<PAGE>


Independent Auditors' Report


To the Shareholders and Board of Directors of Alliance 
Bancorp of New England, Inc.:


We have audited the accompanying consolidated balance sheets of Alliance Bancorp
of New England, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated income statements, statements of changes in shareholders'
equity, and statements of cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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 Alliance Bancorp of
New England, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.




                                    /S/ KPMG LLP
                                    --------------------------
                                    KPMG LLP
                                    Hartford, Connecticut
                                    January 28, 1999




<PAGE>
Management's Report on the Financial Statements

The Management of Alliance Bancorp of New England, Inc. is responsible for the
accuracy and content of the consolidated financial statements and other
information in this annual report. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis in all material respects, and information
presented relies on Management's judgment where material estimates are required.
The consolidated financial statement disclosures include the fair values of
financial instruments, which include many assets and liabilities. They are not a
representation of the fair values or liquidation values of total assets and
liabilities, or the value of present and future business activities of the
Company.

The accounting systems which record, summarize, and report data are supported by
internal controls that are augmented by written policies, internal audits and
staff training programs. The Audit Committee of the Board of Directors is made
up solely of outside directors who are not employees of the Company. It directs
and reviews the activities of the internal audit function and meets at least
annually with representatives of KPMG LLP, the Company's independent auditors.
KPMG LLP, a firm of Certified Public Accountants, has been appointed by the
Audit Committee of the Board of Directors to conduct an independent audit and to
express an opinion as to the fairness of the presentation of the consolidated
financial statements of Alliance Bancorp of New England, Inc., in accordance
with generally accepted accounting principles.

<PAGE>

<TABLE>
<CAPTION>


                           Consolidated Balance Sheets
                                                                        December 31,              December 31,
(in thousands except share data)                                                1998                      1997
----------------------------------------------------------------------------------------------------------------------------
Assets
<S>                                                                        <C>                      <C>       
   Cash and due from banks                                                 $   6,760                $    6,652
   Short-term investments                                                     13,456                    14,765
----------------------------------------------------------------------------------------------------------------------------
         Total cash and cash equivalents                                      20,216                    21,417

   Securities available for sale (at fair value)                              58,556                    43,729

   Securities held to maturity                                                                                              
         (fair value of $15,519 in 1998 and $20,021 in 1997)                  15,431                    19,949

   Residential mortgage loans                                                 57,555                    39,319
   Commercial mortgage loans                                                  46,724                    45,511
   Other commercial loans                                                     25,105                    18,270
   Consumer loans                                                             32,515                    29,504
   Government guaranteed loans                                                22,827                    24,846
----------------------------------------------------------------------------------------------------------------------------
         Total loans                                                         184,726                   157,450
   Less: Allowance for loan losses                                            (3,060)                   (3,000)
----------------------------------------------------------------------------------------------------------------------------
         Net loans                                                           181,666                   154,450

   Premises and equipment, net                                                 4,276                     4,151
   Foreclosed assets, net                                                         80                       617
   Other assets                                                                3,356                     2,816
----------------------------------------------------------------------------------------------------------------------------
         Total assets                                                      $ 283,581                $  247,129
----------------------------------------------------------------------------------------------------------------------------

Liabilities and Shareholders' Equity                                                            
   Demand deposits                                                         $  25,328                $   21,918
   NOW deposits                                                               25,155                    22,260
   Money market deposits                                                      29,585                    15,447
   Savings deposits                                                           37,238                    34,677
   Time deposits                                                             122,679                   127,431
----------------------------------------------------------------------------------------------------------------------------
         Total deposits                                                      239,985                   221,733

   Borrowings                                                                 23,610                     5,739
   Other liabilities                                                           1,790                       854
----------------------------------------------------------------------------------------------------------------------------
         Total liabilities                                                   265,385                   228,326

   Commitments and contingencies (Note 17)
   Preferred stock, ( $.01 par value; 100,000 shares                                                                        
         authorized, none issued)                                                  -                         -
   Common stock, ($.01 par value; authorized 4,000,000                                                                      
         shares; issued 2,492,552 in 1998                                                                                   
         and 1,636,269 in 1997; outstanding 2,291,953 in 1998                                                               
         and 1,636,269 in 1997)                                                   25                        16
   Additional paid-in capital                                                 11,306                    11,073
   Retained earnings                                                           9,223                     7,071
   Accumulated other comprehensive income, net                                   751                       643
   Treasury stock (200,599 shares in 1998)                                    (3,109)                        -
----------------------------------------------------------------------------------------------------------------------------
         Total shareholders' equity                                           18,196                    18,803
----------------------------------------------------------------------------------------------------------------------------
         Total liabilities and shareholders' equity                        $ 283,581                $  247,129
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements



<PAGE>



                         Consolidated Income Statements

<TABLE>
<CAPTION>

Years ended December 31                                                                                 
(dollars in thousands except share data)                        1998                1997                1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                 <C>     
Interest Income
   Loans                                                    $ 13,896            $ 12,138            $ 12,347
   Debt Securities                                             2,620               3,233               2,780
   Dividends on equity securities                              1,224               1,047                 601
   Other earning assets                                          631                 293                 244
-------------------------------------------------------------------------------------------------------------------
         Total interest and dividend income                   18,371              16,711              15,972
-------------------------------------------------------------------------------------------------------------------

Interest Expense
   Deposits                                                    8,984               8,487               7,894
   Borrowings                                                    359                 264                 415
-------------------------------------------------------------------------------------------------------------------
         Total interest expense                                9,343               8,751               8,309
-------------------------------------------------------------------------------------------------------------------

Net interest income                                            9,028               7,960               7,663

Provision For Loan Losses                                        179                 829                 978
-------------------------------------------------------------------------------------------------------------------
   Net interest income after provision for loan losses         8,849               7,131               6,685

Non-Interest Income
   Service charges and fees                                    1,226               1,148               1,115
   Net gain (loss) on securities                               1,204                 961                 (40)
   Net (loss ) gain on assets                                    (11)               (148)                200
-------------------------------------------------------------------------------------------------------------------
         Total non-interest income                             2,419               1,961               1,275

Non-Interest Expense
   Compensation and benefits                                   3,632               3,199               3,253
   Occupancy                                                     618                 586                 597
   Equipment                                                     265                 283                 285
   Data processing services                                      564                 620                 476
   FDIC, office and other insurance                              524                 553                 509
   Problem asset related expense                                 100                  88                 549
   Other                                                       1,644               1,082                 971
-------------------------------------------------------------------------------------------------------------------
         Total non-interest expense                            7,347               6,411               6,640
-------------------------------------------------------------------------------------------------------------------
   Income before income taxes                                  3,921               2,681               1,320
   Income tax expense (benefit)                                1,363                 664                (118)
-------------------------------------------------------------------------------------------------------------------
         Net Income                                          $ 2,558             $ 2,017             $ 1,438
-------------------------------------------------------------------------------------------------------------------

Per Share Data
   Basic earnings per share                                   $ 1.07               $ .85               $ .62
-------------------------------------------------------------------------------------------------------------------
   Diluted earnings per share                                 $ 1.03               $ .82               $ .61
-------------------------------------------------------------------------------------------------------------------

   Average basic shares outstanding                        2,389,828           2,382,654           2,316,218
   Average additional dilutive shares                         98,208              77,087              31,796
-------------------------------------------------------------------------------------------------------------------
   Average diluted shares outstanding                      2,488,036           2,459,741           2,348,014
-------------------------------------------------------------------------------------------------------------------

</TABLE>


<PAGE>



           Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>


                                                                                    Accumulated                          
                                                          Additional                      other                          
Years ended December 31                         Common      paid-In      Retained com-prehensive  Treasury               
(in thousands except share data)                 stock      capital      earnings        income      stock       Total
-------------------------------------------------------------------------------------------------------------------------

<S>                                            <C>          <C>        <C>         <C>                       <C>     
Balance, December 31, 1995                     $ 1,158      $ 8,795    $ 4,328     $ (1,000)                 $ 13,281
Comprehensive income
   Net income                                                            1,438
   Unrealized gains on securities,                                                                                       
   net of reclassification adjustment                                                   767                              
Comprehensive income                                                                                            2,205
Dividends declared ($0.01 per share)                                       (35)                                   (35)
Shares issued                                       15          123                                               138
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                     $ 1,173      $ 8,918    $ 5,731       $ (233)                 $ 15,589
-------------------------------------------------------------------------------------------------------------------------

Comprehensive income
   Net income                                                            2,017
   Unrealized gains on securities,                                                                                       
   net of reclassification adjustment                                                   876                              
Comprehensive income                                                                                            2,893
Dividends declared ($0.12 per share)                                      (278)                                  (278)
Shares issued                                       17          185                                               202
Four for three stock split                                                                                               
effected as a stock dividend                       399                    (399)                                          
Conversion of par value                                                                                                  
to $.01 per share from $1.00                                                                                             
due to formation of Alliance Bancorp            (1,574)       1,574                                                      
Issuance of shares pursuant to exercise of                                                                 
stock options                                        1          396                                               397
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                        $ 16     $ 11,073    $ 7,071        $ 643                  $ 18,803
-------------------------------------------------------------------------------------------------------------------------

Comprehensive income
   Net income                                                            2,558
   Unrealized gains on securities,                                                                                       
   net of reclassification adjustment                                                   108                              
Comprehensive income                                                                                            2,666
Dividends declared ($0.17 per share)                                      (397)                                  (397)
Three for two stock split                                                                                                
effected as a stock dividend                         9                      (9)                                          
Shares issued                                                   233                                               233
Purchase of treasury stock                                                                      $ (3,109)      (3,109)
----------------------------------------------------------------------------------------------------------- -------------
Balance, December 31, 1998                        $ 25     $ 11,306    $ 9,223        $ 751     $ (3,109)    $ 18,196
-------------------------------------------------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
Disclosure of reclassification amount
Years ended December 31 (in thousands)                          1998                1997               1997
-----------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                <C>                   <C>   
Unrealized holding gain arising during                                                                           
   the year net of income tax expense                                                                            
   of $522, $1,002 and $512, respectively                      $ 830             $ 1,453              $ 743
Less reclassification adjustment for                                                                             
   (gains) losses included in net income                                                                         
   net of income tax expense (benefit)                                                                           
   of $482, 384, and $16, respectively                          (722)               (577)                24
-----------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities                             $ 108               $ 876              $ 767
-----------------------------------------------------------------------------------------------------------------

