       ----
                                        ($ In Thousands)


                               <c>        <c>        <c>
Nonperforming loans:
  Residential real estate         $  209     $  820     $  746
  Commercial real estate           1,804      2,030        294
  Construction and land
   development real estate           250         14
  Commercial, financial
   and agricultural                  704        307        475
  Installment and other               48         30          1
                                  ----------------------------
      Total nonperforming
       loans                       3,015      3,201      1,516
      Total other real estate
       owned                                    416      1,288
                                  ----------------------------
      Total nonperforming
       assets                     $3,015     $3,617     $2,804
                                  ============================

Ratios:
      Total nonperforming
       loans to total loans         0.46%      0.49%      0.27%
                                  ============================

      Total nonperforming
       assets to total assets       0.30%      0.38%      0.32%
                                  ============================
</TABLE>

The Company's nonperforming assets decreased $602 thousand to $3.0 million
at December 31, 2001 from $3.6 million at December 31, 2000. Nonperforming
loans decreased $186 thousand, while other real estate owned decreased $416
thousand. Nonperforming residential real estate loans and commercial real
estate loans decreased $611 thousand and $226 thousand, respectively, while
nonperforming commercial, financial and agricultural loans and construction
and land development loans increased $397 thousand and $236 thousand,
respectively. There were no nonperforming multifamily real estate loans in
2001, 2000 and 1999. The Company continues to focus on asset quality issues
and allocates significant resources to the asset quality control functions
of credit policy and administration, and loan review. The asset workout and
collection functions focus on resolving problem credits and other
nonperforming assets. Despite the continued focus on asset quality, 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 $2.5 million and
$2.0 million, respectively, at December 31, 2001 and 2000. The average
recorded investment in impaired loans was $2.3 million, $880 thousand and
$1.1 million, respectively, in 2001, 2000 and 1999. No income was
recognized on impaired loans during 2001, 2000 and 1999. Total cash
collected on impaired loans during 2001, 2000 and 1999 was $380 thousand,
$22 thousand and $779 thousand, respectively, all of which 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 $750 thousand, $439 thousand and $252 thousand,
respectively, at December 31, 2001, 2000 and 1999. During 2001, 2000 and
1999, provisions for possible loan losses applicable to impaired loans were
$611 thousand, $187 thousand and $30 thousand, respectively. Impaired loans
charged off during 2001, 2000 and 1999 were $300 thousand, $0 and $11
thousand, respectively. At December 31, 2001, 2000 and 1999, 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


<PAGE>  16


allowance for estimated costs to sell. Loan losses arising from the
acquisition of such properties are charged against the allowance for
possible loan losses. Provisions to reduce the carrying value to net
realizable value are charged to current period earnings as realized and
reflected as an additional valuation allowance. Operating expenses and
gains and losses upon disposition are reflected in earnings as realized.
Other real estate owned amounted to $0 and $416 thousand at December 31,
2001 and 2000, respectively.

The allowance for possible loan losses is a significant factor in the
Company's operating results and is established through charges against
earnings. It is maintained at a level considered adequate to provide for
estimated 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 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 and/or concentrations; 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 existing conditions; and historical loan charge-off experience.

At December 31, 2001, 2000 and 1999, the allowance for possible loan losses
was $8.1 million, $7.9 million and $7.0 million, respectively, and the
ratio of the allowance to total loans outstanding was 1.23%, 1.19% and
1.24%, respectively. At December 31, 2001, 2000 and 1999, the allowance for
possible loan losses represented 268.2%, 245.4% and 463.9%, respectively,
of nonperforming loans. The amount of the allowance for possible loan
losses increased at December 31, 2001 compared to 2000, primarily as a
result of increases in commercial real estate loans, multifamily real
estate loans and construction and land development loans, as well as a
provision to increase the allowance related to one commercial real estate
loan. The amount of the allowance for possible loan losses increased at
December 31, 2000 compared to 1999, primarily as a result of an increase in
nonperforming and impaired loans, the overall growth of the loan portfolio
and the allowance of the loan portfolio acquired in connection with the
year end 2000 acquisition of two branch offices.

While management believes that the allowance for possible loan losses at
December 31, 2001 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, 2001 and 2000 follows:

<TABLE>
<CAPTION>

                                      December 31,
                                  ---------------------
                                    2001         2000
                                    ----         ----
                                     (In Thousands)


                               <c>          <c>
NOW accounts                      $254,474     $217,774
Savings accounts                    83,746       86,798
Money market deposit accounts       16,978       16,380
Time certificates                  266,019      271,576
                                  ---------------------
      Total interest bearing
       deposits                    621,217      592,528
Noninterest bearing deposits        92,926       90,806
                                  ---------------------
      Total deposits              $714,143     $683,334
                                  =====================
</TABLE>

Savings deposits, which are comprised of NOW accounts, savings accounts and
money market deposit accounts increased $34.2 million to $355.2 million at
December 31, 2001 from $321.0 million at December 31, 2000. The increase
was primarily the result of an increase in NOW accounts of $36.7 million.
The continued success of the special NOW account product introduced by the
subsidiary bank in 1995 and the introduction of another special NOW account
product in October of 2000 were the reasons for the increase in NOW
accounts.

Time certificates decreased $5.6 million, or 2.1%, to $266.0 million at
December 31, 2001 compared to $271.6 million at December 31, 2000. The
slight decrease in time certificates related to the lower interest rate
environment at December 31, 2001 compared to December 31, 2000, with
certain of these depositors looking to achieve higher yields in alternate
products outside of traditional bank sources. Time certificates with
minimum balances of $100 thousand increased $5.7 million, from $41.1
million at December 31, 2000 to $46.8 million at December 31, 2001. The
Company does not use brokers to solicit deposits.

Noninterest bearing deposits increased $2.1 million to $92.9 million at
December 31, 2001 compared to $90.8 million at December 31, 2000. The
increase in noninterest bearing


<PAGE>  17


deposits during 2001 is attributable to the Company's success in attracting
these deposits from its commercial loan customers.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase decreased $5.8 million or
6.4% to $85.0 million at December 31, 2001 from $90.8 million at December
31, 2000. These short-term borrowings are instruments which are used by
municipalities and businesses to invest their excess cash and are
collateralized by US Government Agency obligations.

Other Borrowings

Other borrowings which consists of borrowings from the FHLBB, increased
from $100.5 million at December 31, 2000 to $135.5 million at December 31,
2001. The proceeds of borrowings from the FHLBB were primarily used to fund
investments in securities available for sale.

Principal payments due on other borrowings after December 31, 2001 are $54
thousand in 2002, $30.1 million in 2003, $62 thousand in 2004, $60 thousand
in 2005, $4 thousand in 2006 and $105.2 million in years thereafter. The
FHLBB has the right to call and require the repayment of $70 million of
borrowings during 2002, $20 million of which is at a rate of 4.49% maturing
in 2008, $10 million of which is at a rate of 5.58% maturing in 2009, $30
million of which is at a weighted average interest rate of 5.60% maturing
in 2010 and $10 million of which is at a rate of 3.99% maturing in 2011.
Additionally, the FHLBB has the right to call and require the repayment of
$10,000,000 of borrowings during 2003, which is at a weighted average
interest rate of 4.53% maturing in 2011 and $15,000,000 of borrowings
during 2004, which is at a weighted average interest rate of 4.64% maturing
in 2011. Should the FHLBB require repayment of the callable borrowings on
the call dates, the interest cost to replace such borrowings would likely
increase.

Stockholders' Equity

Stockholders' equity was $80.5 million at December 31, 2001, an increase of
$7.0 million from $73.5 million at December 31, 2000. Book value per share
was $15.38 at December 31, 2001, up $1.62 or 11.8% from $13.76 at December
31, 2000. 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
identification, 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, 2001, approximately 72.5% of the
Company's loan portfolio was comprised of adjustable rate loans.
Approximately 59.1% of its securities available for sale and securities
held to maturity portfolios are debt securities maturing in less than five
years, with an additional 6.7% comprised of debt securities having
adjustable rate features. With regard to deposit liabilities, only 37.3% of
total deposits and 42.8% 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


<PAGE>  18


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 a portion of its
exposure to interest rate risk. At December 31, 2001 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-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
and therefore, 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 FDIC guidelines.

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, 2001. 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, adjusted for estimated prepayment activity. The
earlier of contractual maturities or the next repricing date are used on
all securities. Certain marketable equity securities and certain mutual
fund securities totaling $3.5 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>  19


                   INTEREST RATE SENSITIVITY GAP ANALYSIS
                            at December 31, 2001

<TABLE>
<CAPTION>

                                                                            Sensitivity Period
                                                --------------------------------------------------------------------------
                                                  0-3        3 Months-       1-3          3-5          Over
                                                 Months       1 Year        Years        Years       5 Years       Total
                                                 ------      ---------      -----        -----       -------       -----
                                                                             ($ In Thousands)


                                             <c>          <c>           <c>          <c>          <c>          <c>
Rate-sensitive Assets:
  Interest bearing deposits in other
   banks                                  $     $  4,530                                                          $  4,530
                                       Rate          .88%                                                              .88%
  Securities, including stock
   in FHLBB                               $       26,599     $  3,036      $ 48,847     $123,748     $ 80,645      282,875
                                       Rate         4.00%        6.76%         5.88%        5.70%        6.17%        5.71%
  Loans and loans held for sale           $      141,201      130,233       238,475      101,188       55,709      666,806
                                       Rate         6.14%        7.37%         7.60%        7.43%        7.23%        7.19%
                                                --------------------------------------------------------------------------
      Total                                     $172,330     $133,269      $287,322     $224,936     $136,354     $954,211
                                                ==========================================================================

Rate-sensitive Liabilities:
  Money market deposit accounts           $     $  2,037     $  6,452      $  8,489                               $ 16,978
                                       Rate         1.99%        1.99%         1.99%                                  1.99%
  Savings and NOW accounts                $       16,911       50,733       135,288     $ 67,644     $ 67,644      338,220
                                       Rate         1.57%        1.57%         1.57%        1.57%        1.57%        1.57%
  Time certificates                       $       52,102      155,520        45,638       12,530          229      266,019
                                       Rate         4.33%        3.95%         4.11%        5.09%        5.84%        4.11%
  Securities sold under agreements
   to repurchase                          $       82,979        2,034                                               85,013
                                       Rate         1.91%        3.38%                                                1.94%
  Other borrowings                        $           14           40        30,120           64      105,226      135,464
                                       Rate         6.06%        6.06%         5.87%        5.99%        5.04%        5.22%
                                                --------------------------------------------------------------------------
      Total                                     $154,043     $214,779      $219,535     $ 80,238     $173,099     $841,694
                                                ==========================================================================
Period Sensitivity Gap                          $ 18,287     $(81,510)     $ 67,787     $144,698     $(36,745)    $112,517
Cumulative Sensitivity Gap                      $ 18,287     $(63,223)     $  4,564     $149,262     $112,517
Cumulative Sensitivity Gap as a
 Percent of Total Rate-sensitive Assets             1.92%       (6.63)%        0.48%       15.64%       11.79%
</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 present 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 over the next twelve months should decline by
less than 10%. 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 25%. The following table presents as of
December 31, 2001, 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>  20


<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)

        
                    <c>                       <c>                     <c>                  <c>
          +200                 $(16,928)                 (12.42)%                $(1,838)             (4.68)%
          +100                   (6,982)                  (5.12)                    (590)             (1.50)
        Flat Rate                     0                    0                           0               0
          -100                   (2,209)                  (1.62)                     245               0.62
          -200                   (7,398)                  (5.43)                  (1,953)             (4.98)
</TABLE>

At December 31, 2000, the change in estimated net present value of equity
from the amount calculated under the flat rate scenario was a decrease of
$15.3 million, or 13.27%, assuming a 200 basis points increase in interest
rates and an increase of $3.6 million, or 3.11%, assuming a 200 basis
points decrease in interest rates. The Company's present value of equity is
reasonably stable in an increasing rate environment for 2001 compared to
2000. This is primarily a result of an increase in the balance of
securities available for sale with the weighted average maturity of the
portfolio increasing to 80 months at December 31, 2001 from 66 months at
December 31, 2000, as well as decreases in cash and due from banks and
overnight investments, being offset by a decrease in fifteen year fixed
rate residential real estate loans. The impact of a 200 basis points
decrease in interest rates on the present value of equity is negative in
2001 and positive in 2000. This is primarily a result of the value of
callable borrowings increasing more in the lower interest rate environment
in 2001 than in 2000, which negatively impacts the present value of equity.

At December 31, 2000, the change in hypothetical net interest and dividend
income over the following twelve months from the amount calculated under
the flat rate scenario was a decrease of $2.1 million, or 5.67%, assuming a
200 basis points increase in interest rates and an increase of $504
thousand, or 1.39%, assuming a 200 basis points decrease in interest rates.
The impact of a 200 basis points increase in rates is slightly less
negative to hypothetical net interest and dividend income in 2001 compared
to 2000. The impact of a 200 basis points decline in interest rates is
negative in 2001 as compared to positive in 2000, due to the lower interest
rate environment in 2001 as compared to 2000. As a result, in 2001,
prepayment speeds on residential real estate loans increased in a declining
rate environment which negatively impacted hypothetical net interest and
dividend income. In addition, the financial model in a decreasing rate
environment modeled higher interest rates on certain deposit accounts and
securities sold under agreements to repurchase than it otherwise would
have, because certain floor rates within the model were reached.

As a result of the foregoing, the Company was generally less susceptible to
risk from changes in interest rates in a rising rate environment and more
susceptible to risk in a declining rate environment at December 31, 2001
than at December 31, 2000.

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 are
reasonable based on historical 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 hypothetical 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 hypothetical 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 is
included in securities available for sale, and had an estimated fair value
of $3.2 million and an original cost of $3.0 million at December 31, 2001.
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 24% of the quarters,
and a 20-25% movement in prices in 4% of the quarters. The market price
risk in the Company's marketable equity securities portfolio, assuming
hypothetical decreases in quoted stock prices of 10% and 25%, would amount
to $323 thousand and $808 thousand, respectively.