</TABLE>


<PAGE>



                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

Years ended December 31 (in thousands)                       1998                  1997             1996
--------------------------------------------------------------------------- ---------------------------------------
<S>                                                       <C>                   <C>              <C>  
Operating Activities:
    Net income                                             $ 2,558               $ 2,017          $ 1,438
   Adjustments to reconcile net income to
   net cash provided by operating activities:
         Provision for loan losses                            179                   829              978
         Depreciation and amortization                        621                   500              513
         Net investment security (gains) losses            (1,204)                 (961)              40
         Net asset losses (gains)                              11                   148             (200)
         Loans originated for sale                        (27,105)              (14,741)         (17,719)
         Proceeds from loans sold                          21,853                15,962           18,230
         Increase in other liabilities                        936                   175              207
         Decrease (increase) in other assets                  386                   348             (803)
--------------------------------------------------------------------------- ---------------------------------------
         Net cash provided by operating activities         (1,765)                4,277            2,684

Investing Activities:
   Securities available for sale:
         Proceeds from amortization and maturities          2,802                 3,219            2,447
         Proceeds from sales of securities                 32,081                23,453            3,759
         Purchases of securities                          (49,660)              (23,585)         (28,422)
   Securities held to maturity:
         Proceeds from amortization and maturities          4,518                   741            2,060
         Proceeds from sales of securities                      -                     -              806
   Net (increase) decrease in loans                       (22,651)              (12,963)           5,517
   Proceeds from sales of foreclosed assets                 1,097                 2,021            1,530
   Purchases of premises and equipment                       (473)                  (88)            (157)
   Proceeds from sales of premises and equipment                -                     -              102
--------------------------------------------------------------------------- ---------------------------------------
         Net cash used by investing activities            (32,286)               (7,202)         (12,358)

Financing Activities:
   Net increase in interest-bearing deposits               14,842                13,880           10,177
   Net increase in demand deposits                          3,410                 2,245            1,993
   Proceeds from issuance of FHLB advances                 21,929                 6,052           12,203
   Principal repayments of FHLB advances                   (2,058)               (9,719)         (11,572)
   Net increase (decrease) in other borrowings             (2,000)               (1,000)           2,890
   Stock options exercised                                    233                   599              138
   Cash dividends paid                                       (397)                 (278)             (35)
   Purchase of treasury stock                              (3,109)                    -                -
--------------------------------------------------------------------------- ---------------------------------------
--------------------------------------------------------------------------- ---------------------------------------
         Net cash provided by financing activities         32,850                11,779           15,794
--------------------------------------------------------------------------- ---------------------------------------
Net Change in cash and cash equivalents                    (1,201)                8,854            6,120
Cash and cash equivalents at beginning of the year         21,417                12,563            6,443
--------------------------------------------------------------------------- ---------------------------------------
Cash and cash equivalents at end of the year             $ 20,216              $ 21,417         $ 12,563
--------------------------------------------------------------------------- ---------------------------------------

Supplemental Information On Cash Payments
   Interest expense                                       $ 9,289                $8,737          $ 8,309
   Income taxes                                               797                   494              460

Supplemental Information On Non-cash Transactions
   Net loans transferred to foreclosed assets                 216                 2,128              369


</TABLE>


                   Notes to Consolidated Financial Statements



<PAGE>


1.   Summary Of Significant Accounting Policies

Formation of Bank Holding Company. On October 3, 1997, Alliance Bancorp of New
England, Inc. (the "Company") acquired all of the outstanding common stock of
Tolland Bank (the "Bank") on a one-for-one basis, in accordance with an
Agreement and Plan of Reorganization. The accompanying consolidated financial
statements give effect to the Company's reorganization and the exchange of
stock, which have been accounted for in a manner similar to a
pooling-of-interests transaction.

Principles of Business and Consolidation. The Company is a one bank holding
Company, chartered in Delaware. The Bank is a Connecticut chartered savings bank
with deposits insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank provides consumer and commercial banking services
from its eight offices located in Tolland County, Connecticut. Tolland Bank
maintains a wholly owned foreclosed asset liquidation subsidiary named Asset
Recovery Systems, Inc. ("ARS"). The consolidated financial statements include
the Company, the Bank, and ARS. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Basis of Preparation and Presentation. The consolidated financial statements
have been prepared and presented in conformity with generally accepted
accounting principles. Unless otherwise noted, all dollar amounts presented in
the financial statements and note tables are rounded to the nearest thousand
dollars, except share data. Certain prior period amounts have been reclassified
to conform with current financial statement presentation.

The Company uses the accrual method of accounting for all material items of
income and expense. The Company is required to make certain estimates and
assumptions in preparing these statements. The most significant estimates are
those necessary in determining the allowance for loan losses, the valuation of
foreclosed assets, and the determination of fair values of financial
instruments. Factors affecting these estimates include national economic
conditions, the level and trend of interest rates, local market conditions, and
real estate trends and values.

Securities. Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity securities and reported
at amortized cost. Trading securities, if any, will consist of securities bought
principally for the purpose of selling them in the near term. Unrealized gains
and losses on trading securities are included in earnings. Securities not
classified as either held to maturity securities or trading securities are
classified as available for sale securities and reported at fair value, with
unrealized net gains or losses excluded from earnings and reported in a separate
component of shareholders' equity net of applicable income taxes. Any decline in
the value of a security below its cost considered to be other than temporary is
reflected as a realized loss in the Consolidated Income Statements. Realized
gains or losses on the sale of securities are generally computed on a specific
identified cost basis and reported as Net Gains (Losses) on Securities in the
Consolidated Income Statement. Premiums and discounts are recognized as an
adjustment of yield by the interest method. Calls of securities are accounted
for as sales.

Loans. Total loans are reported at the principal amount outstanding, and
adjusted for the net amount of deferred fees and costs, premiums and discounts,
except for charged-off loans as discussed below. Net loans are total loans less
the amount of the allowance for loan losses. Residential mortgage loans held for
sale, included in residential mortages on the balance sheet, are stated at the
lower of amortized cost or market value. Gains or losses are determined using
the specific identification method. Premiums and discounts are recognized as an
adjustment of yield by the interest method based on the contractual terms of the
loan. Commitment fees are considered to be an adjustment to the loan yield. Loan
origination fees and certain direct costs of loan origination are also deferred
and accounted for as an adjustment to yield. The unamortized balance of deferred
fees and costs is credited or charged to the income statement at the time a loan
repays.
<PAGE>

Interest income receivable is included in Other Assets on the Consolidated
Balance Sheet. Most of the Company's loans require interest payments monthly in
arrears. The Company generally places loans on nonaccrual when a payment becomes
more than three months past due. The Company may also place a loan on nonaccrual
sooner if a concern develops as to the ultimate collection of principal or
interest. The Company may grant a waiver from nonaccrual status on certain
commercial loans which are well secured and in the process of collection.
Generally, when a commercial loan is placed on nonaccrual status, any interest
receivable over 90 days is charged-off, and interest receivable on all other
loans is charged off entirely. Payments received on nonaccruing loans are
normally applied first against unpaid interest. The Company recognizes as
separate assets, rights to service mortgage loans for others, regardless of how
those servicing rights are acquired. Mortgage servicing rights are assessed for
impairment based on the fair value of those rights, and any impairment is
recognized through a valuation allowance. Mortgage servicing rights are
amortized in proportion to and over the period of, estimated net servicing
income. All related amortization and impairment valuations are charged to
mortgage servicing income.


<PAGE>




Allowance for Loan Losses and Provision for Loan Losses. The allowance for loan
losses is maintained at a level estimated by the Company to be adequate to
absorb estimated credit losses associated with the loan portfolio, including all
binding commitments to lend. The Company's estimation of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss and
recovery experience, current economic conditions, the age and composition of the
portfolio, loan loss experience at peer group competitors and other relevant
factors. The provision for loan losses is a charge to current period income
necessary to establish the loan loss allowance at the level estimated to be
adequate by the Company.

The Company's Credit Committee is responsible for assessing the adequacy of the
loan loss allowance and for recommending any loan loss provision necessary to
establish the allowance at an adequate level. The Committee maintains the
allowance in accordance with generally accepted accounting principles and with
regulatory accounting principles. The Committee also considers regulatory
guidelines in effect regarding the establishment of the loan loss allowance. The
Committee provides its quarterly assessment to the Board of Directors for
approval of the amount of the loan loss allowance.

The Company maintains a detailed methodology for assessing the loan loss
allowance. This methodology is based on dividing the loan portfolio into
homogeneous loan pools, and dividing the commercial loan portfolio into pools
based on risk rating. A reserve is established for each pool of loans.
Additional reserves are maintained on classified loans, and management may
establish specific additional allocations for certain loans based on
management's assessment. Impairment reserves are maintained in accordance with
SFAS 114. Additionally, a management allocation is assigned to the overall
allowance based on management's assessment of the overall risks and trends of
the portfolio, and other applicable factors.

A loan is considered impaired when it is probable that the Company will not be
able to collect all amounts due according to the contractual terms of the
agreement. Management excludes large groups of smaller balance homogeneous
loans, including residential mortgages and consumer loans, which are evaluated
collectively for impairment. The amount of impairment for all impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original contractual interest rate, and its
recorded value, or as a practical expedient, for collateral dependent loans, the
difference between the appraised value of the collateral and the recorded amount
of the loan. When foreclosure is probable, impairment is measured based on the
fair value of the collateral. The Company's method of recognition of interest
income on impaired loans is consistent with the method of recognition of
interest on all loans.
<PAGE>

The Company's estimates of the collectibility of principal and interest rely in
many cases on estimates of future borrower cash flows and market conditions and
expectations. In addition, federal and state regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for losses on loans. Based on information available to them at the time of their
examination, and on regulatory guidelines then in effect, such agencies may
require the Company to recognize additions to the allowance for loan losses.
Accordingly, current estimates of loan losses may vary from future estimates and
from ultimate loan loss experience.

Loan Charge-offs. Most nonaccruing consumer loans are automatically charged-off
once they become 150-180 days past due depending on the circumstances,
regardless of how well secured they are. Other nonaccruing loans are charged off
in whole or in part when it has been determined that there has been a loss of
principal. For real estate secured loans, this determination is normally made in
conjunction with a current appraisal analysis and the transfer of the loan to
foreclosed assets. Charge-offs and recoveries are booked to the allowance for
loan losses. Initial write-downs on recently acquired foreclosed assets are also
charged-off against the allowance for loan losses.

Foreclosed Assets. Foreclosed assets include foreclosed real estate, real estate
deeded to the Company, and personal property repossessed by the Company, net of
a valuation allowance for specific properties. Foreclosed assets are transferred
from loans at the lower of cost or fair value less selling costs, with any
necessary write down from carrying value being charged against the allowance for
loan losses.

The Company periodically obtains and analyzes appraisals of foreclosed real
estate. If the fair value less selling costs is less than the carrying value of
these assets, these assets are written down to that value by increasing the
amount of the valuation allowance. Additionally, the Company may recognize a
gain or loss on the ultimate disposition of foreclosed assets. The net amount of
these gains and provisions to increase the valuation allowance are shown as Net
Gain (Loss) on Assets in the Consolidated Income Statements. The carrying value
of foreclosed real estate is subject, in general, to the same uncertainties
discussed above regarding the Allowance for Loan Losses. Net receipts and
disbursements related to the operations of foreclosed real estate are included
in Problem Asset Related Expense in the Consolidated Income Statements.

Premises and Equipment. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operations on a
straight-line basis over the estimated useful lives of the related assets.



<PAGE>


Intangible Assets. Intangible assets related to branch acquisitions are
amortized on a straight line basis over 10-15 years. On a periodic basis, the
Company reviews the intangible assets for events or changes in circumstances
that may indicate the carrying value of the assets may not be recoverable.

Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss carry-forwards. Deferred tax assets are
reduced by a valuation allowance when it is more likely than not that such
deferred tax assets will not be realized. 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. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

Stock Options. The Company measures the compensation cost for its stock option
plans using the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees. No compensation cost
is recognized if, at the grant date, the exercise price of the options is equal
to the fair market value of the Company's common stock. In the notes to its
consolidated financial statements, the Company makes pro forma disclosures of
net income and earnings per share as if the fair value method of accounting in
Statement of Financial Accounting Standards (SFAS), Accounting for Stock-Based
Compensation (SFAS 123), has been applied. Under this method, compensation cost
of stock options is measured at the grant date based on the fair market value of
the award and is recognized over the service period.

Disclosures of 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
Company's entire holdings of a particular financial instrument. Because no
market exists for a portion of the Company's financial instruments, fair value
estimates were 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 effect the estimates
significantly. Fair value estimates were 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. In addition, the tax ramifications relating to
the realization of the unrealized gains and losses may have a significant effect
on fair value estimates and have not been considered in the estimates. Fair
value methods and assumptions are set forth below for the Company's financial
instruments.

The carrying amounts reported in the balance sheets for cash and short-term
instruments approximate those assets' fair values. Fair values of investment
securities were based on quoted market prices where available. If quoted market
prices were not available, fair values were based on quoted market prices of
comparable instruments. The carrying values, reduced by estimated inherent
credit losses, of variable-rate loans and other loans with short-term
characteristics were considered fair values. The fair value of residential
mortgages was based on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for differences in loan
characteristics and credit losses inherent in the portfolio. For other loans,
the fair market values were calculated by discounting scheduled future cash
flows using current interest rates offered on loans with similar terms adjusted
to reflect the estimated credit losses inherent in the portfolio. The carrying
amounts of accrued interest receivable approximates fair values.

The fair values of deposits with no stated maturity, was, by definition, equal
to their carrying value. The fair value of time deposits was based on the
discounted value of contractual cash flows, calculated using the discount rates
that equaled the interest rates offered at the valuation date for deposits of
similar remaining maturities. The carrying amounts of short-term borrowings
approximated their fair values. Rates currently available for debt with similar
terms and remaining maturities were used to estimate fair value of long-term
borrowings. The carrying amount of accrued interest payable approximates fair
value. The fair value of off balance sheet instruments is based on fees
currently charged for such instruments.
<PAGE>

Cash Flow Reporting. The Company uses the indirect method to report cash flows
from operating activities. Under this method, net income is adjusted to
reconcile it to net cash flow from operating activities. Net reporting of cash
transactions affecting balance sheet items has been used where permitted. The
Company considers due from banks and short-term investments to be cash
equivalents.

Recent Accounting Developments. The Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") 130, Reporting Comprehensive Income,
in 1998. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components (such as changes in unrealized
investment gains and losses). Comprehensive income includes net income and any
changes in equity from non-owner sources that are not included in the income
statement. The purpose of reporting comprehensive income is to report a measure
of all changes in equity of an enterprise that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. Application of SFAS 130 has not
impacted the amounts previously reported for net income or affected the
comparability of previously issued financial statements.

In 1998, the Company adopted the provisions of SFAS 132, Employers' Disclosures
about Pensions and Other Post Retirement Benefits. This statement standardizes
disclosure requirements for pensions and other post retirement benefits,
eliminates unnecessary disclosures, and requires additional information. The
accompanying financial statements conform to these disclosure requirements,
including restatement of disclosures for earlier periods provided for
comparative purposes.

In June 1997, the FASB issued SFAS 131, Financial Reporting for Segments of a
Business Enterprise, which sets forth disclosure conditions for segment
information for periods beginning after December 15, 1997. An operating segment
is defined as a component of a business for which separate financial information
is available that is evaluated regularly by the chief operating decision-maker
in deciding how to allocate resources and evaluate performance. The Company
operations are limited to financial services provided within the framework of a
community bank, and decisions are based generally on specific market areas and
or product offerings. Accordingly, based on the financial information now
regularly evaluated by the Company's chief operating decision-maker, the Company
operates in a single business segment and detailed segment operation is not
required.

In April, 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up
Activities. This statement requires that costs of start-up activities and
organization costs be expensed as incurred. The statement is effective for
financial statements for fiscal years beginning after December 15, 1998. Initial
application of this statement is to be reported as the cumulative effect of a
change in accounting principle. The Company does not believe that the adoption
of this statement will have a material impact on its financial position or
results of operations.

In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that
companies record all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. The manner in which the
companies are to record gains and losses resulting from changes in the values of
those derivatives depends on the use of the derivative and whether it qualifies
for hedge accounting. For qualifying hedges, the recognition of changes in the
value of both the hedge and the hedged item are recorded in earnings in the same
period. Changes in the fair value of derivatives that do not qualify for hedge
accounting are included in earnings in the period of the change. SFAS 133 also
allows a one-time reclassification of held to maturity securities. This
statement is effective for years beginning after June 15, 1999. The Company does
not believe that the adoption of this statement will have a material impact on
its financial position or results of operations.


<PAGE>



2.   Cash And Cash Equivalents
<TABLE>
<CAPTION>

Short-term investments at December 31 (in thousands)                 1998              1997
---------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>     
   Federal funds sold                                            $ 13,450          $ 14,760
   FHLBB Ideal Way account                                              6                 5
---------------------------------------------------------------------------------------------
         Total short-term investments                            $ 13,456          $ 14,765
---------------------------------------------------------------------------------------------
</TABLE>

The Company is required to maintain certain average vault cash and cash reserve
balances with the Federal Reserve Bank of Boston. Cash and due from banks
included amounts so required of $757,000 and $714,000 at December 31, 1998 and
December 31, 1997, respectively.



<PAGE>


3.   Securities
<TABLE>
<CAPTION>

                                                          Amortized        Unrealized       Unrealized              Fair
December 31, 1998 (in thousands)                               Cost             Gains           Losses             Value
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S>                                                      <C>                <C>                   <C>         <C>   
Securities available for sale
U.S. Government and agency                                 $ 16,694              $ 34            $ (82)         $ 16,646
U.S. Agency mortgage-backed                                   2,312                22               (1)            2,333
Other debt securities                                        19,265               476              (26)           19,715
Marketable equity                                            17,724             1,107             (150)           18,681
FHLBB stock                                                   1,181                 -                -             1,181
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
   Total available for sale                                $ 57,176           $ 1,639           $ (259)         $ 58,556
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Securities held to maturity
U.S. Government and agency                                  $ 1,952              $ 65              $ -           $ 2,017
U.S. Agency mortgage-backed                                  12,095                22              (28)           12,089
Other debt securities                                         1,384                29                -             1,413
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
   Total held to maturity                                  $ 15,431             $ 116            $ (28)         $ 15,519
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------

                                                          Amortized        Unrealized       Unrealized              Fair
December 31, 1997 (in thousands)                               Cost             Gains           Losses             Value
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Securities available for sale
U.S. Government and agency                                 $ 18,081                27           $ (217)         $ 17,891
U.S. Agency mortgage-backed                                   5,366                27               (2)            5,391
Other debt securities                                         1,312                 9                -             1,321
Marketable equity                                            16,710             1,586                -            18,296
FHLBB stock                                                     830                 -                -               830
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
   Total available for sale                                $ 42,299           $ 1,649           $ (219)         $ 43,729
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Securities held to maturity
U.S. Government and agency                                  $ 2,901              $ 45             $ (5)          $ 2,941
U.S. Agency mortgage-backed                                  15,214                48              (38)           15,224
Other debt securities                                         1,834                25               (3)            1,856
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
   Total held to maturity                                  $ 19,949             $ 118            $ (46)         $ 20,021
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
</TABLE>



<PAGE>


The amortized cost, estimated fair value and average yield of debt securities
are shown below by contractual maturity, except for mortgage-backed (including
collateralized mortgage obligations) and asset-backed instruments, which are
classified based on their expected average lives. The expected average lives
have been determined based on prepayment and related assumptions. Accordingly,
the expected average lives may differ from actual lives.