<PAGE>  21


The after tax impact on capital relating to these hypothetical decreases in
stock prices would be $193 thousand and $483 thousand, 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, 2001 and 2000

Net Earnings

Operations in 2001 resulted in net earnings of $11.4 million, an increase
of $1.3 million over net earnings of $10.1 million in 2000. Basic earnings
per share were $2.16 in 2001 compared to $1.83 in 2000. Diluted earnings
per share were $2.11 in 2001 compared to $1.82 in 2000. The results of
operations in 2001 of the Olde Port branches acquired at the end of 2000
and the increases in gains on the sale of loans in the secondary mortgage
market were the primary reasons for the increase in net earnings. These
factors coupled with fewer shares outstanding in 2001 as compared to 2000,
as a result of repurchases of stock by the Company resulted in the higher
level of earnings per share in 2001 compared to 2000.

Earnings before income taxes were $18.2 million in 2001, an increase of
$2.5 million compared to earnings before income taxes of $15.7 million in
2000. Earnings before income taxes increased in 2001 compared to 2000,
primarily as a result of increases in net interest and dividend income and
noninterest income, partially offset by increases in noninterest expense
and the provision for possible loan losses.

Net Interest and Dividend Income

Net interest and dividend income was $37.0 million in 2001 and $32.2
million in 2000. The increase of $4.8 million in 2001 compared to 2000
relates primarily to an increase of $102.5 million or 12.39% in average
interest earning assets to $929.5 million in 2001 from $827.0 million in
2000, partially offset by an increase in average interest bearing
liabilities of $96.5 million, or 13.31%, to $821.8 million in 2001 from
$725.3 million in 2000. Additionally, the interest rate spread and net
yield on interest earning assets increased to 3.54% and 3.98%,
respectively, in 2001, from 3.37% and 3.90%, respectively, in 2000.

Interest income on loans increased $5.1 million to $53.3 million in 2001
from $48.2 million in 2000. The increase was primarily the result of an
increase in average loan balances of $81.9 million, or 13.97%, to $668.0
million in 2001, from $586.1 million in 2000, partially offset by a
decrease in average loan yields to 7.98% in 2001 from 8.22% in 2000. The
increase in average loan balances is partially attributable to the Olde
Port Bank branch acquisition from which approximately $43.2 million of
loans were acquired at year end 2000, as well as growth during the year in
average commercial real estate loans as well as average residential real
estate loans. Although growth was experienced in the average residential
real estate loan portfolio during 2001, this category actually experienced
a decline in year end balances of $15.5 million during the year, which was
attributable to the lower interest rate environment in 2001 compared to
2000, which encouraged these borrowers to refinance into fixed rate loan
products which the Company sells in the secondary mortgage market. The
decrease in loan yields is attributable to the Federal Reserve Board easing
short term interest rates eleven times, totaling 475 basis points, during
2001. The decrease in loan yields is also attributable to the competitive
environment for attracting commercial real estate, multifamily real estate
and construction and land development loans. Management expects that the
competition for loans will continue to be brisk, which could impact the
yields realized on new loans and therefore, the interest rate spreads in
future periods.

Interest and dividend income on securities, including stock in FHLBB,
increased $124 thousand to $15.0 million in 2001 from $14.8 million in
2000. The increase relates primarily to an increase in the average balances
of securities, including stock in FHLBB of $6.3 million, to $242.5 million
in 2001 from $236.2 million in 2000, partially offset by a decrease in
yields to 6.18% in 2001 from 6.29% in 2000. The lower yields were mainly
attributable to the issuers of callable federal agency securities calling
more securities in 2001 than 2000, which were reinvested at lower rates and
decreases in rates on adjustable rate securities, partially offset by
investments in higher yielding corporate bonds during 2000 and 2001.

Interest expense on deposits remained relatively stable, increasing $145
thousand to $22.1 million in 2001 from $21.9 million in 2000, with interest
on savings deposits decreasing $721 thousand and interest on time deposits
increasing $866 thousand. The increase related primarily to an increase in
the average balances of deposits of $47.6 million to $608.5 million in 2001
from $560.9 million in 2000, partially offset by a decrease in the cost of
deposits to 3.63% in 2001 compared to 3.91% in 2000. The increase in
average interest bearing deposits is attributable partially to the Olde
Port Bank branch acquisition effective at year end 2000, where
approximately $30.3 million of interest bearing deposits were assumed, as
well as normal operational growth in average interest bearing deposits.
Average balances of savings deposits increased $28.9 million to $333.2
million in 2001 from $304.3 million in 2000, and average balances of time
deposits increased $18.7 million to $275.4 million in 2001 from $256.7
million in 2000. The cost


<PAGE>  22


of savings deposits was 2.10% in 2001 compared to 2.54% in 2000. The
decrease in the cost of these deposits related primarily to the lower short
term interest rates in 2001 compared to 2000. The cost of time deposits was
5.48% in 2001 compared to 5.54% in 2000. During the last quarter of 2000,
when interest rates for time deposits were very competitive and higher,
depositors opened and renewed time deposits generally for terms of twelve
to fifteen months. As these time deposits matured in the latter part of
2001, they renewed at much lower rates. As a result, the cost of time
deposits was fairly stable in 2001 compared to 2000.

Interest expense on securities sold under agreements to repurchase
decreased $1.2 million to $3.1 million in 2001 from $4.3 million in 2000.
The decrease was primarily related to a decrease in the cost of these short
term borrowings to 3.50% in 2001 compared to 5.55% in 2000, partially
offset by an increase in the average balances of $10.7 million to $88.4
million in 2001 from $77.7 million in 2000. The decrease in the cost of
securities sold under agreements to repurchase is primarily the result of
the lower short term interest rate environment in 2001 compared to 2000.
The increase in average balances was as a result of local municipalities
and businesses investing more of their excess cash in these instruments
during 2001 compared to 2000.

Interest expense on other borrowings, which consist primarily of advances
from the FHLBB, increased $1.9 million to $6.7 million in 2001 from $4.8
million in 2000. The increase was primarily related to an increase in
average balances of other borrowings of $38.2 million to $124.8 million in
2001 from $86.6 million in 2000, partially offset by a decrease in the cost
of other borrowings to 5.39% in 2001 from 5.59% in 2000. The increase in
the average balance of other borrowings related primarily to the subsidiary
bank making greater use of FHLBB advances to fund asset growth. The
decrease in the cost of other borrowings related to the lower interest rate
environment that was prevalent in 2001 compared to 2000, which allowed the
subsidiary bank to use callable FHLBB advances to borrow funds at
attractive rates.


<PAGE>  23


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,
                                               ----------------------------------------------------------------------------------
                                                          2001                        2000                        1999
                                               --------------------------  --------------------------  --------------------------
                                               Average             Yield/  Average             Yield/  Average             Yield/
                                               Balance   Interest   Cost   Balance   Interest   Cost   Balance   Interest   Cost
                                               -------   --------  ------  -------   --------  ------  -------   --------  ------
                                                                                ($ In Thousands)


                                            <c>       <c>       <c>     <c>       <c>       <c>     <c>       <c>       <c>
Assets
  Interest earning assets
    Loans and loans held for sale <F1>         $667,963  $53,335   7.98%   $586,081  $48,197   8.22%   $559,651  $45,287   8.09%
    Interest bearing deposits in other banks     19,030      614   3.23       4,735      290   6.12      17,456      876   5.02
    Securities, including stock in FHLBB <F2>   242,475   14,973   6.18     236,196   14,849   6.29     232,314   13,639   5.87
                                               --------  -------           --------  -------           --------  -------
      Total interest earning assets             929,468   68,922   7.42     827,012   63,336   7.66     809,421   59,802   7.39
                                                         -------                     -------                     -------
  Non-interest earning assets                    71,291                      55,908                      59,057
  Allowance for possible loan losses             (7,977)                     (7,072)                     (7,138)
                                               --------                    --------                    --------
      Total assets                             $992,782                    $875,848                    $861,340
                                               ========                    ========                    ========

Liabilities and Stockholders' Equity
  Interest bearing liabilities
    Savings deposits                           $333,176    7,000   2.10    $304,261    7,721   2.54    $307,559    7,363   2.39
    Time deposits                               275,364   15,085   5.48     256,668   14,219   5.54     256,660   13,508   5.26
                                               --------  -------           --------  -------           --------  -------
      Total interest bearing deposits           608,540   22,085   3.63     560,929   21,940   3.91     564,219   20,871   3.70
    Securities sold under agreements to
     repurchase                                  88,431    3,096   3.50      77,723    4,316   5.55      65,078    2,654   4.08
    Other borrowings                            124,796    6,731   5.39      86,609    4,838   5.59      83,577    4,371   5.23
                                               --------  -------           --------  -------           --------  -------
      Total interest bearing liabilities        821,767   31,912   3.88     725,261   31,094   4.29     712,874   27,896   3.91
                                                         -------                     -------                     -------
  Non-interest bearing liabilities
    Demand deposits                              89,067                      77,522                      73,145
    Other liabilities                             2,830                       2,351                       2,376
                                               --------                    --------                    --------
      Total non-interest bearing liabilities     91,897                      79,873                      75,521
  Stockholders' equity                           79,118                      70,714                      72,945
                                               --------                    --------                    --------
      Total liabilities and stockholders'
       equity                                  $992,782                    $875,848                    $861,340
                                               ========                    ========                    ========
  Net interest and dividend income/interest
   rate spread                                           $37,010   3.54%             $32,242   3.37%             $31,906   3.48%
                                                         =======   ====              =======   ====              =======   ====
  Net earning balance/net yield on interest
   earning assets                              $107,701            3.98%   $101,751            3.90%   $ 96,547            3.94%
                                               ========            ====    ========            ====    ========            ====

<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>  24


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, 2001 vs. 2000
                                                                         Increase (Decrease) Due To
                                                                       -------------------------------
                                                                       Volume       Rate        Total
                                                                       ------       ----        -----
                                                                               (In Thousands)


                                                                    <c>        <c>          <c>
Interest income on loans                                               $6,495     $(1,357)     $ 5,138
Interest income on interest bearing deposits in other banks               384         (60)         324
Interest and dividend income on securities and stock in FHLBB             362        (238)         124
                                                                       -------------------------------
      Total interest and dividend income                                7,241      (1,655)       5,586
                                                                       -------------------------------
Interest expense on deposits                                              928        (783)         145
Interest expense on securities sold under agreements to repurchase        726      (1,946)      (1,220)
Interest expense on other borrowings                                    2,060        (167)       1,893
                                                                       -------------------------------
      Total interest expense                                            3,714      (2,896)         818
                                                                       -------------------------------
      Net interest and dividend income                                 $3,527     $ 1,241      $ 4,768
                                                                       ===============================

<CAPTION>

                                                                                 Year Ended
                                                                         December 31, 2000 vs. 1999
                                                                         Increase (Decrease) Due To
                                                                       -------------------------------
                                                                       Volume       Rate        Total
                                                                       ------       ----        -----
                                                                               (In Thousands)


                                                                    <c>        <c>          <c>
Interest income on loans                                               $2,171     $   739      $ 2,910
Interest income on interest bearing deposits in other banks              (838)        252         (586)
Interest and dividend income on securities and stock in FHLBB             229         981        1,210
                                                                       -------------------------------
      Total interest and dividend income                                1,562       1,972        3,534
                                                                       -------------------------------
Interest expense on deposits                                             (122)      1,191        1,069
Interest expense on securities sold under agreements to repurchase        582       1,080        1,662
Interest expense on other borrowings                                      161         306          467
                                                                       -------------------------------
      Total interest expense                                              621       2,577        3,198
                                                                       -------------------------------
      Net interest and dividend income                                 $  941     $  (605)     $   336
                                                                       ===============================
</TABLE>

Provision for Possible Loan Losses

The provision for possible loan losses was $660 thousand in 2001 compared
to $330 thousand in 2000. The increase in 2001 compared to 2000, related
primarily to increases in commercial real estate loans, multifamily real
estate loans and construction and land development loans, an additional
provision related to one nonperforming commercial real estate loan, as well
as management's overall evaluation of the loan portfolio and the adequacy
of the level of the allowance for possible loan losses.

Noninterest Income

Noninterest income increased $1.9 million to $7.5 million in 2001 from $5.6
million in 2000. The increase in 2001 compared to 2000 was primarily
attributable to increases in net gains on sales of loans of $1.4 million
and customer account fees and service charges of $354 thousand. The
increase in net gains on sales of loans in the secondary mortgage market
was as a result of an increase in residential real estate loans originated
for and sold into the secondary mortgage market in 2001 compared to 2000,
due to a declining interest rate environment during 2001, which encouraged
borrowers into fixed rate loan products which the Company sells in the
secondary mortgage market. Because the Company does not expect further
significant reductions in market interest rates, management does not expect
to realize the same level of gains on sales of loans in the secondary
mortgage market in 2002 as were realized in 2001. The increase in customer
account fees and service charges relates primarily to increased fees
related to the implementation of a new NOW account "Granite Advantage"
which was introduced in October 2000.

Noninterest Expense

Noninterest expense was $25.7 million in 2001, an increase of $3.9 million,
or 18.10%, compared to $21.7 million in


<PAGE>  25


2000. The increase relates primarily to an increase in salaries and
benefits expenses of $2.2 million to $14.2 million in 2001 from $12.0
million in 2000, an increase of $1.7 million in other noninterest expenses
to $7.1 million in 2001 from $5.4 million in 2000 and an increase in other
real estate owned expense of $177 thousand to $178 thousand in 2001 from $1
thousand in 2000, partially offset by a decrease in occupancy and equipment
expenses of $98 thousand to $4.2 million in 2001 from $4.3 million in 2000.

The increase in salaries and benefits expenses of $2.2 million, or 18.15%,
was attributable in part to the acquisition of the two Olde Port Bank
branches which contributed to an increase in full time equivalent employees
from 266 at year end 2000 to 302 at December 31, 2001. Additionally, normal
salary increases and an increase in commissions paid to mortgage loan
originators as a result of the increased residential real estate loan
activity which occurred during 2001 compared to 2000, contributed to the
increase.

The decrease in occupancy and equipment expenses of $98 thousand, or 2.26%
related primarily to a reduction in the level of depreciation for 2001
compared to 2000, partially offset by an increase in costs associated with
the acquisition of the two Olde Port Bank branches at year end 2000.

The increase of $177 thousand in other real estate owned expenses relates
to an increase in expenses and writedowns related to foreclosed properties.