<TABLE>
<CAPTION>


                                                             Amortized                    Fair                 Average
   December 31, 1998 (in thousands)                               Cost                   Value                   Yield
------------------------------------------------------ ----------------------- ----------------------- ----------------------
<S>                                                       <C>                    <C>                      <C>    
   Securities available for sale
   Due in 1 year or less                                       $ 7,266                 $ 7,266                    4.89%
   Due after 1 to 5 years                                        6,161                   6,108                    5.06
   Due after 5 to 10 years                                       4,686                   4,712                    6.59
   Due after 10 years                                           20,158                  20,608                    7.63
------------------------------------------------------ ----------------------- ----------------------- ----------------------
         Total available for sale                             $ 38,271                $ 38,694                    6.57%
------------------------------------------------------ ----------------------- ----------------------- ----------------------
   Securities held to maturity
   Due in 1 year or less                                       $ 3,597                 $ 3,637                    5.80%
   Due after 1 to 5 years                                       10,843                  10,895                    6.01
   Due after 5 to 10 years                                         547                     543                    5.00
   Due after 10 years                                              444                     444                    6.00
------------------------------------------------------ ----------------------- ----------------------- ----------------------
         Total held to maturity                               $ 15,431                $ 15,519                    5.92%
------------------------------------------------------ ----------------------- ----------------------- ----------------------

</TABLE>


<PAGE>




As of December 31, 1998, securities having an amortized cost of $1,415,000 were
pledged to secure treasury, tax and loan and other deposits.

Two held to maturity securities with an amortized cost totaling $856,000 were
sold in 1996 at a total loss of $50 thousand. These two securities evidenced
significant deterioration in the issuer's creditworthiness through the
downgrading by a credit agency and other relevant factors. Under state statutes
the Company was required to evaluate these securities for sale, and the Company
made a determination that they be sold due to uncertainties about their credit
quality. All securities sold in 1998 and 1997, and all other securities sold in
1996 were securities available for sale. The book value of securities called in
1998 was $20,910,000, with gross gains of $40,000. The book value of debt and
equity securities sold, together with gross gains and gross losses, were as
follows:

<TABLE>
<CAPTION>

Years ended December 31 (in thousands)                            1998                    1997                    1996
------------------------------------------------------ ----------------------- ----------------------- ----------------------
<S>                                                      <C>                       <C>                       <C>
Debt securities sold
Book value at sale                                            $ 18,908                 $ 8,716                 $ 4,267
Gross gains                                                          4                       7                      11
Gross losses                                                         -                       -                     (52)
Equity securities sold
Book value at sale                                            $ 11,969                $ 13,776                  $  338
Gross gains                                                      1,260                     954                       1
Gross losses                                                       (60)                      -                       -
</TABLE>


<PAGE>



4.   Total Loans
<TABLE>
<CAPTION>

     December 31 (in thousands)                                                        1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
<S>                                                                                <C>                       <C>     
     Residential mortgage loans                                                    $ 57,555                  $ 39,319
     Commercial mortgage loans                                                       46,724                    45,511
     Other commercial loans:
         Construction                                                                 6,062                     4,642
         Other commercial real estate secured                                         5,658                     5,645
         Other commercial, not real estate secured                                   13,385                     7,983
------------------------------------------------------------------------ ------------------------- -------------------------
              Total other commercial loans                                           25,105                    18,270
     Consumer loans:
         Installment                                                                 12,602                    11,133
         Home equity line loans                                                      17,906                    16,569
         Other consumer loans                                                         2,007                     1,802
------------------------------------------------------------------------ ------------------------- -------------------------
              Total consumer loans                                                   32,515                    29,504
------------------------------------------------------------------------ ------------------------- -------------------------
              Total regular loans                                                   161,899                   132,604
     Purchased government guaranteed loans                                           22,827                    24,846
------------------------------------------------------------------------ ------------------------- -------------------------
              Total loans                                                         $ 184,726                 $ 157,450
------------------------------------------------------------------------ ------------------------- -------------------------
     Net deferred costs included in total loans                                       $ 489                     $ 401
</TABLE>



<PAGE>


The majority of the Company's loans are secured by real estate located within
Tolland County or surrounding communities. Real estate loan activities are
governed by the Company's loan policies, and loan to value ratios are based on
an analysis of the collateral backing each loan. Following is additional
information about the Company's nonaccruing loans, delinquent loans, impaired
loans, and loans restructured prior to January 1, 1995. At December 31, 1998 and
1997 residential mortgage loans held for sale totaled $5,354,000 and $102,000,
respectively.
<TABLE>
<CAPTION>



   December 31 (in thousands)                                                          1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
<S>                                                                                   <C>                     <C>    
   Total nonaccruing loans                                                            $ 574                   $ 2,133
   Accruing loans past due 90 days or more                                                -                        86
   Impaired loans:
         Impaired loans - valuation allowance required                                  420                     1,607
         Impaired loans - no valuation allowance required                               252                     1,576
------------------------------------------------------------------------ ------------------------- -------------------------
              Total Impaired Loans                                                    $ 672                   $ 3,183
         Total valuation allowance on impaired loans                                    110                       340
         Commitments to lend additional funds for impaired loans                          -                         -
   Restructured loans, all of which are performing:
         Loans restructured prior to January 1, 1995                                      -                       502
         Commitments to lend additional funds for restructured loans                      -                         -


   Years ended December 31 (in thousands)                                         1998             1997              1996
------------------------------------------------------------------------ ---------------- ----------------- ----------------
   Additional interest income that would have been earned on year-end loans if
   they had been accruing based on originals terms:
         Nonaccruing loans                                                        $ 38            $ 310             $ 198
         Loans restructured prior to January 1, 1995                                 -               17                23
   Total income recognized on impaired loans                                        84              111               311
   Average recorded investment in impaired loans                                 1,928            3,949             5,779

</TABLE>


<PAGE>


In the ordinary course of business, the Company makes loans to its directors and
officers and their related interests for substantially the same terms prevailing
at the time of origination for comparable transactions with others. As of
December 31, 1998, and 1997, loans to related parties totaled $199,000 and
$616,000 respectively. During 1998 originations of related party loans totaled
$12,000 and payments on related party loans totaled $429,000. Loans serviced for
others totaled $7,280,000 and $7,248,000 at December 31, 1998 and 1997,
respectively.


5.   Allowance For Loan Losses
<TABLE>
<CAPTION>

   Years ended December 31 (in thousands)                            1998                    1997                    1996
------------------------------------------------------ ----------------------- ----------------------- ----------------------
<S>                                                               <C>                     <C>                     <C>    
   Balance at beginning of year                                   $ 3,000                 $ 2,850                 $ 2,340
   Charge-offs                                                       (401)                   (768)                   (567)
   Recoveries                                                         282                      89                      99
   Provision for loan losses                                          179                     829                     978
------------------------------------------------------ ----------------------- ----------------------- ----------------------
         Balance at end of year                                   $ 3,060                 $ 3,000                 $ 2,850
------------------------------------------------------ ----------------------- ----------------------- ----------------------
</TABLE>

<PAGE>

6.   Premises and Equipment, Net
<TABLE>
<CAPTION>

   December 31 (in thousands)                                                          1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
<S>                                                                                 <C>                       <C>    
   Land                                                                             $ 1,222                   $ 1,195
   Buildings                                                                          4,375                     4,292
   Furniture, fixtures, and equipment                                                 3,452                     3,089
------------------------------------------------------------------------ ------------------------- -------------------------
         Total property and equipment                                                 9,049                     8,576
   Less: accumulated depreciation and amortization                                   (4,773)                   (4,425)
------------------------------------------------------------------------ ------------------------- -------------------------
         Property and equipment, net                                                $ 4,276                   $ 4,151
------------------------------------------------------------------------ ------------------------- -------------------------

</TABLE>


7.   Foreclosed Assets, Net
<TABLE>
<CAPTION>

   December 31 (in thousands)                                                          1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
<S>                                                                                    <C>                      <C>  
   Foreclosed and repossessed assets                                                   $ 80                     $ 977
   Foreclosed asset valuation allowance                                                   -                      (360)
------------------------------------------------------------------------ ------------------------- -------------------------
         Net foreclosed assets                                                         $ 80                     $ 617
------------------------------------------------------------------------ ------------------------- -------------------------
</TABLE>

Transactions in the valuation allowance for foreclosed assets, and gains and
losses included in net gains (loss) on assets in the Consolidated Income
Statements, were as follows:
<TABLE>
<CAPTION>

   Years ended December 31 (in thousands)                            1998                    1997                    1996
------------------------------------------------------ ----------------------- ----------------------- ----------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
   Transactions in the valuation allowance:
   Balance at beginning of year                                   $   360                 $   222                 $   341
   Write-downs, net                                                  (360)                      -                    (188)
   Provision for losses, net                                            -                     138                      69
------------------------------------------------------ ----------------------- ----------------------- ----------------------
   Balance at end of year                                         $     -                 $   360                 $   222
------------------------------------------------------ ----------------------- ----------------------- ----------------------
   Gains and losses included in net gain (loss) on assets in the statements of
   income:
   Gross gains                                                    $    34                 $    31                 $   270
   Gross losses                                                       (45)                   (179)                   (141)
------------------------------------------------------ ----------------------- ----------------------- ----------------------
         Net gain (loss)                                          $   (11)                $  (148)                $   129
------------------------------------------------------ ----------------------- ----------------------- ----------------------
</TABLE>