Other noninterest expenses increased $1.7 million, or 31.06%, which was
partially attributable to an increase in amortization expense of $588
thousand, of which $474 thousand related to goodwill and intangible assets
associated with the Olde Port Bank branch acquisition and $114 thousand
related to mortgage servicing rights. Additionally, other significant
increases related to professional fees of $278 thousand, advertising and
marketing expenses of $153 thousand, printing and supplies expenses of $124
thousand, data processing costs of $123 thousand and telephone expenses of
$105 thousand. The increase in professional fees is related primarily to an
increase in legal fees associated with the resolution of nonperforming
assets in 2001 compared to 2000. The acquisition of the two Olde Port Bank
branches was the primary reason for the increases in advertising and
marketing, printing and supplies, data processing and telephone expenses in
2001 compared to 2000.

Income Taxes

Income tax expense increased $1.1 million to $6.8 million in 2001 from $5.7
million in 2000 and represented effective tax rates of 37.3% and 36.0%,
respectively, of pretax income. The increase in the effective tax rate in
2001 compared to 2000, related primarily to a decrease in dividend income
on marketable equity securities and the dividend received deduction, as a
result of a decrease in investments in marketable equity securities
available for sale.

Comparison of Operating Results for the Years
 Ended December 31, 2000 and 1999

Net Earnings

Operations in 2000 resulted in net earnings of $10.1 million, stable with
net earnings of $10.1 million in 1999. Basic earnings per share were $1.83
in 2000 compared to $1.75 in 1999. Diluted earnings per share were $1.82 in
2000 compared to $1.71 in 1999. Fewer shares outstanding in 2000 as
compared to 1999 as a result of repurchases of stock by the Company
resulted in the higher level of earnings per share in 2000 compared to
1999.

Earnings before income taxes were $15.7 million in 2000, an increase of
$334 thousand compared to earnings before income taxes of $15.4 million in
1999. Earnings before income taxes increased in 2000 compared to 1999,
primarily as a result of increases in net interest and dividend income and
noninterest income and a decrease in noninterest expense, partially offset
by an increase in the provision for possible loan losses.

Net Interest and Dividend Income

Net interest and dividend income was $32.2 million in 2000 and $31.9
million in 1999. The increase of $336 thousand in 2000 compared to 1999
relates primarily to an increase of $17.6 million or 2.17% in average
interest earning assets to $827.0 million in 2000 from $809.4 million in
1999, partially offset by an increase in average interest bearing
liabilities of $12.4 million, or 1.74%, to $725.3 million in 2000 from
$712.9 million in 1999. Additionally, the increase was partially offset by
decreases in the interest rate spread and net yield on interest earning
assets to 3.37% and 3.90%, respectively, in 2000 from 3.48% and 3.94%,
respectively, in 1999.

Interest income on loans increased $2.9 million to $48.2 million in 2000
from $45.3 million in 1999. The increase was primarily the result of an
increase in average loan balances of $26.4 million, or 4.72%, to $586.1
million in 2000, from $559.7 million in 1999, coupled with an increase in
average loan yields to 8.22% in 2000 from 8.09% in 1999. The increase in
average loan balances reflects strong loan demand in both the residential
real estate and commercial real estate loan markets, as well as a slow down
in the pace of repayments due to the higher interest rate environment in
2000 compared to 1999. The increase in loan yields is as a result of the
higher interest rate environment that was prevalent during 2000 compared to
1999. This was partially offset by the competitive environment for
attracting commercial real estate and commercial, financial and
agricultural loans and the trend for residential real estate borrowers
choosing adjustable rate loan products over fixed rate loan products, both
of which contributed to reducing the amount by which the overall loan
yields increased.

Interest and dividend income on securities, including stock in FHLBB,
increased $1.2 million to $14.8 million in 2000 from $13.6 million in 1999.
The increase relates primarily to


<PAGE>  26


a slight increase in the average balances of securities, including stock in
FHLBB of $3.9 million, to $236.2 million in 2000 from $232.3 million in
1999, coupled with an increase in yields to 6.29% in 2000 from 5.87% in
1999. While average balances were relatively stable, increasing by only
1.67% in 2000 compared to 1999, the increase in yields resulted from
securities purchased at higher yields during the latter part of 1999 and
2000 as interest rates trended higher. Additionally, a change in the mix of
the securities portfolio with some additional investments in higher
yielding corporate obligations and a decrease in investments in lower
yielding US Treasury and US Government Agency obligations and marketable
equity securities contributed to the higher yields in 2000.

Interest expense on deposits increased $1.0 million to $21.9 million in
2000 from $20.9 million in 1999, with interest on savings deposits
increasing $358 thousand and interest on time deposits increasing $711
thousand. The increase related primarily to a higher cost of deposits of
3.91% in 2000 compared to 3.70% in 1999, while the average balances of
deposits were relatively stable, decreasing by $3.3 million, or 0.58%, to
$560.9 million in 2000 compared to $564.2 million in 1999. Average balances
of savings deposits decreased $3.3 million to $304.3 million in 2000 from
$307.6 million in 1999, while average balances of time deposits were stable
at $256.7 million in both 2000 and 1999. The cost of savings deposits was
2.54% in 2000 compared to 2.39% in 1999. The increase in the cost of these
deposits related primarily to a change in the mix of the savings deposits,
with an increase in balances of the special NOW account product introduced
by the subsidiary bank in 1995, offset by reductions in lower yielding
savings, regular NOW and money market deposit accounts. The cost of time
deposits was 5.54% in 2000 compared to 5.26% in 1999. The increase in the
cost of these deposits was primarily the result of the higher interest rate
environment that was prevalent in 2000 compared to 1999, with time deposits
maturing in 2000 generally renewing at higher rates.

Interest expense on securities sold under agreements to repurchase
increased $1.6 million to $4.3 million in 2000 from $2.7 million in 1999.
The increase was primarily related to an increase in average balances of
$12.6 million to $77.7 million in 2000 from $65.1 million in 1999, coupled
with an increase in the cost of these short term borrowings to 5.55% in
2000 compared to 4.08% in 1999. The increase in average balances was as a
result of local municipalities and businesses investing more of their
excess cash in these instruments as short term interest rates trended
higher during 2000. The higher cost of these short term borrowings in 2000
compared to 1999 related primarily to short term interest rates being
higher during 2000 than 1999.

Interest expense on other borrowings, which consist primarily of advances
from the FHLBB, increased $467 thousand to $4.8 million in 2000 from $4.4
million in 1999. The increase was primarily related to an increase in
average balances of other borrowings of $3.0 million to $86.6 million in
2000 from $83.6 million in 1999, coupled with an increase in the cost of
other borrowings to 5.59% in 2000 from 5.23% in 1999. The increase in the
average balance of other borrowings related primarily to the subsidiary
bank making greater use of FHLBB advances to fund asset growth. The
increase in the cost of other borrowings related to the higher interest
rate environment that was prevalent in 2000 compared to 1999, and the
subsidiary bank borrowing additional funds to replace callable advances
that were called by the FHLBB during 2000.

Provision for Possible Loan Losses

The provision for possible loan losses was $330 thousand in 2000 compared
to $50 thousand in 1999. The increase in 2000 compared to 1999, related
primarily to an increase in nonperforming loans and an increase in the loan
portfolio, as well as management's overall evaluation of the loan portfolio
and the adequacy of the level of the allowance for possible loan losses.
Nonperforming loans increased $1.7 million to $3.2 million in 2000 compared
to $1.5 million in 1999. Growth in the loan portfolio, excluding loans
acquired at year end 2000 of $43.2 million in connection with the Olde Port
Bank branch acquisition, was $45.5 million during 2000.

Noninterest Income

Noninterest income increased $106 thousand to $5.6 million in 2000 from
$5.5 million in 1999. The increase in 2000 compared to 1999 was
attributable to increases in customer account fees and service charges of
$129 thousand and other noninterest income of $610 thousand, partially
offset by decreases in net gains on sales of securities available for sale
of $386 thousand, net gains on sales of loans of $203 thousand and mortgage
service fees of $44 thousand. The increase in customer account fees and
service charges relates primarily to changes in certain fees and service
charges for both commercial and retail customers which were implemented
effective January 1, 2000. The increase in other noninterest income is
primarily related to increases in the cash surrender value of life
insurance policies owned by the subsidiary bank, as well as increases in
commissions from brokerage activities. The decrease in net gains on sales
of loans was as a result of a decrease in loans originated for and sold
into the secondary mortgage market in 2000 compared to 1999, due to the
higher interest rate environment in 2000, which encouraged residential real
estate loan borrowers into adjustable rate products which the subsidiary
bank retains in its loan portfolio. The higher interest rate environment
also slowed loan refinance activity. These factors also contributed to the
decrease in mortgage service fees, as loans serviced for others decreased
in 2000 compared to 1999.

Noninterest Expense

Noninterest expense was $21.7 million in 2000, a decrease of $172 thousand
compared to $21.9 million in 1999. The decrease was attributable to a
decrease in other real estate owned expenses of $358 thousand to $1
thousand in 2000


<PAGE>  27


from $359 thousand in 1999 and a decrease in other noninterest expenses of
$186 thousand to $5.4 million in 2000 from $5.6 million in 1999, partially
offset by an increase in salaries and benefits expenses of $153 thousand to
$12.0 million in 2000 from $11.8 million in 1999 and an increase in
occupancy and equipment expenses of $219 thousand to $4.3 million in 2000
from $4.1 million in 1999.

The slight increase in salaries and benefits expenses of $153 thousand, or
1.29%, related primarily to normal salary increases of 5.28%, including
increases related to job promotions and increases in retirement and health
costs. The increases were partially offset by continued personnel
efficiencies, as average full time equivalent employees was 270 in 2000
compared to 288 in 1999, and by a decrease in compensation expense relating
to stock awards.

The increase in occupancy and equipment expenses of $219 thousand, or
5.31%, related primarily to an increase in costs associated with
maintenance agreements on new equipment and a $93 thousand writedown on
bank buildings, based on an appraisal, relating to property used as a
branch office which was closed during 2000.

The decrease of $358 thousand in other real estate owned expenses relates
to the decrease in properties held in foreclosure, with costs related to
holding properties in foreclosure and writedowns of properties subsequent
to foreclosure being offset by gains on disposals of foreclosed properties
during 2000.

Other noninterest expenses decreased $186 thousand, or 3.33%, with
decreases in legal and collection expenses, year 2000 related expenses and
amortization of tax advantaged limited partnerships being partially offset
by an increase in advertising and marketing expenses.

Income Taxes

Income tax expense increased $381 thousand to $5.7 million in 2000 from
$5.3 million in 1999 and represented effective tax rates of 36.0% and
34.3%, respectively, of pretax income. The increase in the effective tax
rate in 2000 compared to 1999, related primarily to an increase in state
tax expense and a decrease in tax credits.

Capital Resources and Liquidity

Capital Resources

Stockholders' equity totaled $80.5 million or 7.90% of total assets at
December 31, 2001 compared to $73.5 million, or 7.69% of total assets at
December 31, 2000. Stockholders' equity increased $7.0 million, primarily
as a result of net earnings of $11.4 million, the change in accumulated
other comprehensive income (loss) of $2.6 million, restricted stock award
amortization of $286 thousand, and other increases of $43 thousand,
partially offset by repurchases of stock of $3.7 million and dividends
declared of $3.6 million.

The Company and subsidiary bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum requirements can result in the initiation of certain mandatory and
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 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, 2001 and 2000, the Company and
subsidiary bank meet all capital adequacy requirements to which they are
subject. See note 19 of Notes to Consolidated Financial Statements for
further details of regulatory capital.

As of December 31, 2001, 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.
There have been no conditions or events since that notification that
management believes would cause a change in the subsidiary bank's
categorization.

On May 3, 2000, the Company announced a Stock Repurchase Program
("Program"), whereby the Company's Board of Directors authorized the
repurchase of up to 10% (or approximately 566,000 shares), of the Company's
outstanding common shares from time to time. Shares repurchased under this
Program may be held in treasury, retired or used for general corporate
purposes. As of December 31, 2001, the Company had repurchased 484,902
shares of common stock, with approximately 81,098 shares still available to
be purchased under this 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 amount 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 2001, 2000 and 1999 were $7.5 million, $10.0 million and
$5.3 million, respectively. The Company declared cash dividends of $.68,
$.64 and $.56 per share, respectively, in 2001, 2000 and 1999, resulting in
total dividends declared in those years of $3.6 million, $3.5 million and
$3.3 million, respectively. The primary source


<PAGE>  28


of liquidity in the Company is its interest bearing deposit with its
subsidiary bank of $1.9 million at December 31, 2001. Management believes
that these funds are adequate to provide for the Company's needs.

The subsidiary bank monitors its level of short-term assets and
liabilities, maintaining an appropriate balance between liquidity, risk and
return. The major sources of liquidity are 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,
                                                                                         ----------------------------------
                                                                                           2001         2000         1999
                                                                                           ----         ----         ----
                                                                                                   (In Thousands)


                                                                                      <c>          <c>          <c>
Cash and due from banks at beginning of year                                             $ 26,434     $ 18,575     $ 23,506

Operating activities:
  Net earnings                                                                             11,389       10,078       10,125
  Adjustments to reconcile net earnings to net cash provided by operating activities      (11,847)        (209)        (727)
                                                                                         ----------------------------------
Net cash provided by (used in) operating activities                                          (458)       9,869        9,398
Net cash provided by (used in) investing activities                                       (57,584)     (31,978)       1,045
Net cash provided by (used in) financing activities                                        52,750       29,968      (15,374)
                                                                                         ----------------------------------
Cash and due from banks at end of year                                                   $ 21,142     $ 26,434     $ 18,575
                                                                                         ==================================
</TABLE>

Operating activities used cash in 2001 and provided cash in 2000 and 1999.
Cash used in operations in 2001 was primarily comprised of loans originated
for sale in the secondary mortgage market, net of loans sold in the
secondary mortgage market, offset by net earnings. Cash provided by
operating activities in 2000 and 1999 were primarily comprised of net
earnings.

Investing activities used cash in 2001 and 2000 and provided cash in 1999.
The primary investing activities of the Company and the subsidiary bank,
are originating loans and purchasing securities available for sale. In
2001, loan repayments, net of loan originations were $2.7 million, while in
2000 and 1999, loan originations net of repayments were $46.2 million and
$14.2 million, respectively. Purchases of securities available for sale
were $239.7 million, $22.6 million and $101.0 million, respectively, in
2001, 2000 and 1999. A substantial portion of the net loan originations in
2000 and 1999 and purchases of securities available for sale in 2001, 2000
and 1999, were funded by maturities and calls of securities held to
maturity in 2001 and 1999, maturities, calls, principal payments received
and sales of securities available for sale in 2001, 2000 and 1999,
increases in deposits in 2001 and 2000, increases in securities sold under
agreements to repurchase in 2000 and 1999 and increases in other borrowings
in 2001, 2000 and 1999. Effective at year end 2000, the Company acquired
certain assets and assumed certain liabilities in connection with the
acquisition of two branch offices of Olde Port Bank. The Company paid $9.9
million, net of cash acquired of $2.2 million. For a description of assets
acquired and liabilities assumed, see "Acquisition of Branches".

Financing activities provided cash in 2001 and 2000 and used cash in 1999.
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. Deposits increased $30.8
million and $15.9 million in 2001 and 2000, respectively, and decreased
$22.5 million in 1999. Securities sold under agreements to repurchase
decreased $5.8 million in 2001 and increased $14.6 million and $4.1
million, respectively, in 2000 and 1999. In 2001, 2000 and 1999 proceeds
from other borrowings exceeded repayments, which increased other borrowings
by $34.9 million, $10.0 million and $10.0 million, respectively.
Additionally, during 2001, 2000 and 1999 the Company used cash of $3.7
million, $7.1 million and $4.1 million, respectively, to repurchase shares
of its common stock for treasury. The Company also used cash of $3.6
million, $3.5 million and $3.2 million, respectively, in 2001, 2000 and
1999 to pay dividends on its common stock. Net cash provided by financing
activities in 2001 and 2000 was used primarily to fund cash used in
investing activities. Net cash used in financing activities in 1999 was
funded by cash provided by operating and investing activities and a
decrease in cash and due from banks.

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 7 year fixed income US
Government agency securities and corporate securities. In addition to
assets in cash on hand and due from banks of $21.1 million at December 31,
2001, the Company through


<PAGE>  29


its subsidiary bank has interest bearing deposits in other banks, primarily
with FHLBB, of $4.5 million and securities available for sale of $274.2
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, 2001, the subsidiary bank had $135.5 million of
outstanding borrowings with the FHLBB, with an additional borrowing
capacity of approximately $119.4 million.

The Company anticipates that the subsidiary bank will have sufficient funds
available to meet its current loan commitments. At December 31, 2001, the
subsidiary bank had outstanding loan commitments of $68.9 million. For
additional information as to loan commitments, see note 14 of Notes to
Consolidated Financial Statements. Time deposits which are scheduled to
mature in one year or less at December 31, 2001, totaled $207.6 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 20 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

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which after amendment, was effective for fiscal years beginning after June
15, 2000. SFAS No. 133 must be adopted prospectively and retroactive
application is not permitted. SFAS No. 133 requires 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 (loss) 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 adopted SFAS No. 133, as
amended, on January 1, 2001. The cumulative effect on prior years of
adopting SFAS No. 133 on January 1, 2001, was not significant and therefore
has not been separately disclosed. The impact of accounting for derivative
instruments under SFAS No. 133 during the year ended December 31, 2001
decreased net interest and dividend income by $147,000 and net earnings by
$88,000, or $.02 per basic and diluted share.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities",
which replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". This statement
revises the standards for accounting for the securitizations and other
transfers of financial assets and collateral. It also requires certain
disclosures, but carries over most of the provisions of SFAS No. 125. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and must be
adopted prospectively. For recognition and reclassification of collateral
and for certain disclosures, this statement was effective for fiscal years
ending after December 15, 2000. The adoption of this statement had no
impact on the Company's consolidated financial statements.

On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Intangible Assets". SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of
SFAS No. 142. Major provisions of these Statements and their effective
dates for the Company are as follows:

*     All business combinations initiated after June 30, 2001 must use the
      purchase method of accounting. The pooling of interests method of
      accounting is prohibited except for transactions initiated before
      July 1, 2001.

*     Intangible assets acquired in a business combination must be recorded
      separately from goodwill if they


<PAGE>  30


      arise from contractual or other legal rights or are separable from
      the acquired entity and can be sold, transferred, licensed, rented or
      exchanged, either individually or as part of a related contract,
      asset or liability.

*     Goodwill, as well as intangible assets with indefinite lives,
      acquired after June 30, 2001, will not be amortized. Effective
      January 1, 2002, all previously recognized goodwill and intangible
      assets with indefinite lives will no longer be subject to
      amortization.

*     Effective January 1, 2002, goodwill and intangible assets with
      indefinite lives will be tested for impairment annually and whenever
      there is an impairment indicator.

*     All acquired goodwill must be assigned to reporting units for
      purposes of impairment testing and segment reporting.

Effective January 1, 2002, annual goodwill amortization of approximately
$500,000 will no longer be recognized. The Company has completed a
transitional fair value based impairment test of goodwill as of January 1,
2002. No impairment of goodwill was evident as a result of the impairment
testing performed.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. SFAS No. 144
establishes a single accounting model, based on the framework established
in SFAS No. 121, for long-lived assets to be disposed of by sale. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years, with earlier application
encouraged and its provisions are to be applied prospectively. The adoption
of this statement is not expected to have a material impact on the
Company's consolidated financial statements.


<PAGE>  31


                                        [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, 2001 and 2000, 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, 2001. These financial
statements are the responsibility of the management of Granite State
Bankshares, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of Granite
State Bankshares, Inc. and subsidiary as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.


/s/ Grant Thornton LLP


Boston, Massachusetts
January 11, 2002


<PAGE>  33


Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>

                                                                                                     December 31,
                                                                                                ----------------------
                                                                                                   2001         2000
                                                                                                   ----         ----
                                                                                                    (In Thousands)


                                                                                             <c>           <c>
                                           ASSETS
Cash and due from banks                                                                         $   21,142    $ 26,434
Interest bearing deposits in other banks, at cost, which approximates market value                   4,530       8,872
Securities available for sale (amortized cost $271,600,000 in 2001 and $198,316,000 in 2000)       274,201     196,522
Securities held to maturity (market value $5,226,000 in 2001 and $17,922,000 in 2000)                5,006      18,011
Stock in Federal Home Loan Bank of Boston                                                            7,201       7,201
Loans held for sale                                                                                 14,821         657

Loans                                                                                              655,000     657,385
  Less:  Unearned income                                                                            (1,075)     (1,177)
         Allowance for possible loan losses                                                         (8,085)     (7,854)
                                                                                                ----------------------
Net loans                                                                                          645,840     648,354

Premises and equipment                                                                              16,841      17,756
Other assets                                                                                        29,360      31,202
                                                                                                ----------------------
      Total assets                                                                              $1,018,942    $955,009
                                                                                                ======================

                            LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Interest bearing deposits                                                                       $  621,217    $592,528
Noninterest bearing deposits                                                                        92,926      90,806
                                                                                                ----------------------
      Total deposits                                                                               714,143     683,334

Securities sold under agreements to repurchase                                                      85,013      90,811
Other borrowings                                                                                   135,464     100,515
Other liabilities                                                                                    3,785       6,885
                                                                                                ----------------------
      Total liabilities                                                                            938,405     881,545

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
 shares issued at December 31, 2001 and 2000, respectively                                           6,790       6,790
Additional paid-in capital                                                                          37,807      37,916
                                                                                                ----------------------
                                                                                                    44,597      44,706
Retained earnings                                                                                   54,217      46,437
Accumulated other comprehensive income (loss)                                                        1,555      (1,089)
                                                                                                ----------------------
                                                                                                   100,369      90,054

  Less:  Treasury stock, at cost, 1,554,438 and 1,449,362 shares at
          December 31, 2001 and 2000, respectively                                                 (18,803)    (16,344)
         Unearned restricted stock                                                                  (1,029)       (246)
                                                                                                ----------------------
         Total stockholders' equity                                                                 80,537      73,464
                                                                                                ----------------------
         Total liabilities and stockholders' equity                                             $1,018,942    $955,009
                                                                                                ======================
</TABLE>

      The accompanying notes are an integral part of these statements.


<PAGE>  34


Consolidated Statements of Earnings

<TABLE>
<CAPTION>

                                                                                           Year Ended December 31,
                                                                                   ---------------------------------------
                                                                                        2001         2000         1999
                                                                                        ----         ----         ----
                                                                                   ($ In Thousands, except per share data)


                                                                                  <c>          <c>          <c>
Interest and dividend income
  Loans                                                                              $  53,335    $  48,197    $  45,287
  Debt securities available for sale                                                    13,820       12,525       11,182
  Marketable equity securities available for sale                                          248          621          738
  Securities held to maturity                                                              481        1,154        1,248
  Interest bearing deposits in other banks                                                 614          290          876
  Dividends on Federal Home Loan Bank of Boston stock                                      424          549          471
                                                                                     -----------------------------------
      Total interest and dividend income                                                68,922       63,336       59,802
                                                                                     -----------------------------------

Interest expense
  Deposits                                                                              22,085       21,940       20,871
  Securities sold under agreements to repurchase                                         3,096        4,316        2,654
  Other borrowings                                                                       6,731        4,838        4,371
                                                                                     -----------------------------------
      Total interest expense                                                            31,912       31,094       27,896
                                                                                     -----------------------------------
      Net interest and dividend income                                                  37,010       32,242       31,906
Provision for possible loan losses                                                         660          330           50
                                                                                     -----------------------------------
      Net interest and dividend income after provision for possible loan losses         36,350       31,912       31,856

Noninterest income
  Customer account fees and service charges                                              3,035        2,681        2,552
  Mortgage service fees                                                                    472          441          485
  Net gains on sales of securities available for sale                                      403          322          708
  Net gains on sales of loans                                                            1,722          364          567
  Other                                                                                  1,860        1,761        1,151
                                                                                     -----------------------------------
      Total noninterest income                                                           7,492        5,569        5,463

Noninterest expense
  Salaries and benefits                                                                 14,175       11,997       11,844
  Occupancy and equipment                                                                4,243        4,341        4,122
  Other real estate owned                                                                  178            1          359
  Other                                                                                  7,084        5,405        5,591
                                                                                     -----------------------------------
      Total noninterest expense                                                         25,680       21,744       21,916
                                                                                     -----------------------------------
      Earnings before income taxes                                                      18,162       15,737       15,403
Income taxes                                                                             6,773        5,659        5,278
                                                                                     -----------------------------------
      NET EARNINGS                                                                   $  11,389    $  10,078    $  10,125
                                                                                     ===================================

Net earnings per share-basic                                                         $    2.16    $    1.83    $    1.75
                                                                                     ===================================

Net earnings per share-diluted                                                       $    2.11    $    1.82    $    1.71
                                                                                     ===================================

Shares used in computing net earnings per share-basic                                5,264,873    5,494,982    5,778,272

Shares used in computing net earnings per share-diluted                              5,389,746    5,537,735    5,927,668
</TABLE>

      The accompanying notes are an integral part of these statements.


<PAGE>  35


Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>

                                                                               Year Ended December 31,
                                                                            -----------------------------
                                                                              2001       2000       1999
                                                                              ----       ----       ----
                                                                                    (In Thousands)


                                                                         <c>        <c>        <c>
Net earnings                                                                $11,389    $10,078    $10,125
Other comprehensive income (loss):
  Unrealized holding gains (losses) on securities available for sale
   arising during the period                                                  4,798      5,629     (8,972)
  Related income tax effects                                                 (1,913)    (2,210)     3,507
                                                                            -----------------------------
      Net unrealized holding gains (losses) on securities available for
       sale, net of related income tax effects                                2,885      3,419     (5,465)
                                                                            -----------------------------

  Less: reclassification adjustment for net gains on sales of securities
   available for sale realized in net earnings:
    Realized net gains                                                         (403)      (322)      (708)
    Related income tax effects                                                  162        126        278
                                                                            -----------------------------
      Net reclassification adjustment                                          (241)      (196)      (430)
                                                                            -----------------------------

      Total other comprehensive income (loss)                                 2,644      3,223     (5,895)
                                                                            -----------------------------

Comprehensive income                                                        $14,033    $13,301    $ 4,230
                                                                            =============================
</TABLE>

      The accompanying notes are an integral part of these statements.


<PAGE>  36


Consolidated Statements of Stockholders' Equity
 Years Ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>

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


                                <c>       <c>         <c>        <c>            <c>            <c>         <c>         <c>
Balance as of December 31, 1998    $6,790    $38,018     $32,998    $ (6,065)      $1,583         $(71)       $  (653)    $72,600
Net earnings                                              10,125                                                           10,125
Payment of Employee Stock
 Ownership Plan Indebtedness                                                                        35                         35
Employee Stock Ownership Plan
 distribution                                     76                                                                           76
Cash dividends declared on
 common stock, $.56 per share                             (3,253)                                                          (3,253)
Change in accumulated other
 comprehensive income (loss),
 net of income taxes                                                               (5,895)                                 (5,895)
Restricted stock awards                           (8)                    104                                      (96)          -
Restricted stock award amortization                                                                               305         305
Reissuance of common stock from
 treasury upon exercise of stock
 options, including related
 tax effects                                    (167)                    595                                                  428
Purchase of common stock
 for treasury                                                         (4,052)                                              (4,052)
                                   ----------------------------------------------------------------------------------------------
Balance as of December 31, 1999     6,790     37,919      39,870      (9,418)      (4,312)         (36)          (444)     70,369
Net earnings                                              10,078                                                           10,078
Payment of Employee Stock
 Ownership Plan Indebtedness                                                                        36                         36
Employee Stock Ownership Plan
 distribution                                     76                                                                           76
Cash dividends declared on
 common stock, $.64 per share                             (3,511)                                                          (3,511)
Change in accumulated other
 comprehensive income (loss),
 net of income taxes                                                                3,223                                   3,223
Restricted stock award amortization                                                                               198         198
Reissuance of common stock from
 treasury upon exercise of stock
 options, including related
 tax effects                                     (79)                    145                                                   66
Purchase of common stock
 for treasury                                                         (7,071)                                              (7,071)
                                   ----------------------------------------------------------------------------------------------
Balance as of December 31, 2000     6,790     37,916      46,437     (16,344)      (1,089)           -           (246)     73,464
Net earnings                                              11,389                                                           11,389
Cash dividends declared on
 common stock, $.68 per share                             (3,609)                                                          (3,609)
Change in accumulated other
 comprehensive income (loss),
 net of income taxes                                                                2,644                                   2,644
Restricted stock awards                            2                   1,067                                   (1,069)          -
Restricted stock award amortization                                                                               286         286
Reissuance of common stock from
 treasury upon exercise of
 stock options                                  (111)                    154                                                   43
Purchase of common stock
 for treasury                                                         (3,680)                                              (3,680)
                                   ----------------------------------------------------------------------------------------------
Balance as of December 31, 2001    $6,790    $37,807     $54,217    $(18,803)      $1,555         $  -        $(1,029)    $80,537
                                   ==============================================================================================
</TABLE>

      The accompanying notes are an integral part of these statements.