<PAGE>



8.   Other Assets
<TABLE>
<CAPTION>

   December 31 (in thousands)                                                          1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
<S>                                                                                 <C>                       <C>    
   Accrued loan interest receivable                                                 $ 1,336                   $ 1,190
   Other accrued interest and dividends receivable                                      841                       434
   Purchased deposit premium, net                                                       105                       220
   Goodwill, net                                                                        139                       169
   Mortgage servicing rights                                                             44                        56
   Deferred tax asset, net                                                                -                        73
   Income tax receivable                                                                305                       305
   All other assets                                                                     586                       369
------------------------------------------------------------------------ ------------------------- -------------------------
         Total other assets                                                         $ 3,356                   $ 2,816
------------------------------------------------------------------------ ------------------------- -------------------------
</TABLE>

9.   Deposits
<TABLE>
<CAPTION>

   December 31 (dollars in thousands)                                 1998                               1997
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
                                                             Amount          Avg. Rate          Amount            Avg. Rate
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S>                                                        <C>                  <C>           <C>                  <C>  
   Demand deposits                                         $ 25,328             0.00%         $ 21,918             0.00%
   NOW deposits                                              25,155             1.82            22,260             1.80
   Money market deposits                                     29,585             4.05            15,447             4.03
   Savings deposits                                          37,238             2.30            34,677             2.30
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
         Total non-time deposits                            117,306             2.14            94,302             1.93
   Time deposits, by remaining
   period to maturity:
   Within 1 year                                             87,488             5.12            78,770             5.26
   After 1, but within 2 years                               23,556             5.45            31,943             5.88
   After 2, but within 3 years                                3,875             5.76            10,369             6.02
   After 3 years                                              7,760             5.84             6,349             6.17
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
         Total time deposits                                122,679             5.25           127,431             5.52
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
              Total deposits                              $ 239,985             3.73         $ 221,733             3.99
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
   Time deposits of $100,000 or more                       $ 16,168             5.15%         $ 15,210             5.55%
</TABLE>

Interest expense and interest paid on deposits is summarized as follows:
<TABLE>
<CAPTION>

   Years ended December 31 (in thousands)                            1998                    1997                    1996
------------------------------------------------------ ----------------------- ----------------------- ----------------------
   Interest Expense
<S>                                                                 <C>                     <C>                     <C>  
         NOW deposits                                               $ 379                   $ 361                   $ 342
         Money market deposits                                        914                     285                     143
         Savings deposits                                             809                     850                     880
         Time deposits                                              6,882                   6,991                   6,529
------------------------------------------------------ ----------------------- ----------------------- ----------------------
              Total deposit interest expense                      $ 8,984                 $ 8,487                  $7,894
------------------------------------------------------ ----------------------- ----------------------- ----------------------
   Interest Paid
         Time deposits of $100,000 or more                          $ 727                   $ 773                   $ 915
         Total deposit interest paid                                9,003                   8,470                   7,883
</TABLE>


<PAGE>

10.  Borrowings
<TABLE>
<CAPTION>

   December 31 (dollars in thousands)                                 1998                             1997
------------------------------------------------------ ----------------------------------- ----------------------------------
   Due Date                                                 Amount             Rate            Amount             Rate
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S>                                                       <C>               <C>               <C>              <C>          
   FHLB advances by remaining period to maturity:
         Within 1 year                                       $ 110            6.98%               $ -                -%
         After 1, but within 2 years                         3,500             6.11               239             6.95
         After 2, but within 3 years                             -             -                3,500             6.11
         After 3 years                                      20,000             4.90                 -             -
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
              Total FHLB advances                           23,610             5.09             3,739             6.16
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
   Federal funds purchased                                       -             -                2,000             6.05
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
                  Total Borrowings                        $ 23,610             5.09%          $ 5,739             6.12%
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------

</TABLE>


<PAGE>


The Company has a line of credit equal to 2% of total assets with the Federal
Home Loan Bank of Boston (FHLBB). The Company may borrow additional funds from
the FHLBB subject to certain limitations. To secure advances from the FHLBB, the
Company has pledged certain qualifying assets, as defined in the FHLBB Statement
of Credit Policy. To obtain additional loan advances, the Company may be
required to invest in additional amounts of FHLBB stock, per FHLBB guidelines.
FHLB advances maturing after three years at December 31, 1998 were callable at
the option of the lender. At December 31, 1998, the Company had a $5,000,000
facility for repurchase agreements, and two lines of credit for unsecured
federal funds borrowings for $4,000,000 and $3,000,000. The Company maintains
compensating balances of $30,000 related to the $4,000,000 line of credit. The
Company paid $286,000, $267,000, and $426,000, in interest on borrowings during
the years ended December 31, 1998, 1997, and 1996, respectively.


11.  Shareholders' Equity

Treasury Stock

On July 1, 1998, the Company purchased 200,599 common shares from an
institutional shareholder in a privately negotiated transaction totaling $3.1
million. The shares are being held as treasury stock.

Net Unrealized Gain (Loss) on Securities
<TABLE>
<CAPTION>

   December 31 (dollars in thousands)                                                  1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
<S>                                                                                 <C>                       <C>    
   Net gain (loss) on securities available for sale                                 $ 1,379                   $ 1,430
   Net unamortized loss on securities held to maturity                                  (77)                     (215)
   Income tax effect                                                                   (551)                     (572)
------------------------------------------------------------------------ ------------------------- -------------------------
         Total Net Unrealized Gain (Loss)                                             $ 751                     $ 643
------------------------------------------------------------------------ ------------------------- -------------------------

</TABLE>



<PAGE>


The net unamortized loss on securities held to maturity relates to securities
transferred in 1994 from securities available for sale to securities held to
maturity.

Dividends

The Company's principal asset is its investment in its bank subsidiary. As such,
the Company's ability to pay dividends to its shareholders is largely dependent
on the ability of the Bank to pay dividends to the Company. The declaration of
cash dividends is dependent on a number of factors, including regulatory
limitations, financial conditions, and the Bank's operating results. The
shareholders of the Company will be entitled to dividends only when, and if,
declared by the Company's Board of Directors out of funds legally available
therefore. The declaration of future dividends will be subject to favorable
operating results, financial conditions, tax considerations and other factors.
The Federal Deposit Insurance Corporation regulations require banks to maintain
certain capital ratios as noted below which may otherwise restrict the ability
of the Bank to pay dividends to the Company. During 1998, the Company declared a
three-for-two common stock split effected as a 50.0% stock dividend which was
paid on May 26, 1998. All per share information has been retroactively adjusted
to reflect this stock dividend.

Regulatory Capital Requirements

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


<PAGE>

Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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). Whereas the regulatory requirement for Tier I
Capital to Average Assets is a minimum ratio of 4.0%, a minimum ratio of 6.0% is
shown in the table based on the Bank's Board Resolution at December 31, 1998 and
1997. Management believes, as of December 31, 1998, that the Company and Bank
meet all capital adequacy requirements to which it is subject.

As of December 31, 1998, the most recent notification from the FDIC categorized
the Bank as Well Capitalized under the regulatory framework for prompt
corrective action. To be categorized as Well Capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events that management believes
have changed the institution's category. The Company's and Bank's actual capital
amounts and ratios are also presented in the table.


<PAGE>
<TABLE>
<CAPTION>


                                                                                                        To Be Well
                                                                                                     Capitalized Under
                                                                         For Capital                 Prompt Corrective
(dollars in thousands )                       Actual                  Adequacy Purposes              Action Provisions
------------------------------------- -------------- ------------- -------------- -------------- -------------- --------------
                                           Amount       Ratio        => Amount    => Ratio          => Amount   => Ratio
------------------------------------- -------------- ------------- -------------- -------------- -------------- --------------
<S>                                     <C>             <C>            <C>           <C>            <C>            <C> 
Consolidated, December 31, 1998:
   Risk-based Total Capital              $ 20,127       10.5%         $ 15,286        8.0%          $ 19,108       10.0%
   Risk-based Tier I Capital               17,302        9.0             7,643        4.0             11,465        6.0
   Tier I Leverage Capital                 17,302        6.5            10,646        4.0             13,308        5.0

Tolland Bank, December 31, 1998:
   Risk-based Total Capital              $ 19,812       10.4%         $ 15,182        8.0%           $ 18,977      10.0%
   Risk-based Tier I Capital               17,000        9.0             7,591        4.0              11,386       6.0
   Tier I Leverage Capital                 17,000        6.4            15,978        6.0              15,978       6.0

Consolidated, December 31, 1997:
   Risk-based Total Capital              $ 19,734       13.2%         $ 11,970        8.0%          $ 14,962       10.0%
   Risk-based Tier I Capital               17,850       11.9             5,985        4.0              8,977        6.0
   Tier I Leverage Capital                 17,850        7.2             9,868        4.0             12,335        5.0

Tolland Bank, December 31, 1997:
   Risk-based Total Capital              $ 19,432       13.1%         $ 11,837        8.0%           $ 14,796      10.0%
   Risk-based Tier I Capital               17,569       11.8             5,918        4.0               8,877       6.0
   Tier I Leverage Capital                 17,569        7.1            14,790        6.0              14,790       6.0
</TABLE>
<PAGE>


Stock Options

At December 31, 1998, the Company had two stock option plans, which are
described below. As permitted by SFAS 123, the Company applies APB Opinion No.
25 and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock options been determined consistent
with the fair value method in SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model in accordance with the weighted-average
assumptions indicated as follows:


<TABLE>
<CAPTION>


Year ended December 31 (in thousands except share data)        1998                 1997
--------------------------------------------------------------------------------------------
<S>                             <C>                         <C>                  <C> 
Net income                       As Reported                  $ 2,558             $ 2,017
                                 Pro forma                      2,451               1,822
Basic earnings per share         As Reported                     1.07                0.85
                                 Pro forma                       1.03                0.77
Diluted earnings per share       As Reported                     1.03                0.82
                                 Pro forma                        .99                0.74



Assumptions used as of December 31                               1998                1997
--------------------------------------------------------------------------------------------
Expected dividend yield                                          1.75%               1.15%
Expected volatility                                             28.00%              27.00%
Risk free interest rate                                          4.66%               5.75%
Expected life (years)                                           10.00               10.00


</TABLE>

<PAGE>


The Company maintains a Stock Option Incentive Plan for the benefit of officers
and other employees of the Company. Under the terms of this Plan, 299,993 shares
may be issued or transferred pursuant to the exercise of options to purchase
shares of common stock and stock appreciation rights (SARs) and awards of
restricted stock. The exercise price of the option is equal to the market price
of the common stock on the date of grant. Options granted to officers and other
full-time salaried employees may be accompanied by SARs and awards of restricted
stock. No SARs or awards of restricted stock have been granted as of December
31, 1998. Total shares reserved for future grants were 177,156 at December 31,
1998.