<PAGE>  37


Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                               Year Ended December 31,
                                                                                         ------------------------------------
                                                                                           2001          2000         1999
                                                                                           ----          ----         ----
                                                                                                    (In Thousands)


                                                                                      <c>           <c>          <c>
Increase (decrease) in cash and due from banks
Cash flows from operating activities
  Net earnings                                                                           $  11,389     $ 10,078     $  10,125
  Adjustments to reconcile net earnings to net cash provided by operating activities
    Provision for possible loan losses                                                         660          330            50
    Provision for depreciation and amortization                                              2,735        2,339         2,363
    Net amortization of security discounts and premiums                                        160            9           193
    Provision for loss on other real estate owned                                              173           50           146
    Deferred income taxes (benefits)                                                          (227)        (220)          412
    Market value adjustment for derivative instruments                                         147
    Realized gains on sales of securities available for sale, net                             (403)        (322)         (708)
    Writedown of premises and equipment                                                                      93
    Loans originated for sale                                                             (107,443)     (18,362)      (26,122)
    Proceeds from sale of loans originated for sale                                         95,001       18,548        28,038
    Increase in other assets                                                                (1,231)      (1,976)       (4,739)
    Increase (decrease) in other liabilities                                                   196         (443)          106
    Allocation of common stock by the ESOP                                                                  112           111
    Amortization of unearned restricted stock                                                  286          198           305
    Realized gains on sales of loans                                                        (1,722)        (364)         (567)
    (Gains) losses on sales of other assets                                                     20                        (11)
    Decrease in unearned income                                                               (102)        (130)         (258)
    Realized gains on sales of other real estate owned                                         (97)         (71)          (46)
                                                                                         ------------------------------------
      Net cash provided by (used in) operating activities                                     (458)       9,869         9,398
                                                                                         ------------------------------------

Cash flows from investing activities
  Proceeds from sales of securities available for sale                                     114,769       30,934        57,067
  Proceeds from maturities and calls of securities available for sale                       48,500       15,000        35,000
  Principal payments received on securities available for sale                               3,368        1,383         3,916
  Purchase of securities available for sale                                               (239,674)     (22,641)     (100,995)
  Proceeds from maturities and calls of securities held to maturity                         13,000                      4,300
  Loan repayments (originations), net                                                        2,721      (46,169)      (14,246)
  Purchase of premises and equipment                                                        (1,802)        (870)       (1,465)
  Proceeds from sales of other assets                                                           24                        760
  Net (increase) decrease in interest-bearing deposits in other banks                        4,342       (4,470)       15,130
  Proceeds from sales of other real estate owned                                               500        1,436         1,324
  Net cash paid for assets acquired and liabilities assumed related to the
   Olde Port Bank branch acquisition                                                        (3,332)      (6,581)
  Other                                                                                                                   254
                                                                                         ------------------------------------
      Net cash provided by (used in) investing activities                                  (57,584)     (31,978)        1,045
                                                                                         ------------------------------------

Cash flows from financing activities
  Net increase (decrease) in demand, NOW, money market deposit
   and savings accounts                                                                     36,366       14,073       (11,671)
  Net increase (decrease) in time certificates                                              (5,557)       1,875       (10,798)
  Net increase (decrease) in securities sold under agreements to repurchase                 (5,798)      14,606         4,137
  Increase in other borrowings                                                              34,949        9,952         9,955
  Repayment on liability relating to ESOP                                                                   (36)          (35)
  Dividends paid on common stock                                                            (3,573)      (3,463)       (3,185)
  Proceeds from exercise of stock options                                                       43           32           275
  Purchase of common stock for treasury                                                     (3,680)      (7,071)       (4,052)
                                                                                         ------------------------------------
      Net cash provided by (used in) financing activities                                   52,750       29,968       (15,374)
                                                                                         ------------------------------------
      Net increase (decrease) in cash and due from banks                                    (5,292)       7,859        (4,931)
Cash and due from banks at beginning of year                                                26,434       18,575        23,506
                                                                                         ------------------------------------
Cash and due from banks at end of year                                                   $  21,142     $ 26,434     $  18,575
                                                                                         ====================================
</TABLE>


      The accompanying notes are an integral part of these statements.


<PAGE>  38


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 is 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 has a diversified lending operation that
services Cheshire, Hillsborough, Merrimack, Strafford and Rockingham
counties, New Hampshire. The subsidiary bank also originates residential
real estate loans for sale in the secondary mortgage market. The subsidiary
bank has nineteen full service offices and an additional twenty-four remote
automatic teller locations. The subsidiary bank offers its products and
services online through its internet banking branch, GRANITe-bank.

In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of
the dates of the balance sheets, and revenues and expenses 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 2000 and 1999 consolidated financial statements have
been reclassified to conform to the 2001 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 (loss) as a
separate component of stockholders' equity, net of estimated income taxes.
During 2001, 2000 and 1999, 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 principal or recorded as income according to management's judgment
as to the collectibility of principal.

The Company measures loan impairment on commercial, financial and
agricultural loans, commercial and multifamily real estate loans and
construction and land development real estate loans in excess of $100,000
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


<PAGE>  39


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, financial and
agricultural loans, commercial and multifamily real estate loans and
construction and land development real estate loans of $100,000 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 and/or concentrations; 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 existing conditions; and historical loan charge-off experience.

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.

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.

Mortgage 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 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.

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,
10-20 years for leasehold improvements and 2-10 years for furniture and
equipment.

The Company reviews for impairment of long-lived assets 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


<PAGE>  40


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

The Company has investments in two tax advantaged limited partnerships.
These investments are included in other assets and amortized over the same
period the tax benefits are expected to be received.

The core deposit intangible arising from the year end 2000 branch
acquisition is included in other assets, net of accumulated amortization,
and is being amortized on a declining balance method over 10 years.

Goodwill arising from acquisitions is included in other assets, net of
accumulated amortization. Through December 31, 2001, goodwill has been
amortized on the straight line basis over 15 years. Beginning January 1,
2002, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, goodwill will no longer be amortized, but will be tested
for impairment annually or whenever there is an impairment indicator.

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 22 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 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, plus
discretionary contributions.

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 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.


<PAGE>  41


Derivative Financial Instruments

The Company utilizes interest rate cap agreements to manage a portion of
its exposure to interest rate risk. The Company does not purchase
derivative financial instruments for trading purposes. Under these
agreements, 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 related
financial instruments.

Comprehensive Income

SFAS No. 130, "Reporting Comprehensive Income", 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 (loss) separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. The Company's accumulated other comprehensive income
(loss) included in stockholders' equity is comprised exclusively of net
unrealized gains (losses) on securities available for sale, net of related
tax effects.

Disclosure about Segments

SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", 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.

Recent Accounting Developments

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which after amendment, was effective for fiscal years beginning after June
15, 2000. SFAS No. 133 must be adopted prospectively and retroactive
application is not permitted. SFAS No. 133 requires 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 (loss) 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 adopted SFAS No. 133, as
amended, on January 1, 2001. The cumulative effect on prior years of
adopting SFAS No. 133 on January 1, 2001, was not significant and therefore
has not been separately disclosed. The impact of accounting for derivative
instruments under SFAS No. 133 during the year ended December 31, 2001
decreased net interest and dividend income by $147,000 and net earnings by
$88,000, or $.02 per basic and diluted share.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities",
which replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". This statement
revises the standards for accounting for the securitizations and other
transfers of financial assets and collateral. It also requires certain
disclosures, but carries over most of the provisions of SFAS No. 125. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and must be
adopted prospectively. For recognition and reclassification of collateral
and for certain disclosures, this statement was effective for fiscal years
ending after December 15, 2000. The adoption of this statement had no
impact on the Company's consolidated financial statements.

On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Intangible Assets". SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of
SFAS No. 142. Major provisions of these Statements and their effective
dates for the Company are as follows:

*     All business combinations initiated after June 30, 2001 must use the
      purchase method of accounting. The pooling of interests method of
      accounting is prohibited except for transactions initiated before
      July 1, 2001.

*     Intangible assets acquired in a business combination must be recorded
      separately from goodwill if they arise from contractual or other
      legal rights or are separable from the acquired entity and can be
      sold, transferred, licensed, rented or exchanged, either individually
      or as part of a related contract, asset or liability.

*     Goodwill, as well as intangible assets with indefinite lives,
      acquired after June 30, 2001, will not be


<PAGE>  42


      amortized. Effective January 1, 2002, all previously recognized
      goodwill and intangible assets with indefinite lives will no longer
      be subject to amortization.

*     Effective January 1, 2002, goodwill and intangible assets with
      indefinite lives will be tested for impairment annually and whenever
      there is an impairment indicator.

*     All acquired goodwill must be assigned to reporting units for
      purposes of impairment testing and segment reporting.

Effective January 1, 2002, annual goodwill amortization of approximately
$500,000 will no longer be recognized. The Company has completed a
transitional fair value based impairment test of goodwill as of January 1,
2002. No impairment of goodwill was evident as a result of the impairment
testing performed.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. SFAS No. 144
establishes a single accounting model, based on the framework established
in SFAS No. 121, for long-lived assets to be disposed of by sale. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years, with earlier application
encouraged and its provisions are to be applied prospectively. The adoption
of this statement is not expected to have a material impact on the
Company's consolidated financial statements.

Note 2-Acquisition of Branches

Effective at year end 2000, the Company completed its acquisition of two
branch offices of Olde Port Bank, a division of Webster Bank. Webster Bank
is the subsidiary of Webster Financial Corporation. The acquired branches
are located in the city of Portsmouth and the town of Hampton, both in
Rockingham County, New Hampshire. The acquisition has been accounted for
using the purchase method of accounting. Since the acquisition was
effective at year end 2000, results of operations relating to the acquired
branches are reflected in earnings commencing January 1, 2001.

      The acquisition was allocated as follows:

<TABLE>
<CAPTION>

Description                                       Amount
-----------                                       ------
                                              (In Thousands)


                                               <c>
Loans, net of allowance for possible loan
 losses of $606,000                               $42,514
Bank premises and equipment                         1,952
Core deposit intangible                               882
Goodwill                                            5,146
Other assets                                          256
                                                  -------
      Assets acquired                              50,750

Deposits                                           39,368
Securities sold under agreements
 to repurchase                                      1,163
Other liabilities                                     306
                                                  -------
      Liabilities assumed                          40,837
                                                  -------
      Total consideration for acquisition, net
       of cash acquired of $2,214,000             $ 9,913
                                                  =======
</TABLE>

Of the consideration of $9,913,000, net of cash acquired, $6,581,000 was
paid in December of 2000 and $3,332,000 was paid in February 2001. At
December 31, 2000, the $3,332,000 due to Webster Bank is included in other
liabilities in the Consolidated Statements of Financial Condition.

Note 3-Earnings Per Share

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

<TABLE>
<CAPTION>

                                        Year Ended December 31,
                                  -----------------------------------
                                     2001         2000         1999
                                     ----         ----         ----
                                           ($ in Thousands,
                                        except per share data)


                               <c>          <c>          <c>
Net earnings                        $11,389      $10,078      $10,125
                                  ===================================
Weighted average common
 shares outstanding-basic         5,264,873    5,494,982    5,778,272
Dilutive effect of stock
 options and restricted stock
 awards computed using
 the treasury stock method          124,873       42,753      149,396
                                  -----------------------------------
Weighted average common
 shares outstanding-diluted       5,389,746    5,537,735    5,927,668
                                  ===================================
Net earnings per share-basic          $2.16        $1.83        $1.75
                                  ===================================
Net earnings per share-diluted        $2.11        $1.82        $1.71
                                  ===================================
</TABLE>


<PAGE>  43


Weighted average options to purchase 7,985 shares, 225,517 shares and
75,000 shares of common stock were outstanding during 2001, 2000 and 1999,
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.

Note 4-Supplemental Cash Flow Disclosures

Supplemental Disclosures of Cash Flow Information

<TABLE>
<CAPTION>

                           Year Ended
                          December 31,
                  -----------------------------
                    2001       2000       1999
                    ----       ----       ----
                          (In Thousands)


               <c>        <c>        <c>
Cash paid for
  Interest        $32,054    $31,010    $27,837
  Income taxes      6,810      5,925      3,725
</TABLE>

Supplemental Schedule of Noncash Investing and
 Financing Activities

Effective at year end 2000, the Company acquired certain assets and assumed
certain liabilities in connection with the acquisition of two branch
offices of Olde Port Bank, a division of Webster Bank. For a description of
assets acquired and liabilities assumed, see note 2 of Notes to
Consolidated Financial Statements.

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 $160,000, $543,000 and $1,111,000 during the
years ended December 31, 2001, 2000 and 1999, respectively. Loans granted
in settlement of asset sales were $925,000, $0 and $0 during the years
ended December 31, 2001, 2000 and 1999, respectively.

Dividends declared and unpaid on common stock at December 31, 2001, 2000
and 1999 were $890,000, $854,000 and $806,000, respectively.

Note 5-Cash and Due From Banks

The Federal Reserve Bank requires the subsidiary bank to maintain average
reserve balances. Reserves (in the form of deposits with the Federal
Reserve Bank) of $1,000,000 were maintained to satisfy Federal regulatory
requirements at December 31, 2001 and 2000. These reserves are included in
cash and due from banks in the Consolidated Statements of Financial
Condition.


<PAGE>  44


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)


                                           <c>             <c>            <c>          <c>
Securities held to maturity
 At December 31, 2001
  Other corporate obligations                 $  5,006        $  220                      $  5,226
                                              ----------------------------------------------------
      Total securities held to maturity       $  5,006        $  220         $    0       $  5,226
                                              ====================================================

Securities available for sale
 At December 31, 2001
  US Government agency obligations            $144,812        $1,968         $  391       $146,389
  Other corporate obligations                  105,021         2,407          1,715        105,713
  Mortgage-backed securities:
    FNMA                                         1,548            40                         1,588
    FHLMC                                       15,415            19            145         15,289
    GNMA                                           687            47                           734
    SBA                                            198            11                           209
                                              ----------------------------------------------------
      Total mortgage-backed securities          17,848           117            145         17,820
  Mutual Funds                                     900           164             17          1,047
  Marketable equity securities                   3,019           309             96          3,232
                                              ----------------------------------------------------
      Total securities available for sale     $271,600        $4,965         $2,364       $274,201
                                              ====================================================

Securities held to maturity
 At December 31, 2000
  US Government agency obligations            $ 13,003        $    3         $   36       $ 12,970
  Other corporate obligations                    5,008                           56          4,952
                                              ----------------------------------------------------
      Total securities held to maturity       $ 18,011        $    3         $   92       $ 17,922
                                              ====================================================

Securities available for sale
 At December 31, 2000
  US Government agency obligations            $100,504        $    5         $  459       $100,050
  Other corporate obligations                   84,245           265          1,368         83,142
  Mortgage-backed securities:
    FNMA                                         3,904            44              7          3,941
    FHLMC                                        1,161            12                         1,173
    GNMA                                           767            73                           840
    SBA                                            310             5                           315
                                              ----------------------------------------------------
      Total mortgage-backed securities           6,142           134              7          6,269
  Mutual Funds                                     900            98             21            977
  Marketable equity securities                   6,525           318            759          6,084
                                              ----------------------------------------------------
      Total securities available for sale     $198,316        $  820         $2,614       $196,522
                                              ====================================================
</TABLE>

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 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, 2001 and
2000, the subsidiary bank had investments in FHLBB stock of $7,201,000.
Such investments are reflected separately in the Consolidated Statements of
Financial Condition.


<PAGE>  45


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>

                                                 2001                      2000                      1999
                                         ---------------------     ---------------------     ---------------------
                                         Realized     Realized     Realized     Realized     Realized     Realized
                                           Gain         Loss         Gain         Loss         Gain         Loss
                                         --------     --------     --------     --------     --------     --------
                                                                      (In Thousands)

      
                                 <c>          <c>          <c>           <c>         <c>           <c>
      Securities
        Debt securities                   $  680       $  837       $    6        $  1        $  317        $ 39
        Marketable equity securities         832          272        1,096         779         1,157         727
                                          ----------------------------------------------------------------------
                                          $1,512       $1,109       $1,102        $780        $1,474        $766
                                          ======================================================================
</TABLE>

At December 31, 2001, U. S. Government Agency Obligations and mortgage-
backed securities with carrying values of $148,602,000 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, 2001. 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)


                                                 <c>        <c>              <c>            <c>          <c>
Amortized Cost
 At December 31, 2001
  Securities held to maturity
    Other corporate obligations                                $  5,006                                     $  5,006
                                                    ----------------------------------------------------------------
      Total debt securities held to maturity        $  0       $  5,006         $     0        $     0      $  5,006
                                                    ================================================================
  Securities available for sale
    US Government agency obligations                           $ 83,373         $61,439                     $144,812
    Other corporate obligations                                  74,432           5,137        $25,452       105,021
    Mortgage-backed securities                      $  5                          4,948         12,895        17,848
                                                    ----------------------------------------------------------------
      Total debt securities available for sale      $  5       $157,805         $71,524        $38,347      $267,681
                                                    ================================================================

Estimated Market Value
 At December 31, 2001
  Securities held to maturity
    Other corporate obligations                                $  5,226                                     $  5,226
                                                    ----------------------------------------------------------------
      Total debt securities held to maturity        $  0       $  5,226         $     0        $     0      $  5,226
                                                    ================================================================
  Securities available for sale
    US Government agency obligations                           $ 83,738         $62,651                     $146,389
    Other corporate obligations                                  76,316           5,125        $24,272       105,713
    Mortgage-backed securities                      $  5                          4,896         12,919        17,820
                                                    ----------------------------------------------------------------
      Total debt securities available for sale      $  5       $160,054         $72,672        $37,191      $269,922
                                                    ================================================================
</TABLE>

At December 31, 2001, all of the U.S. Government Agency Obligations with
carrying values of $146,389,000 were callable at the discretion of the
issuer without penalty, of which $89,139,000 were callable during 2002 at a
weighted average yield of 5.37%, $49,030,000 were callable during 2003 at a
weighted average yield of 5.56% and $8,220,000 were callable during 2004 at
a weighted average yield of 5.89%.


<PAGE>  46


Note 7-Loans

Loans consist of the following at:

<TABLE>
<CAPTION>

                                      December 31,
                                 ---------------------
                                   2001         2000
                                   ----         ----
                                     (In Thousands)


                              <c>          <c>
Commercial, financial and
 agricultural                    $ 43,823     $ 50,750
Real estate-residential           335,632      351,146
Real estate-multifamily            49,579       43,140
Real estate-commercial            184,502      177,453
Real estate-construction and
 land development                   9,060        5,385
Installment                         5,932        6,547
Other                              26,472       22,964
                                 ---------------------
      Total loans                 655,000      657,385
Less:
  Unearned income                  (1,075)      (1,177)
  Allowance for possible loan
   losses                          (8,085)      (7,854)
                                 ---------------------
      Net loans                  $645,840     $648,354
                                 =====================
</TABLE>

At December 31, 2001 and 2000, loans which were on nonaccrual status were
$3,015,000 and $3,201,000, 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, 2001, 2000 and
1999, was $263,000, $239,000 and $157,000, respectively. Interest income
recognized on nonaccrual loans in 2001, 2000 and 1999 amounted to $28,000,
$110,000 and $49,000, 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 $2,543,000 and $1,997,000, respectively, at December 31, 2001 and
2000. The average recorded investment in impaired loans was $2,344,000,
$880,000 and $1,052,000, respectively, in 2001, 2000 and 1999. No income
was recognized on impaired loans during 2001, 2000 and 1999. Total cash
collected on impaired loans during 2001, 2000 and 1999 was $380,000,
$22,000 and $779,000, respectively, all of which was credited to the
principal balance outstanding on such loans.

The allowance for possible loan losses associated with impaired loans was
$750,000, $439,000 and $252,000 at December 31, 2001, 2000 and 1999,
respectively. During 2001, 2000 and 1999, provisions for possible loan
losses applicable to impaired loans were $611,000, $187,000 and $30,000,
respectively. Impaired loans charged off during 2001, 2000 and 1999 were
$300,000, $0 and $11,000, respectively. At December 31, 2001 and 2000,
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 real estate
loans, commercial real estate loans, commercial, financial and agricultural
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,
financial and agricultural 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, 2001 and 2000, the subsidiary bank serviced real estate
loans sold to others in the amounts of $190,386,000 and $130,172,000,
respectively.

Note 8-Allowance for Possible Loan Losses

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

<TABLE>
<CAPTION>

                                    Year Ended December 31,
                                  --------------------------
                                   2001      2000      1999
                                   ----      ----      ----
                                        (In Thousands)


                               <c>       <c>       <c>
Balance at beginning of year      $7,854    $7,032    $7,122
Allowance of loan portfolio
 related to branch acquisition                 606
Provision for possible loan
 losses                              660       330        50
Loans charged off                   (550)     (324)     (559)
Recoveries of loans previously
 charged off                         121       210       419
                                  --------------------------
Balance at end of year            $8,085    $7,854    $7,032
                                  ==========================
</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 $7,816,000 and $9,488,000 at December 31, 2001
and 2000, respectively. During 2001, $2,510,000 of new loans were made and
repayments totaled $3,734,000. Approximately $448,000 of related party
loans at December 31, 2000 were


<PAGE>  47


loans to officers and directors who were no longer associated with the
Company in those capacities at December 31, 2001.

Note 10-Premises and Equipment

The following is a summary of premises and equipment:

<TABLE>
<CAPTION>

                                       December 31,
                                    ------------------
                                      2001       2000
                                      ----       ----
                                      (In Thousands)


                                 <c>        <c>
Bank buildings                      $16,420    $17,418
Leasehold improvements                1,689      1,689
Furniture and equipment              14,389     12,718
                                    ------------------
                                     32,498     31,825
  Less: Accumulated depreciation
   and amortization                  18,395     17,170
                                    ------------------
                                     14,103     14,655
Land                                  2,738      3,101
                                    ------------------
                                    $16,841    $17,756
                                    ==================
</TABLE>

Depreciation and amortization expense on premises and equipment for the
years ended December 31, 2001, 2000 and 1999 was $1,748,000, $1,940,000 and
$1,959,000, respectively.

Note 11-Other Assets

A summary of other assets follows:

<TABLE>
<CAPTION>

                                              December 31,
                                           ------------------
                                             2001       2000
                                             ----       ----
                                             (In Thousands)


                                        <c>        <c>
Cash surrender value of life
 insurance                                 $11,385    $10,780
Accrued interest receivable                  7,099      6,854
Net deferred tax assets                      1,687      3,210
Goodwill, net of accumulated
 amortization of $3,124,000 in 2001
 and $2,536,000 in 2000                      5,705      6,293
Core deposit intangibles, net of accum-
 ulated amortization of $132,000 in
 2001 and $0 in 2000                           750        882
Mortgage servicing rights, net of ac-
 cumulated amortization of $1,565,000
 in 2001 and $1,298,000 in 2000                995        344
Prepaid expenses                               719      1,108
Other                                        1,020      1,731
                                           ------------------
                                           $29,360    $31,202
                                           ==================
</TABLE>

Mortgage servicing rights of $918,000, $96,000 and $169,000, were
capitalized during 2001, 2000 and 1999. Amortization expense on mortgage
servicing rights was $267,000, $153,000 and $158,000 in 2001, 2000 and
1999, respectively.

Amortization expense on core deposit intangibles was $132,000 during 2001
and $0 during each of the years 2000 and 1999.

Amortization expense on goodwill was $588,000 during 2001 and $246,000
during each of the years 2000 and 1999.

At December 31, 2001 and 2000, other real estate owned included in other
assets was $0 and $416,000, respectively.

Note 12-Interest Bearing Deposits

Interest bearing deposits consisted of the following:

<TABLE>
<CAPTION>

                                     December 31,
                                 --------------------
                                   2001        2000
                                   ----        ----
                                    (In Thousands)


                              <c>         <c>
NOW accounts                     $254,474    $217,774
Savings accounts                   83,746      86,798
Money market deposit accounts      16,978      16,380
Time certificates                 266,019     271,576
                                 --------------------
                                 $621,217    $592,528
                                 ====================
</TABLE>

Maturities of time certificates after December 31, 2001 are $207,622,000 in
2002, $33,678,000 in 2003, $11,960,000 in 2004, $3,473,000 in 2005,
$9,057,000 in 2006 and $229,000 in years thereafter.

Time certificates with balances of $100,000 or more at December 31, 2001
and 2000 totaled $46,812,000 and $41,149,000, respectively.

Note 13-Borrowings

Securities Sold Under Agreements to Repurchase

Short-term borrowings in the form of securities sold under agreements to
repurchase at December 31, 2001 and 2000, totaled $85,013,000 and
$90,811,000, respectively. Such borrowings were collateralized at December
31, 2001 by the Company's U.S. Government agency securities with a carrying
value of $146,389,000 (see note 6 of Notes to Consolidated Financial
Statements). The collateral is maintained under the control of the Company
in a separate custodial account at the FHLBB. The weighted average interest
rate on these borrowings was 1.94% and 5.43%, respectively, at December 31,
2001 and 2000.

The maximum amount of securities sold under agreements to repurchase at any
month end during 2001, 2000 and 1999, were $96,820,000, $90,811,000 and
$75,042,000, respectively. The average amount of securities sold under
agreements to repurchase in 2001, 2000 and 1999 were $88,431,000,
$77,723,000 and $65,078,000, respectively. The average cost of securities
sold under agreements to repurchase was 3.50%, 5.55% and 4.08% during 2001,
2000 and 1999, 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 may arise. Short and long-term
borrowings from the FHLBB are primarily secured by a blanket lien on
qualifying unencumbered residential real estate loans and the guaranteed
portion of government and small business association loans. The Company's
subsidiary bank is able


<PAGE>  48


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, 2001 and 2000.

Based upon "qualifying" collateral held, the Company's subsidiary bank had
a total borrowing capacity with the FHLBB as of December 31, 2001 of
approximately $254,894,000, of which approximately $119,430,000 was still
available.

Other borrowings, all of which were with the FHLBB, consisted of the
following:

<TABLE>
<CAPTION>

                                   December 31, 2001
                               ------------------------
                                              Range of
                                Amount        Rates (%)
                                ------        ---------
                            (In Thousands)


                            <c>            <c>
Due within one year            $     54       5.00-6.17
Due from one to three years      30,120       5.00-6.17
Due over three years            105,290       3.99-6.17
                               --------
                               $135,464
                               ========
<CAPTION>

                                   December 31, 2000
                               ------------------------
                                              Range of
                                Amount        Rates (%)
                                ------        ---------
                            (In Thousands)


                            <c>            <c>
Due within one year            $     51       5.00-6.17
Due from one to three years      30,112       5.00-6.17
Due over three years             70,352       4.49-6.17
                               --------
                               $100,515
                               ========
</TABLE>

Principal payments due on other borrowings after December 31, 2001 are
$54,000 in 2002, $30,058,000 in 2003, $62,000 in 2004, $60,000 in 2005,
$4,000 in 2006 and $105,226,000 in years thereafter. The FHLBB has the
right to call and require the repayment of $70,000,000 of borrowings during
2002, $20,000,000 of which is at an interest rate of 4.49% maturing in
2008; $10,000,000 of which is at an interest rate of 5.58% maturing in
2009; $30,000,000 of which is at a weighted average interest rate of 5.60%
maturing in 2010 and $10,000,000 of which is at an interest rate of 3.99%
maturing in 2011. Additionally, the FHLBB has the right to call and require
the repayment of $10,000,000 of borrowings during 2003, which is at a
weighted average interest rate of 4.53% maturing in 2011 and $15,000,000 of
borrowings during 2004, which is at a weighted average interest rate of
4.64% maturing in 2011.

Note 14-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 these 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,
2001 and 2000 were as follows:

<TABLE>
<CAPTION>

                                            Contract or
                                          Notional Amount
                                        ------------------
                                          2001       2000
                                          ----       ----
                                          (In Thousands)


                                     <c>        <c>
Financial instruments whose contract
 amounts represent credit risk
  Commitments to originate loans        $16,065    $ 8,732
  Unused lines and standby letters
   of credit                             48,925     52,653
  Unadvanced portions of con-
   struction loans                        3,869      2,498
</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.

Derivative Financial Instruments

The Company uses interest rate cap agreements in managing a portion of 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 Company
entered into these agreements with AAA-rated counterparties.