Under the Company's 1988 Stock Option Plan for Non-Employee Directors, 199,995
shares were reserved for issuance. This plan expired on February 15, 1998. At
expiration, 99,990 options for which shares had been reserved had been granted.

Under the Company's 1986 Stock Option Plan for the benefit of officers and other
employees, 199,995 shares were reserved for issuance. As of December 31, 1996,
this plan had expired. All 199,995 of the options for which shares had been
reserved had been granted. No SARs or restricted stock awards were granted under
the plan.

A summary of the status of the Company's stock option plans and changes in them
is presented below.

<TABLE>
<CAPTION>


Years ended December 31                              1998                       1997                      1996
---------------------------------------------------------------------------------------------------------------------------
                                                    Weighted-Avg.              Weighted-Avg.             Weighted-Avg.
                                                         Exercise                   Exercise                  Exercise
                                               Shares       Price         Shares       Price        Shares       Price
---------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>            <C>          <C>          <C>          <C>   
Outstanding at beginning of year               223,212      $ 6.24         244,969      $ 5.06       244,138      $ 5.07
Granted                                         45,600       10.59          87,986        8.59        40,823        4.98
Exercised                                      (38,288)       6.09        (109,743)       5.49       (29,993)       4.60
Forfeited                                       (1,299)       9.02              -            -        (9,999)       6.25
------------------------------------------ ------------ -------------- ------------ ------------- ------------ ------------
Outstanding at end of year                     229,225      $ 7.12         223,212      $ 6.24       244,969      $ 5.06
------------------------------------------ ------------ -------------- ------------ ------------- ------------ ------------
Options exercisable at year-end                219,159      $ 7.07         213,213      $ 6.19       244,969      $ 5.06
---------------------------------------------------- -- -------------- ------------ ------------- ------------ ------------
Weighted-average fair value of options granted              $ 2.34                      $ 2.23                    $ 2.52
------------------------------------------ ------------ -------------- ------------ ------------- ------------ ------------
Shares reserved for future grants              177,156           -         322,011           -       110,004          -
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>

                                              Options Outstanding                              Options Exercisable
---------------------------- ---------------- --------------------- ------------------- ---------------- -------------------
Range of                            Number       Weighted-Avg.         Weighted-Avg.          Number       Weighted-Avg.
Exercise                       Outstanding           Remaining              Exercise     Outstanding            Exercise
Prices                         at 12/31/98    Contractual Life                 Price     at 12/31/98               Price
---------------------------- ---------------- --------------------- ------------------- ---------------- -------------------
<S>                            <C>               <C>                   <C>             <C>                 <C>   
$ 1 to 6                            96,389           4.7 years               $ 4.17       96,389                  $ 4.17
  6 to 9                            57,986           8.3                       7.13       51,320                    7.13
  9 to 12                           74,850           9.5                      10.91       71,450                   10.95
---------------------------- ---------------- --------------------- ------------------- ---------------- -------------------
Total                              229,225           7.2 years               $ 7.12      219,159                  $ 7.07
---------------------------- ---------------- --------------------- ------------------- ---------------- -------------------

</TABLE>





<PAGE>



12.  Financial Instruments With Off-Balance Sheet Risk
<TABLE>
<CAPTION>

December 31 ( in thousands)                                                1998            1997
------------------------------------------------------------------------------------------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
   Commitments to extend credit:
   Commitments to originate new loans                                  $ 21,218         $ 8,204
   Unadvanced construction lines of credit                                4,873           1,667
   Unadvanced home equity credit lines                                   19,417          15,847
   Unadvanced commercial lines of credit                                  7,987           5,942
   Unadvanced reserve credit lines                                          421             405
   Standby letters of credit                                                733             461
   Commitments to purchase Government guaranteed loans                        -           1,043

</TABLE>


Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn on, the total
commitment amounts do not necessarily represent future cash requirements or
credit risk. Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
generally payable only if the customer fails to perform some specified
contractual obligation. Standby letters of credit are generally unconditional
and irrevocable, and are generally not expected to be drawn upon. For the above
types of financial instruments, the Company evaluates each customer's
creditworthiness on a case-by-case basis, and collateral is obtained, if deemed
necessary, based on the Company's credit evaluation. In general, the Company
uses the same credit policies in providing these financial instruments as it
does in making funded loans.


13.  Derivative Financial Instruments with Off-Balance Sheet Risk

The Bank has entered into a $10,000,000 interest rate swap agreement with the
Federal Home Loan Bank of Boston (FHLBB) as a hedge against an asset-sensitive
gap position. This contract amount, also known as notional amount, expresses the
volume of the swap; the amount potentially subject to credit risk is much
smaller. Under the swap, the Bank pays the FHLBB a variable rate of interest
which averaged 5.59% in 1998, and receives back a fixed rate of interest of
5.59%. The swap agreement will mature January 13, 1999, and had no fair value at
December 31, 1998. The swap interest income and expense are recorded as
borrowing interest expense. The net interest paid was $8,000 in 1998.


<PAGE>



14.  Fair Values of Financial Instruments
<TABLE>
<CAPTION>

      Years ended December 31 (in thousands)                       1998                                 1997
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
                                                          Carrying              Fair         Carrying              Fair
                                                             Value             Value            Value             Value
------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S>                                                       <C>               <C>              <C>               <C>     
Financial assets:
   Cash and cash equivalents                              $ 20,216          $ 20,216         $ 21,417          $ 21,417
   Securities available for sale                            58,556            58,556           43,729            43,729
   Securities held to maturity                              15,431            15,519           19,949            20,021
   Net loans                                               181,666           190,640          154,450           155,997
   Accrued interest receivable                               2,177             2,177            1,624             1,624
Financial liabilities:
   Deposits with no stated maturity                        117,306           117,306           94,302            94,302
   Time deposits                                           122,679           124,502          127,431           128,176
   Borrowings                                               23,610            23,323            5,739             5,750
   Accrued interest payable                                    260               260               96                96
   Off balance sheet financial instruments                       -               289                -               189

</TABLE>



15.  Retirement Plans

The Company sponsors a noncontributory defined benefit pension plan covering all
employees who meet certain eligibility requirements. Benefits are based on
length of service and qualifying compensation. The Company's policy is to fund
the plan in accordance with the requirements of applicable regulations. Plan
assets are invested in stock, bond, and money market mutual funds. The plan
valuation date is October 1. The pension plan's funded status and amounts
recognized in the Company's financial statements are as follows:


<PAGE>

<TABLE>
<CAPTION>


Years ended December 31 ( in thousands)                                                1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
<S>                                                                                 <C>                       <C>    
Change in benefit obligation:
   Projected benefit obligation at beginning of year                                $ 2,326                   $ 1,788
   Service cost                                                                         117                        98
   Interest cost                                                                        164                       151
   Liability loss                                                                       173                       331
   Benefits paid                                                                        (34)                      (42)
------------------------------------------------------------------------ ------------------------- -------------------------
         Projected benefit obligation at end of year                                $ 2,746                   $ 2,326
------------------------------------------------------------------------ ------------------------- -------------------------

Change in plan assets:
   Assets at beginning of year                                                      $ 2,564                   $ 2,085
   Employer contributions                                                                61                       123
   Actual return                                                                        262                       398
   Expenses paid                                                                        (30)                        -
   Benefits paid                                                                        (34)                      (42)
------------------------------------------------------------------------ ------------------------- -------------------------
         Assets at end of year                                                      $ 2,823                   $ 2,564
------------------------------------------------------------------------ ------------------------- -------------------------


December 31 ( in thousands)                                                            1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
Funded status                                                                            77                       238
Unrecognized net transition asset being recognized over 15 years                        (72)                      (90)
Unrecognized net loss                                                                   233                        59
Unrecognized past service liability                                                     (71)                      (88)
------------------------------------------------------------------------ ------------------------- -------------------------
         Prepaid pension cost                                                           167                       119
------------------------------------------------------------------------ ------------------------- -------------------------

Weighted average assumptions as of October 1:
   Discount rate                                                                     6.25%                     7.25%
   Expected return on plan assets                                                    9.25%                     9.25%
   Rate of compensation increase                                                     5.00%                     5.00%
</TABLE>

Components of net periodic pension cost (excluding administrative cost):
<TABLE>
<CAPTION>

Years ended December 31 (in thousands)                               1998                    1997                    1996
------------------------------------------------------ ----------------------- ----------------------- ----------------------
<S>                                                                 <C>                      <C>                     <C> 
Service costs earned during the year                                $ 117                    $ 98                    $ 98
Interest cost on projected benefit obligation                         164                     151                     124
Return on plan assets, net                                           (232)                   (398)                   (238)
Net amortization and deferral                                         (35)                    176                      39
------------------------------------------------------ ----------------------- ----------------------- ----------------------
   Net periodic pension expense                                      $ 14                    $ 27                    $ 23
------------------------------------------------------ ----------------------- ----------------------- ----------------------

</TABLE>

The Company also sponsors a defined contribution 401(k) savings plan. This plan
includes a discretionary matching contribution by the Company which was 35% of
the employees' contribution up to 6% for the years 1998, 1997, and 1996.
Additionally, the Company offers retirees participation in its medical insurance
benefit program. The cost of offering this participation is not material to the
financial condition or results of operations of the Company.