<PAGE>  49


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 2001, 2000 and 1999.

At December 31, 2001 and 2000 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>

Investment in Limited Partnerships

At December 31, 2001, the subsidiary bank was committed to invest an
additional $629,000 in two real estate development limited partnerships
related to low income housing. The investments will be $187,000 in 2002,
$177,000 in 2003, $166,000 in 2004 and $99,000 in 2005. At December 31,
2001 and 2000, the Company had $409,000 and $377,000, respectively,
invested in such partnerships, which are included in other assets in the
Consolidated Statements of Financial Condition.

Lease Commitments

As of December 31, 2001, the Company was obligated under noncancelable
operating leases for premises. Minimum future rentals under leases are as
follows:

<TABLE>
<CAPTION>

                                Amount
                                ------
                            (In Thousands)


                             <c>
Year Ending December 31,
  2002                          $  411
  2003                             394
  2004                             385
  2005                             341
  2006                             250
  Thereafter                       436
                                ------
                                $2,217
                                ======
</TABLE>

Rent expense amounted to $526,000, $558,000 and $537,000, for the years
ended December 31, 2001, 2000 and 1999, 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 15-Income Taxes

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

Income tax expense (benefit) reflected in the Consolidated Statements of
Earnings for years ended December 31, are as follows:

<TABLE>
<CAPTION>

               2001       2000       1999
               ----       ----       ----
                     (In Thousands)


           <c>        <c>        <c>
Federal:
  Current     $5,588     $4,677     $4,010
  Deferred      (152)      (158)       405

State:
  Current      1,412      1,202        856
  Deferred       (75)       (62)         7
              ----------------------------
              $6,773     $5,659     $5,278
              ============================
</TABLE>

The above amounts include a tax provision on securities transactions of
$162,000, $126,000 and $278,000, in 2001, 2000 and 1999, respectively.

The income tax benefit related to the exercise of nonstatutory stock
options reduces taxes currently payable and is credited to additional paid-
in capital. Such amounts were $0 in 2001, $34,000 in 2000 and $153,000 in
1999.

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>

                                  2001      2000      1999
                                  ----      ----      ----
                                       (In Thousands)


                              <c>       <c>       <c>
Computed "expected" Federal
 income tax expense at
 statutory rate                  $6,175    $5,351    $5,237
Increase (decrease) resulting
 from:
  State income tax, net of
   Federal tax benefit              882       752       570
  Low income/rehabilitation
   tax credits                     (187)     (187)     (320)
  Other                             (97)     (257)     (209)
                                 --------------------------
                                 $6,773    $5,659    $5,278
                                 ==========================
</TABLE>


<PAGE>  50


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

<TABLE>
<CAPTION>

                                          December 31,
                                        ----------------
                                         2001      2000
                                         ----      ----
                                         (In Thousands)


                                     <c>       <c>
Deferred tax assets:
  Allowance for possible loan losses    $2,880    $2,454
  Other real estate owned                   68        61
  Federal net operating loss
   carryforwards                           172       299
  Accrued interest                         118        91
  Core deposit intangibles                  62        56
  Deferred compensation                     37        47
  Marketable equity securities                        14
  Restricted stock awards                  165       137
  Low income-housing partnerships           97        86
  Unrealized loss on securities
   available for sale                                705
  Premises and equipment                   246       118
  Other                                     39        44
                                        ----------------
      Total deferred tax assets          3,884     4,112
                                        ----------------

Deferred tax liabilities:
  Unearned income                          664       674
  Deferred loan fees                        86       107
  Mortgage servicing rights                402       121
  Unrealized gains on securities
   available for sale                    1,045
                                        ----------------
      Total deferred tax liabilities     2,197       902
                                        ----------------
      Net deferred tax asset            $1,687    $3,210
                                        ================
</TABLE>

At December 31, 2001 and 2000, net deferred tax assets includes $1,045,000
in deferred tax liabilities and $705,000 in deferred tax assets,
respectively, which are attributable to the tax effects of net unrealized
gains in 2001 and net unrealized losses in 2000 on securities available for
sale. Pursuant to SFAS No. 115 and SFAS No. 109, the corresponding charge
or credit has been made directly to stockholders' equity.

As of December 31, 2001 the Company has net operating loss carryforwards
available for tax purposes of approximately $429,000, 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 2002.

Deferred tax assets at December 31, 2001 and 2000 have not been reduced by
a valuation allowance because management believes that it is more likely
than not that the full amount of deferred tax assets will be realized.

Note 16-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, 2001 and 2000 (the most recent
actuarial valuations):

<TABLE>
<CAPTION>

                                              2001      2000
                                              ----      ----
                                              (In Thousands)


                                          <c>       <c>
Actuarial present value of benefit
 obligations:
  Accumulated benefit obligation             $3,570    $2,897
                                             ================
Projected benefit obligation, beginning
 of period                                   $3,926    $3,350
  Service costs-benefits earned during
   the period                                   321       306
  Interest cost on projected benefit
   obligation                                   307       273
  Actuarial (gain) loss recognized
   during the period                            184        94
  Annuity payments made during the
   period                                       (83)      (80)
  Settlements occurring during the
   period                                       (92)      (17)
                                             ----------------
Projected benefit obligation, end of
 period                                       4,563     3,926
                                             ----------------
Plan assets at fair value, beginning of
 period, primarily fixed income and
 equity securities                            4,514     3,682
  Return on plan assets during the
   period                                      (405)      509
  Employer contributions during the
   period                                       394       420
  Annuity payments made during the
   period                                       (83)      (80)
  Settlements occurring during the
   period                                       (92)      (17)
                                             ----------------
Plan assets at fair value, end of period,
 primarily fixed income and equity
 securities                                   4,328     4,514
                                             ----------------
Plan assets in excess of (less than)
 projected benefit obligation                  (235)      588
  Unrecognized net (gain) loss from
   past experience different from that
   assumed and effects of changes in
   assumptions                                  201      (814)
  Unrecognized net liability being
   recognized over approximately
   12 years                                                23
                                             ----------------
      Accrued pension cost                   $  (34)   $ (203)
                                             ================
</TABLE>


<PAGE>  51


Net periodic pension expense included the following components:

<TABLE>
<CAPTION>

                                              Year Ended
                                             December 31,
                                       -------------------------
                                        2001      2000      1999
                                        ----      ----      ----
                                             (In Thousands)


                                    <c>       <c>       <c>
Service cost-benefits earned during
 the period                            $ 321     $ 306     $ 202
Interest cost on projected benefit
 obligation                              307       273       222
Expected return on plan assets          (388)     (304)     (259)
Net amortization and deferral            (15)       31        53
                                       -------------------------
      Net periodic pension expense     $ 225     $ 306     $ 218
                                       =========================
</TABLE>

The weighted average discount rate of 7.25% in 2001, 8.00% in 2000 and
8.00% in 1999, and the rate of increase in future compensation levels of
4.50% in 2001, 5.50% in 2000 and 5.50% in 1999, were used in determining
the actuarial present value of the projected benefit obligation. The
expected long-term rate of return on assets was 8.50% for 2001 and 8.00%
for 2000 and 1999.

Supplemental Executive Retirement Plan

The Company sponsors a SERP, and in connection therewith, maintains a Rabbi
Trust, which purchases life insurance policies to satisfy its benefit
obligations thereunder. The cash surrender value of the life insurance
policies related to the SERP was $6,954,000 and $6,580,000 at December 31,
2001 and 2000, 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 each of the years ended December 31, 2001, 2000 and 1999
amounted to $605,000.

Note 17-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 was guaranteed by the
Company. Annual principal payments were approximately $36,000 with interest
at approximately the prime rate. Company contributions were the primary
source of funds for the ESOP's repayment of the loan. The ESOP debt was
fully repaid during 2000.

Compensation expense related to the ESOP amounted to $175,000, $287,000 and
$287,000, respectively, for the years ended December 31, 2001, 2000 and
1999 and included additional contributions in excess of amounts required to
service the ESOP debt of $175,000 in each of those years.

The total shares held by the ESOP, all of which were allocated were 373,651
shares at December 31, 2001 and 355,078 shares at December 31, 2000.

Note 18-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 that were granted to
certain officers and members of the Board of Directors of Primary Bank 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 in 1997. 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. Certain of the stock options granted by Primary Bank
were performance based options, all of which became exercisable in 1997
when Primary Bank's common stock price achieved designated price levels.


<PAGE>  52


The following is a description of activity in the stock compensation plans:

Fixed Stock Option Plans

<TABLE>
<CAPTION>

                                                                    Year Ended December 31,
                                    ----------------------------------------------------------------------------------------
                                               2001                           2000                           1999
                                    --------------------------     --------------------------     --------------------------
                                                    Weighted                       Weighted                       Weighted
                                    Number of       Average        Number of       Average        Number of       Average
                                     Options      Option Price      Options      Option Price      Options      Option Price
                                    ---------     ------------     ---------     ------------     ---------     ------------


                                  <c>             <c>            <c>             <c>            <c>             <c>
Options at beginning of year         424,451         $16.41         531,201         $17.54         520,468         $17.06
Granted                               60,900          21.39                                         25,250          21.44
Exercised                             (7,796)          4.51          (7,000)          4.62         (14,017)          6.37
Canceled                                                            (99,750)         23.26            (500)         23.88

                                     -------                        -------                        -------
Options at end of year               477,555         $17.24          424,451        $16.41         531,201         $17.54
                                     =======         ======         ========        ======         =======         ======
Options exercisable at year end      265,461         $16.42          224,393        $15.88         198,315         $15.85
                                     =======         ======         ========        ======         =======         ======
</TABLE>

<TABLE>
<CAPTION>

                                                                At December 31, 2001
                             ------------------------------------------------------------------------------------------
                                              Options Outstanding                            Options Exercisable
                             -----------------------------------------------------     --------------------------------
                               Number        Weighted Average     Weighted Average       Number        Weighted Average
Range of Exercise Prices     Outstanding      Remaining Life       Exercise Price      Exercisable      Exercise Price
                             -----------     ----------------     ----------------     -----------     ----------------


                            <c>                 <c>                 <c>               <c>                <c>
$3.33                            2,500             0.3                 $ 3.33              2,500            $ 3.33
$6.33 to $7.52                   7,427             2.2                   7.26              7,427              7.26
$8.29 to $9.10                   2,872             3.5                   8.86              2,872              8.86
$11.09 to $11.40                 3,618             3.8                  11.39              3,618             11.39
$13.93                             988             5.0                  13.93                988             13.93
$17.00                         399,250             5.8                  17.00            248,056             17.00
$20.13                          36,200             9.0                  20.13
$23.25                          24,700             9.7                  23.25
                               -------                                                   -------
$3.33 to $23.25                477,555             6.1                 $17.24            265,461            $16.42
                               =======             ===                 ======            =======            ======
</TABLE>

Performance-Based Stock Option Plans

<TABLE>
<CAPTION>


                                                                    Year Ended December 31,
                                    ----------------------------------------------------------------------------------------
                                               2001                           2000                           1999
                                    --------------------------     --------------------------     --------------------------
                                                    Weighted                       Weighted                       Weighted
                                    Number of       Average        Number of       Average        Number of       Average
                                     Options      Option Price      Options      Option Price      Options      Option Price
                                    ---------     ------------     ---------     ------------     ---------     ------------


                                   <c>            <c>             <c>            <c>            <c>             <c>
Options at beginning of year          2,992          $11.03          2,992          $11.03          19,506         $11.23
Exercised                              (603)          10.78                                        (16,514)         11.27
                                      -----                          -----                         -------
Options at end of year                2,389          $11.10          2,992          $11.03           2,992         $11.03
                                      =====          ======          =====          ======         =======         ======

Options exercisable at year end       2,389          $11.10          2,992          $11.03           2,992         $11.03
                                      =====          ======          =====          ======         =======         ======
</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 4.3 years at
December 31, 2001.

No stock options were granted during 2000. The weighted average fair value
of options at their grant date during 2001 and 1999 was $6.97 and $7.80,
respectively, per option share. 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>

                              2001        1999
                              ----        ----


                        <c>           <c>
Expected option lives        7 years     7 years
Expected volatility            32%         30%
Risk free interest rate    4.86-4.94%     6.21%
Expected dividend yield       3.08%       2.72%
</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 changed to
the pro forma amounts indicated below for the years ended December 31:

<TABLE>
<CAPTION>

                                2001       2000       1999
                                ----       ----       ----
                                  ($ In Thousands, except
                                      per share data)


             <c>            <c>        <c>        <c>
Net Earnings    As Reported    $11,389    $10,078    $10,125
                Pro forma      $10,902    $10,143    $ 9,342
Net Earnings
 Per Share:
  Basic         As Reported    $  2.16    $  1.83    $  1.75
                Pro forma      $  2.07    $  1.85    $  1.62
  Diluted       As Reported    $  2.11    $  1.82    $  1.71
                Pro forma      $  2.02    $  1.83    $  1.58
</TABLE>

Pro forma net earnings and pro forma net earnings per share increased in
2000 as a result of the cancellation of certain stock options in 2000, that
were granted in 1999 and 1998, for which pro forma net earnings and pro
forma net earnings per share were reduced in those years. Excluding the
impact of the cancellation of the stock options, pro forma net earnings for
2000 would have been $9,679,000 and pro forma basic and diluted net
earnings per share would have been $1.76 and $1.75, respectively.

In 1999, 4,500 shares of restricted stock were awarded to certain officers
under the 1997 Long-Term Incentive Stock Benefit Plan with a fair value at
the date of grant of $21.44 per share. In 2001, 50,000 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 $21.38 per share. At December 31, 2001, restricted stock awards totaled
101,000 shares of which 35,300 shares were vested. Shares vest ratably over
a period of five years. Compensation expense applicable to the stock awards
was $286,000, $198,000 and $305,000 in 2001, 2000 and 1999, respectively.

Note 19-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 result in the initiation of certain
mandatory and 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, 2001 and 2000, the Company and the subsidiary bank meet all capital
adequacy requirements to which they are subject.

As of December 31, 2001, the most recent notification from the Federal
Deposit Insurance Corporation 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>  54


The Company's and the subsidiary bank's actual capital amounts and ratios
as of December 31, 2001 and 2000 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)


                                             <c>         <c>        <c>         <c>          <c>         <c>
As of December 31, 2001:
  Total Capital (to Risk Weighted Assets):
    Consolidated                                $80,612     11.69%     $55,180     >/=8.00%         N/A
    Subsidiary Bank                             $79,680     11.55%     $55,180     >/=8.00%     $68,975     >/=10.00%
  Tier I Capital (to Risk Weighted Assets):
    Consolidated                                $72,527     10.51%     $27,590     >/=4.00%         N/A
    Subsidiary Bank                             $71,595     10.38%     $27,590     >/=4.00%     $41,385      >/=6.00%
  Tier I Capital (to Average Assets):
    Consolidated                                $72,527      7.09%     $40,904     >/=4.00%         N/A
    Subsidiary Bank                             $71,595      7.00%     $40,904     >/=4.00%     $51,130      >/=5.00%

As of December 31, 2000:
  Total Capital (to Risk Weighted Assets):
    Consolidated                                $75,011     11.61%     $51,693     >/=8.00%         N/A
    Subsidiary Bank                             $74,296     11.50%     $51,693     >/=8.00%     $64,616     >/=10.00%
  Tier I Capital (to Risk Weighted Assets):
    Consolidated                                $67,157     10.39%     $25,846     >/=4.00%         N/A
    Subsidiary Bank                             $66,442     10.28%     $25,846     >/=4.00%     $38,769      >/=6.00%
  Tier I Capital (to Average Assets):
    Consolidated                                $67,157      7.52%     $35,731     >/=4.00%         N/A
    Subsidiary Bank                             $66,442      7.44%     $35,731     >/=4.00%     $44,664      >/=5.00%
</TABLE>

Stock Repurchase Program

On May 3, 2000, the Company announced a Stock Repurchase Program
("Program"), whereby the Company's Board of Directors authorized the
repurchase of up to 10% (or approximately 566,000 shares), of the Company's
outstanding common shares from time to time. Shares repurchased under this
Program may be held in treasury, retired or used for general corporate
purposes. As of December 31, 2001, the Company had repurchased 484,902
shares of common stock, with approximately 81,098 shares still available to
be purchased under this Program.

Note 20-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, 2001 and 2000, no such transactions
existed between the Company and the subsidiary bank.

Note 21-Other Noninterest Expense

Components of other noninterest expense were as follows:

<TABLE>
<CAPTION>

                                     Year Ended
                                    December 31,
                             --------------------------
                              2001      2000      1999
                              ----      ----      ----
                                   (In Thousands)


                          <c>       <c>       <c>
Advertising and marketing    $  894    $  741    $  623
Amortization                    987       399       404
Data processing                 432       309       340
Postage and freight             554       512       529
Professional fees               567       289       398
Printing and supplies           586       462       439
Telephone                       589       484       489
Other                         2,475     2,209     2,369
                             --------------------------
                             $7,084    $5,405    $5,591
                             ==========================
</TABLE>

Note 22-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


<PAGE>  55


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, life insurance contracts, deferred tax
assets, 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.

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, financial
and agricultural, commercial and multifamily 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. 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
that mature within ninety days and bear market interest rates approximates
carrying value. For those maturing after ninety days, estimated fair value
is based upon the discounted value of contractual cash flows, with the
discount rate based on rates currently offered for borrowings of similar
maturities.

Other Borrowings

The fair value of other borrowings is based upon the discounted value of
contractual cash flows. The discount


<PAGE>  56


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, 2001 and 2000, because they
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.

The following presents the carrying value and estimated fair value of the
Company's financial instruments at December 31, 2001 and 2000:

<TABLE>
<CAPTION>

                                                                        December 31,
                                                     ---------------------------------------------------
                                                              2001                        2000
                                                     -----------------------     -----------------------
                                                     Carrying     Estimated      Carrying     Estimated
                                                      Value       Fair Value      Value       Fair Value
                                                     --------     ----------     --------     ----------
                                                                       (In Thousands)


                                                  <c>           <c>           <c>           <c>
Financial Assets
  Cash and due from banks                            $ 21,142      $ 21,142      $ 26,434      $ 26,434
  Interest bearing deposits in other banks              4,530         4,530         8,872         8,872
  Securities held to maturity                           5,006         5,226        18,011        17,922
  Stock in Federal Home Loan Bank of Boston             7,201         7,201         7,201         7,201
  Securities available for sale                       274,201       274,201       196,522       196,522
  Net loans                                           645,840       673,213       648,354       648,234
  Loans held for sale                                  14,821        14,923           657           657
  Mortgage servicing rights                               995         1,254           344           642
  Accrued interest receivable                           7,099         7,099         6,854         6,854

Financial Liabilities
  Deposits (with no stated maturity)                  448,124       448,124       411,758       411,758
  Time deposits                                       266,019       268,394       271,576       272,527
  Securities sold under agreements to repurchase       85,013        85,039        90,811        90,839
  Other borrowings                                    135,464       140,037       100,515        99,791
  Accrued interest payable                              1,328         1,328         1,470         1,470

<CAPTION>

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


                                                    <c>              <c>          <c>              <c>
Off-balance sheet instruments
  Commitments to extend credit                         $68,859          $ 0          $63,883          $ 0
  Interest rate cap agreements                          20,000           18           20,000           76
</TABLE>


<PAGE>  57


Note 23-Condensed Parent Company Only Financial Information

Condensed parent company only financial statements of Granite State
Bankshares, Inc., as of December 31, 2001 and 2000, and for the years ended
December 31, 2001, 2000 and 1999, are as follows:

Balance Sheets

<TABLE>
<CAPTION>

                                                      December 31,
                                                   -------------------
                                                    2001        2000
                                                    ----        ----
                                                     (In Thousands)


                                                <c>         <c>
Assets
  Interest bearing deposits in subsidiary bank     $ 1,853     $ 1,585
  Investment in subsidiary bank, at equity          79,605      72,785
  Other assets                                           9           9
                                                   -------------------
                                                   $81,467     $74,379
                                                   ===================

Liabilities                                        $   930     $   915

Stockholders' equity                                80,537      73,464
                                                   -------------------
                                                   $81,467     $74,379
                                                   ===================
</TABLE>

Statements of Earnings

<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                                        -------------------------------
                                                                         2001        2000        1999
                                                                         ----        ----        ----
                                                                                (In Thousands)


                                                                     <c>         <c>         <c>
Revenues
  Interest income from subsidiary bank                                  $    25     $    35     $    47
  Dividend income from subsidiary bank                                    7,500      10,000       5,250
                                                                        -------------------------------
      Total revenues                                                      7,525      10,035       5,297
Operating expenses                                                           25          35          47
                                                                        -------------------------------
Earnings before equity in undistributed earnings of subsidiary bank       7,500      10,000       5,250
Equity in undistributed earnings of subsidiary bank                       3,889          78       4,875
                                                                        -------------------------------
      Net earnings                                                      $11,389     $10,078     $10,125
                                                                        ===============================
</TABLE>


<PAGE>  58


Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                              Year Ended December 31,
                                                                                          --------------------------------
                                                                                           2001         2000        1999
                                                                                           ----         ----        ----
                                                                                                   (In Thousands)


                                                                                       <c>         <c>          <c>
Cash flows from operating activities:
  Net earnings                                                                            $11,389     $ 10,078     $10,125
  Adjustments to reconcile net earnings to net cash provided by operating activities:
    Equity in undistributed earnings of subsidiary bank                                    (3,889)         (78)     (4,875)
    Increase in other assets                                                                                (2)         (4)
    Increase (decrease) in other liabilities                                                  (22)           8         (80)
                                                                                          --------------------------------
      Net cash provided by operating activities                                             7,478       10,006       5,166
                                                                                          --------------------------------

Cash flows from investing activities:
  (Increase) decrease in interest bearing deposits with subsidiary bank                      (268)         532       1,831
                                                                                          --------------------------------
      Net cash provided by (used in) investing activities                                    (268)         532       1,831
                                                                                          --------------------------------

Cash flows from financing activities:
  Dividends paid on common stock                                                           (3,573)      (3,463)     (3,185)
  Proceeds from exercise of stock options                                                      43           32         275
  Purchase of common stock for treasury                                                    (3,680)      (7,071)     (4,052)
  Repayment on liability relating to ESOP                                                                  (36)        (35)
                                                                                          --------------------------------
      Net cash used in financing activities                                                (7,210)     (10,538)     (6,997)
                                                                                          --------------------------------
      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 Statements of Comprehensive Income and Statements of Stockholders'
Equity for the parent company only, are identical to the Consolidated
Statements of Comprehensive Income and 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>  59


Note 24-Summary of Quarterly Results (Unaudited)

The following is a summary of the quarterly results of operations for the
years ended December 31, 2001 and 2000.

<TABLE>
<CAPTION>

                                                               2001                                        2000
                                             ----------------------------------------    ----------------------------------------
                                             Fourth      Third     Second      First     Fourth      Third     Second      First
                                             Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter
                                             -------    -------    -------    -------    -------    -------    -------    -------
                                                                    ($ In Thousands, except per share data)


                                          <c>        <c>        <c>        <c>        <c>        <c>        <c>        <c>
Interest and dividend income
  Loans                                      $12,850    $13,471    $13,518    $13,496    $12,599    $12,307    $11,857    $11,434
  Securities available for sale                3,784      3,654      3,495      3,135      3,280      3,236      3,234      3,396
  Securities held to maturity                     77         83         95        226        288        289        288        289
  Interest bearing deposits in other
   banks                                         149        210        137        118         89         66         65         70
  Dividends on Federal Home Loan
   Bank of Boston stock                           82        101        112        129        145        144        135        125
                                             ------------------------------------------------------------------------------------
      Total interest and dividend
       income                                 16,942     17,519     17,357     17,104     16,401     16,042     15,579     15,314
                                             ------------------------------------------------------------------------------------

Interest expense
  Deposits                                     4,649      5,527      5,927      5,982      5,744      5,549      5,419      5,228
  Other borrowed funds                         2,298      2,599      2,414      2,516      2,543      2,377      2,079      2,155
                                             ------------------------------------------------------------------------------------
      Total interest expense                   6,947      8,126      8,341      8,498      8,287      7,926      7,498      7,383
                                             ------------------------------------------------------------------------------------
      Net interest and dividend
       income                                  9,995      9,393      9,016      8,606      8,114      8,116      8,081      7,931

Provision for possible loan losses               300        180        120         60        100        150         50         30
                                             ------------------------------------------------------------------------------------

      Net interest and dividend
       income after provision for
       possible loan losses                    9,695      9,213      8,896      8,546      8,014      7,966      8,031      7,901
Net gains (losses) on sales of securities
 available for sale                              (54)        37        192        228        233         83          0          6
Other noninterest income                       2,279      1,838      1,578      1,394      1,268      1,337      1,376      1,266
Noninterest expense                            6,795      6,489      6,418      5,978      5,542      5,448      5,474      5,280
                                             ------------------------------------------------------------------------------------

      Earnings before income taxes             5,125      4,599      4,248      4,190      3,973      3,938      3,933      3,893
Income tax expense                             1,987      1,735      1,518      1,533      1,442      1,422      1,411      1,384
                                             ------------------------------------------------------------------------------------

      NET EARNINGS                           $ 3,138    $ 2,864    $ 2,730    $ 2,657    $ 2,531    $ 2,516    $ 2,522    $ 2,509
                                             ====================================================================================

Net earnings per share-basic<F1>             $   .60    $   .54    $   .52    $   .50    $   .48    $   .47    $   .45    $   .44

Net earnings per share-diluted               $   .59    $   .53    $   .50    $   .49    $   .47    $   .46    $   .45    $   .44

Annualized Returns
  Return on average assets                      1.20%      1.12%      1.12%      1.14%      1.12%      1.14%      1.17%      1.16%
  Return on average stockholders'
   equity                                      15.14%     14.18%     14.07%     14.14%     13.96%     14.30%     14.50%     14.25%

<FN>
--------------------
<F1>  Net earnings per share is calculated by dividing net earnings by the
      average common shares outstanding for each quarter. Therefore, the
      sum of net earnings per share for the quarters may not equal net
      earnings per share for the year.
</FN>
</TABLE>


<PAGE>  60


Selected Consolidated Financial Data

Balance Sheet Data:

<TABLE>
<CAPTION>

                                                                   At or for Years Ended December 31,
                                                       ----------------------------------------------------------
                                                          2001         2000        1999        1998        1997
                                                          ----         ----        ----        ----        ----
                                                                ($ In Thousands, except per share data)


                                                    <c>           <c>         <c>         <c>         <c>
Total assets                                           $1,018,942    $955,009    $867,677    $878,147    $813,670
Net loans                                                 645,840     648,354     560,414     547,071     500,082
Loans held for sale                                        14,821         657         479       1,828       1,068
Investments<F1>                                           286,408     221,734     240,790     249,243     219,791
Deposits                                                  714,143     683,334     628,018     650,487     648,983
Securities sold under agreements to repurchase             85,013      90,811      75,042      70,905      66,025
Other borrowings                                          135,464     100,515      90,563      80,608      25,877
Stockholders' equity                                       80,537      73,464      70,369      72,600      66,914

Operating Data:

Interest and dividend income                           $   68,922    $ 63,336    $ 59,802    $ 58,626    $ 59,011
Interest expense                                           31,912      31,094      27,896      27,653      28,900
                                                       ----------------------------------------------------------
      Net interest and dividend income                     37,010      32,242      31,906      30,973      30,111
Provision for possible loan losses                            660         330          50       1,125       2,425
Net gains on sales of securities available for sale           403         322         708       4,185       2,187
Other noninterest income                                    7,089       5,247       4,755       4,865       4,912
Noninterest expense<F2>                                    25,680      21,744      21,916      24,205      31,774
                                                       ----------------------------------------------------------
Earnings before income taxes                               18,162      15,737      15,403      14,693       3,011
Income taxes                                                6,773       5,659       5,278       5,136         704
                                                       ----------------------------------------------------------
      Net earnings<F2>                                 $   11,389    $ 10,078    $ 10,125    $  9,557    $  2,307
                                                       ==========================================================

Per share data:

Net earnings per share-basic                           $     2.16    $   1.83    $   1.75    $   1.64    $    .42
                                                       ==========================================================
Net earnings per share-diluted                         $     2.11    $   1.82    $   1.71    $   1.60    $    .40
                                                       ==========================================================

Cash dividends declared on common stock                $      .68    $    .64    $    .56    $    .50    $    .29

Financial Ratios:
Return on average assets                                     1.15%       1.15%       1.18%       1.17%        .29%
Return on average stockholders' equity                      14.39%      14.25%      13.88%      13.30%       3.57%

<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>  61