<PAGE>

16.  Income Tax Expense (Benefit)

Charges (credits) for income taxes (benefits) in the Consolidated Income
Statements are composed of the following:
<TABLE>
<CAPTION>

Years ended December 31 ( in thousands)                              1998                    1997                    1996
------------------------------------------------------ ----------------------- ----------------------- ----------------------
Current:
<S>                                                                <C>                      <C>                     <C>  
   Federal                                                         $  958                   $ 575                   $ 246
   State                                                              212                     131                       9
------------------------------------------------------ ----------------------- ----------------------- ----------------------
   Total current                                                    1,170                     706                     255
Deferred:
   Federal                                                             14                      57                      (9)
   State                                                               73                      51                     190
------------------------------------------------------ ----------------------- ----------------------- ----------------------
   Total deferred                                                      87                     108                     181
Change in valuation allowance for the gross                                   
   deferred tax asset                                                 106                    (150)                   (554)
------------------------------------------------------ ----------------------- ----------------------- ----------------------
         Total income tax expense                                 $ 1,363                   $ 664                  $ (118)
------------------------------------------------------ ----------------------- ----------------------- ----------------------
</TABLE>


The actual income tax expense (benefit) differs from the "expected" income tax
expense, (computed by applying the statutory U.S. Federal corporate tax rate of
34%) in 1998, 1997 and 1996 to income before income taxes, as follows:
<TABLE>
<CAPTION>



Years ended December 31 ( in thousands)                               1998                  1997                  1996
------------------------------------------------------------ --------------------- --------------------- ---------------------
<S>                                                                <C>                     <C>                   <C>  
Expected income tax expense (benefit) at statutory rate            $ 1,333                 $ 912                 $ 449
Increase (decrease) in income tax resulting from:
   Connecticut state tax                                               188                   120                   131
   Dividend received deduction                                        (278)                 (237)                 (132)
   Change in valuation allowance for deferred tax assets               106                  (150)                 (554)
   Other, net                                                           14                    19                   (12)
------------------------------------------------------------ --------------------- --------------------- ---------------------
         Total income tax expense (benefit)                        $ 1,363                 $ 664                $ (118)
------------------------------------------------------------ --------------------- --------------------- ---------------------


</TABLE>

<PAGE>


The Company made income tax payments of $797,000, $494,000 and $460,000 during
the years ended December 31, 1998, 1997, and 1996, respectively. The tax effects
of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities are presented below:

<TABLE>
<CAPTION>


Years ended December 31 ( in thousands)                                                1998                      1997
------------------------------------------------------------------------ ------------------------- -------------------------
<S>                                                                                   <C>                       <C>  
Deferred tax asset:
   Allowance for loan losses                                                          $ 815                     $ 706
   State NOL carry forward                                                                -                         -
   Foreclosed assets                                                                      -                       143
   Depreciation expense                                                                  47                        19
   Unrealized loss on securities                                                         31                        85
   Other, net                                                                           155                       112
------------------------------------------------------------------------ ------------------------- -------------------------
   Total gross deferred tax asset                                                     1,048                     1,065
   Less: valuation allowance                                                           (136)                      (85)
   Gross asset, net of valuation allowance                                              912                       980
   Less: deferred tax liability
         Unrealized gain on securities                                                 (551)                     (572)
         Loan origination fees                                                         (191)                        -
         Depreciation expense                                                             -                         -
         Core deposit amortization                                                      (42)                      (78)
         Other                                                                         (227)                     (257)
------------------------------------------------------------------------ ------------------------- -------------------------
         Total gross deferred tax liability                                          (1,011)                     (907)
------------------------------------------------------------------------ ------------------------- -------------------------
   Net deferred tax asset (liability)                                                $  (99)                     $ 73
------------------------------------------------------------------------ ------------------------- -------------------------
</TABLE>

The valuation allowance increased by $106,000 in 1998, due primarily to
Management's assessment of the realizability of deferred state income taxes due
to the expected formation of a Passive Investment Corporation. In assessing the
realizability of deferred tax assets, Management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. In making the assessment, Management considers the estimated reversal
of deferred tax liabilities, projected future taxable income, income taxes paid
in prior years that are recoverable, and tax planning strategies. Based on the
level of historical taxable income, and projections for future taxable income
over the periods in which the deferred tax assets are deductible, Management
believes it is more likely than not that the Company will realize the benefits
of the deductible temporary difference, net of the existing valuation allowance
at December 31, 1998.


<PAGE>
17.  Commitments and Contingencies

Future minimum rental payments required under operating leases that have
remaining noncancellable lease terms in excess of one year as of December 31,
1998, total $988,000, due by years ending December 31 as follows: 1999 -
$108,000; 2000 - $82,000; 2001 - $82,000; 2002 - $82,000; 2003 - $77,000; and
$557,000 thereafter. Total rental expense under these leases and prior leases
was $86,000, $70,000, and $77,000, for the years ended December 31, 1998, 1997
and 1996 respectively.

In 1995, the Company entered into an employment agreement with its former
President. During 1996, the Company charged $272,000, to operations in
connection with this agreement; nothing was charged to operations in 1998 and
1997. Included in other liabilities at December 31, 1998, was approximately
$32,000 representing total future amounts due under this agreement.

There are various legal proceedings against the Company arising out of its
business. Although the outcome of these cases is uncertain, in the opinion of
Management, based on discussions with legal counsel, these matters are not
expected to result in a material adverse effect on the financial position or
future operating results of the Company.

              Consolidated Supplementary Financial Data (unaudited)

Selected Quarterly Financial Data

<TABLE>
<CAPTION>
                                                           1998                                        1997
 (in thousands except share data)           4          3          2          1          4          3          2          1
 -----------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>    
 Net interest income                  $ 2,489    $ 2,280    $ 2,172    $ 2,087    $ 2,011    $ 1,980    $ 2,008    $ 1,961
 Provision for loan losses                 11         10         14        144        312        379         64         74
 Non-interest income                      502        467        768        682        758        693        250        260
 Non-interest expense                   1,998      1,769      1,836      1,745      1,663      1,584      1,587      1,577
 Income tax expense (benefit)             306        315        464        278        231        187        126        120
 -----------------------------------------------------------------------------------------------------------------------------
    Net income                          $ 676      $ 653      $ 626      $ 602      $ 563      $ 523      $ 481      $ 450
 -----------------------------------------------------------------------------------------------------------------------------
 Per Share Data:
 Basic earnings per share              $ 0.29     $ 0.28     $ 0.25     $ 0.24     $ 0.23     $ 0.22     $ 0.21     $ 0.19
 Diluted earnings per share               .28        .27        .24        .23        .22        .21        .20        .19
 Cash dividends declared                  .05        .05        .03        .03        .03        .03        .03        .03
 Common stock price:
    High                                13.00      15.75      16.67      14.25      12.00      12.17      10.00       8.06
    Low                                  9.00       9.75      14.00      10.92      10.92       8.69       6.87       5.75
    Close                               11.75      10.13      15.75      14.00      11.00      11.17       9.87       7.13


</TABLE>

<PAGE>

The increase in interest income in the second half of 1998 included the benefit
of lower nonaccruing loans and collections of nonaccrued interest in conjunction
with the liquidation of problem loans. Non-interest income decreased in the
second half of 1998 due to lowering net securities gains in the second half of
the year. The provision for loan losses decreased after the first quarter of
1998 due to the liquidation of problem loans. Higher non-interest expense in the
fourth quarter of 1998 included charges related to branch expansion. Income tax
expense in the second quarter of 1998 included a charge related to an increase
in the valuation allowance on the deferred tax asset related to the anticipated
impact on state income taxes due to the planned formation of a Passive
Investment Corporation.


Volume and Rate Analysis - FTE Basis


<TABLE>
<CAPTION>

                                        1998 versus 1997 Change due to              1997 versus 1996 Change due to
------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
(in thousands)                            Volume          Rate          Total        Volume           Rate         Total
------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
<S>                                      <C>             <C>          <C>            <C>             <C>          <C>    
Interest income
Loans                                    $ 1,520         $ 238        $ 1,758        $ (166)         $ (43)       $ (209)
Securities available for sale               (384)          163           (221)        1,145             36         1,181
Securities held to maturity                 (134)            3           (131)          (91)            26           (65)
Other earning assets                         366             5            371            42             13            55
------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
   Total Change                            1,368           409          1,777           930             32           962
------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
Interest expense
Deposits                                     505            (8)           497           481            112           593
Borrowings                                   114           (19)            95          (171)            20          (151)
------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
   Total Change                              619           (27)           592           310            132           442
------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
   Net Change                              $ 749         $ 436        $ 1,185         $ 620         $ (100)        $ 520
------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------

</TABLE>

Note: Changes attributable jointly to volume and rate have been allocated
proportionately.

<PAGE>


Construction and Commercial Loans
<TABLE>
<CAPTION>

                                                               1 Year              1-5            Over 5
  December 31, 1998 (in millions)                             or Less            Years             Years             Total
  ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S>                                                          <C>               <C>             <C>              <C>           
  Contractual maturity:
  Construction loans:
     Residential                                                 $ -               $ -              $ 0.4             $ 0.4
     Commercial                                                    2.2               2.1              1.7               6.0
  Commercial loans                                                 5.5               4.5              9.1              19.1
  ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
           Total                                                 $ 7.7             $ 6.6           $ 11.2            $ 25.5
  ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
  Interest rate sensitivity:
     Predetermined rates                                         $ 1.4             $ 2.7            $ 5.6             $ 9.7
     Variable rates                                                6.3               3.9              5.6              15.8
  ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
           Total                                                 $ 7.7             $ 6.6           $ 11.2            $ 25.5
  ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>


Securities Cost and Fair Value
<TABLE>
<CAPTION>

                                                             1998                     1997                     1996
  --------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
                                                Amortized         Fair    Amortized         Fair    Amortized         Fair
  December 31, (in thousands)                        Cost        Value         Cost        Value         Cost        Value
  --------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
  Available for sale
<S>                                              <C>          <C>          <C>          <C>          <C>          <C>     
  U.S. Government and agency                     $ 16,694     $ 16,646     $ 18,081     $ 17,891     $ 25,314     $ 24,982
  U.S. Agency mortgage-backed                       2,312        2,333        5,366        5,391        3,375        3,390
  Other debt securities                            19,265       19,715        1,312        1,321        1,745        1,734
  Marketable equity                                17,724       18,681       16,710       18,296       13,989       14,560
  FHLBB stock                                       1,181        1,181          830          830          720          720
  --------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
     Total available for sale                    $ 57,176     $ 58,556     $ 42,299     $ 43,729     $ 45,143     $ 45,386
  --------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
  Held to maturity
  U.S. Government and agency                      $ 1,952      $ 2,017      $ 2,901      $ 2,941      $ 2,876      $ 2,895
  U.S. Agency mortgage-backed                      12,095       12,089       15,214       15,224       15,757       15,710
  Other debt securities                             1,384        1,413        1,834        1,856        2,057        2,044
  --------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
     Total held to maturity                      $ 15,431     $ 15,519     $ 19,949     $ 20,021     $ 20,690     $ 20,649
  --------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
</TABLE>


<PAGE>


Table of Market Risk Sensitive Instruments
<TABLE>
<CAPTION>

Expected Maturity Date at December 31,                                                          There-         Fair Value
1998 (dollars in millions)                   1999       2000      2001       2002      2003      after     Total     12/31/98
----------------------------------------- ---------- --------- ---------- --------- ---------- --------- --------- -----------
<S>                                        <C>         <C>        <C>      <C>      <C>        <C>       <C>        <C>
Interest Sensitive Assets:
Loans:
Fixed interest rate
   Residential mortgages                      $ 9        $ 2       $ 2        $ 2       $ 2       $ 22      $ 39       $ 41
     Average interest rate                   6.76%      7.45%     7.45%      7.38%     7.38%      7.49%     7.31%
Variable interest rate
   Residential mortgages                        3          2         2          2         2          8        19         20
     Average interest rate                   8.04%      8.06%     8.06%      8.13%     8.08%      8.00%     8.04%
Fixed interest rate
   Consumer loans                               2          1         1          2         2          4        12         13
     Average interest rate                   8.57%      8.66%     8.66%      7.81%     7.81%      9.39%     8.57%
Variable interest rate
   Consumer loans                               7          2         1          1         1          8        20         20
     Average interest rate                   7.61%      7.64%     7.78%      7.99%     8.80%      7.26%     7.56%
Fixed interest rate
   Commercial loans                            18          7         4          4         3         13        49         50
     Average interest rate                   8.25%      8.19%     8.03%      8.50%     8.61%      7.96%     8.19%
Variable interest rate
   Commercial loans                            22          7         5          3         2          7        46         47
     Average interest rate                   8.69%      8.57%     8.03%      8.00%     8.69%      8.74%     8.57%
Fixed interest rate
   Securities                                  16          6         4          -         2         19        47         47
     Average interest rate                   5.74%      6.42%     6.25%         -      6.38%      7.61%     6.66%
Variable interest rate
   Securities                                   3          8         -          -         1         15        27         27
     Average interest rate                   5.87%      5.51%        -          -      5.00%      6.21%     5.91%
----------------------------------------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
       Total interest sensitive assets       $ 80       $ 35      $ 19       $ 14      $ 15       $ 96     $ 259      $ 265
----------------------------------------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
Interest Sensitive Liabilities:
Deposits:
   Checking                                   $ 1        $ 1       $ 1        $ 1       $ 1       $ 45      $ 50       $ 50
     Average interest rate                   0.91%      0.91%     0.91%      0.91%     0.91%      0.91%     0.91%
   Savings                                      3          2         1          1         1         29        37         37
     Average interest rate                   2.30%      2.30%     2.30%      2.30%     2.30%      2.30%     2.30%
   Money market                                 1          1         1          1         1         25        30         30
     Average interest rate                   4.05%      4.05%     4.05%      4.05%     4.05%      4.05%     4.05%
   Time deposits                               87         24         4          4         4          -       123        125
     Average interest rate                   5.13%      5.46%     5.76%      6.15%    5.50%          -      5.25%
Borrowings:
   FHLBB                                        -          4        10          -         5          5        24         23
     Average interest rate                      -       6.11%     4.66%         -     4.89%       5.39%     5.09%
------------------------------------------- -------- --------- ---------- --------- ---------- --------- ---------- ---------
       Total interest sensitive liabilities   $ 92      $ 32      $ 17        $ 7      $ 12      $ 104     $ 264      $ 265
------------------------------------------- -------- --------- ---------- --------- ---------- --------- ---------- ---------
</TABLE>

Note: The amounts above reflect principal cash amounts only. The table includes
non-trading instruments only; the Company had no trading instruments at December
31, 1998. For more information, see Quantitative Disclosures about Market Risk
in Management's Discussion and Analysis of Financial Condition and Results of
Operations. The base interest rate for variable rate instruments is equal to the
rate in effect at year-end 1998. The table excludes off balance sheet financial
instruments (e.g., commitments to extend credit, standby letters of credit and
commitments to purchase Government guaranteed loans) with a fair value totaling
$289 thousand which are sensitive to changes in interest rates and have an
expected maturity date within 1999.

<PAGE>


18.  Condensed Financial Statements of Alliance Bancorp of New England, Inc.\
     (Parent Company)



On October 3, 1997, Alliance Bancorp of New England, Inc. acquired all of the
outstanding common stock of Tolland Bank on a one-for-one basis, concluding the
formation of a bank holding Company. The Income Statement and Statement of Cash
Flows are for the year ended December 31, 1998 and the quarter ended December
31, 1997.
<TABLE>
<CAPTION>

Balance Sheet

December 31 (in thousands except share data)                                         1998                      1997
---------------------------------------------------------------------- ------------------------- -----------------------------
Assets
<S>                                                                             <C>                       <C>      
   Cash and cash equivalents                                                    $     108                 $      65
   Investment in subsidiary                                                        17,999                    18,601
   Other assets                                                                       180                       150
---------------------------------------------------------------------- ------------------------- -----------------------------
---------------------------------------------------------------------- ------------------------- -----------------------------
         Total assets                                                           $  18,287                 $  18,816
---------------------------------------------------------------------- ------------------------- -----------------------------

Liabilities and Shareholders' Equity
Liabilities:
   Accrued expenses                                                                    91                        13
---------------------------------------------------------------------- ------------------------- -----------------------------
         Total liabilities                                                             91                        13
         Total shareholders' equity                                                18,196                    18,803
---------------------------------------------------------------------- ------------------------- -----------------------------
         Total liabilities and shareholders' equity                             $  18,287                 $  18,816
---------------------------------------------------------------------- ------------------------- -----------------------------

Income Statement

Year ended (1998) and quarter ended (1997) December 31                                            
(in thousands except share data)                                                  1998                      1997
---------------------------------------------------------------------- ------------------------- -----------------------------
   Dividends from bank subsidiary                                              $ 3,489                     $ 258
---------------------------------------------------------------------- ------------------------- -----------------------------
         Total operating income                                                  3,489                       258
---------------------------------------------------------------------- ------------------------- -----------------------------
   Non-interest expenses                                                           379                        44
   Income before income tax benefit and                                                         
         equity in net income of subsidiary                                      3,110                       214
---------------------------------------------------------------------- ------------------------- -----------------------------
   Income tax benefit                                                              157                        22
---------------------------------------------------------------------- ------------------------- -----------------------------
   Income before equity in net income of subsidiary                              3,267                       236
   Equity in undistributed income of subsidiary                                   (709)                      329
---------------------------------------------------------------------- ------------------------- -----------------------------
         Net Income                                                            $ 2,558                     $ 565
---------------------------------------------------------------------- ------------------------- -----------------------------
</TABLE>




<PAGE>


<TABLE>
<CAPTION>

Statement of Cash Flows

Year ended (1998) and quarter ended (1997) December 31                                                                        
(in thousands)                                                                  1998                      1997
---------------------------------------------------------------------- ------------------------- -----------------------------
<S>                                                                        <C>                       <C>      
Operating Activities:
   Net income                                                              $   2,558                 $     563

Adjustments to reconcile net income to
   net cash provided by operating activities:
   Equity in undistributed net income of subsidiary                              709                      (329)
   (Increase) in other assets                                                    (30)                     (148)
   Increase in other liabilities                                                  79                        13
---------------------------------------------------------------------- ------------------------- -----------------------------
         Net cash provided by operating activities                             3,316                        99

Investing Activities:
         Net cash used by investing activities                                     -                         -

Financing Activities:
   Stock options exercised                                                       233                        55
   Dividends paid to stockholders                                               (397)                      (89)
   Purchase of treasury stock                                                 (3,109)
---------------------------------------------------------------------- ------------------------- -----------------------------
         Net cash used by financing activities                                (3,273)                      (34)
---------------------------------------------------------------------- ------------------------- -----------------------------

Net Change in Cash and Cash Equivalents                                           43                        65
---------------------------------------------------------------------- ------------------------- -----------------------------
Cash and cash equivalents beginning of period                                     65                         -
---------------------------------------------------------------------- ------------------------- -----------------------------
Cash and cash equivalents end of period                                    $     108                 $      65
---------------------------------------------------------------------- ------------------------- -----------------------------
</TABLE>