SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

[X]  Annual report  pursuant to Section 13 or 15 (d) of the Securities  Exchange
     Act of 1934
  

     For the fiscal year ended: December 31, 1996

                        Commission file number: 0-21500

                                KSB Bancorp, Inc.
                 (Name of small business issuer in its charter)

        Delaware                                             04-3189069
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation            (I.R.S. Employer 
or organization)                                         Identification No.)

     Main Street
  Kingfield, Maine                                             04947
--------------------------------------------------------------------------------
(Address of principal executive offices)                    (Zip Code)

                        Telephone Number: (207) 265-2181

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the  Securities  Exchange Act of
1934  during the  preceding  12  months-(or  for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.   Yes [  ]   No  [  ]


      Securities Registered Pursuant to Section 12(g) of the Exchange Act:
                                  Common Stock 

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the  Registrant's  knowledge,  in  definitive  proxy or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

         The aggregate  market value of the voting stock held by  non-affiliates
of the  registrant,  computed by reference to the last  reported  sales price of
such  stock  on  the  NASDAQ   National  Market  system  on  March 6,  1997  was
approximately $11,555,740.

         The number of shares outstanding of the registrant's  Common Stock, the
registrant's only class of outstanding capital stock, as of March 18, 1997, was 
412,705.

         Issuer's revenues for the year ended December 31, 1996:  $11,843,451.
<PAGE>
                       Documents Incorporated by Reference 

         The  following  documents,   in  whole  or  in  part  are  specifically
incorporated  by  reference  in the  indicated  Part of this Annual  Report Form
10-KSB:

I.   Portions of the KSB Bancorp Inc.  1996 Annual  Report are  incorporated  by
     reference into certain items of Part I and Part II.

II.  Portions  of the KSB  Bancorp  Inc.  Proxy  Statement  for the 1996  Annual
     Meeting of Shareholders are incorporated by reference into certain items of
     Part III.
<PAGE>
                                KSB BANCORP, INC.
                                   FORM 10-KSB
                                      INDEX


                                    PART I.

Item 1.           Description of Business

Item 2.           Description of Property

Item 3.           Legal Proceedings

Item 4.           Submission of Matters to a Vote of Security Holders

                                    PART II

Item 5.           Market for Common Equity and Related Stockholder Matters

Item 6.           Management's Discussion and Analysis of Plan of Operation

Item 7.           Financial Statements

Item 8.           Change In and Disagreements With Accountants on
                  Accounting and Financial Disclosure

                                    PART III

Item 9.           Directors, Executive Officers, Promoters and Control
                  Persons; Compliance with Section 16(a) of the Exchange Act

Item 10.          Executive Compensation

Item 11.          Security Ownership of Certain Beneficial Owners and Management

Item 12.          Certain Relationships and Related Transactions

                                    PART IV

Item 13.          Exhibits and Reports on Form 8-K

Signature page
<PAGE>
Item 1 - Description of Business.

General

KSB Bancorp (the "Company"),  a Delaware  Corporation,  was organized in 1993 to
act as the  holding  Company  for  Kingfield  Savings  Bank  (the  "Bank")  upon
completion of the Bank's  conversion from a mutual to a stock form of ownership,
(the  "Conversion").  The Company received  approval from the Federal Reserve to
acquire all outstanding stock of the Bank upon completion of the conversion. The
Conversion was completed on June 24, 1993. The Bank is a Maine-chartered savings
Bank headquartered in Kingfield,  Maine.  Originally chartered in 1895, the Bank
is a community-oriented financial institution that conducts its business through
eight  full-service  retail  banking  offices,  and one seasonal  banking office
(Sugarloaf/USA),  located in Franklin, Androscoggin and Somerset Counties, Maine
(see Market Area and Competition).

At December 31,  1996,  the Company had total  assets of $134.4  million,  total
loans of $99.2 million,  deposits of $109.4  million and tangible  stockholders'
equity of $9.2 million.

The  Bank  is  subject  to  regulation,   examination  and  supervision  by  the
Superintendent   of  the   Bureau  of   Banking  of  the  State  of  Maine  (the
"Superintendent) and the Federal Deposit Insurance Corporation (the "FDIC"). The
Company  is subject  to  regulation  by the Board of  Governors  of the  Federal
Reserve System (the "FRB") and to a limited extent by the Superintendent and the
FDIC.

The Bank's principal  business consists of attracting  deposits from the general
public  and  investing  those  deposits,  together  with  borrowings  and  funds
generated  from  operations,  in mortgage  loans secured by  one-to-four  family
residential  real estate,  commercial  business loans, the majority of which are
secured by real estate, and  mortgage-backed  securities.  At December 31, 1996,
the Bank had $52.7 million of loans (including loans held for sale), or 53.1% of
total loans receivable  (including loans held for sale),  secured by one-to-four
family,  residential  real property.  An additional  $29.9 million of loans,  or
30.1% of total loans receivable  (there were no commercial loans held for sale),
were commercial business loans secured by real estate. At December 31, 1996, the
Bank's  mortgage-backed  securities portfolio totaled $21.9 million, or 16.3% of
total assets at such date.

Market Area and Competition

The Bank's home office is located in Kingfield,  Maine. Since 1988, the Bank has
expanded its market area within  Franklin and into  Kennebec,  Androscoggin  and
Somerset Counties,  Maine. In 1988, the Bank opened a branch office in Stratton,
Maine.  In 1990,  a loan  production  office  located in  Waterville,  Maine was
expanded to a full service branch and later closed in 1995 when loan  production
decreased.  In April 1991, the Bank  purchased two branches  located in Phillips
and Rangeley,  Maine from Maine National Bank. In June 1993, the Bank opened its
Farmington, Maine office. In March 1994 the Bank purchased one branch located in
Lewiston,  Maine from the Resolution Trust  Corporation.  In March 1995 the Bank
purchased  four  branches  located in Kingfield,  Stratton,  Bingham and Strong,
Maine from Fleet Bank of Maine.  In August 1995,  the Bank closed its Waterville
branch,  maintaining a mortgage lending presence through commissioned brokers in
the area.  The Bank  management  believes that all of its offices are located in
communities  that  can  generally  be  characterized  as  stable  and,  with the
exception of Lewiston, predominantly rural areas.
<PAGE>
The  Bank  faces  significant  competition  both in  lending  and in  attracting
deposits.  The Bank's  competition for loans comes  principally  from commercial
banks,  savings banks,  credit unions and mortgage banking  companies.  The most
direct  competition  for deposits  has  historically  come from  savings  banks,
commercial  banks  and  credit  unions;  however,  additional  competition  from
short-term  money market  funds and other  security  funds  offered by brokerage
firms and insurance companies is significant.

Certain Financial Information

Interest Rate Sensitivity Table
         The following table sets forth the amounts of  interest-earning  assets
and  interest-bearing  liabilities  outstanding  at December  31, 1996 which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods  shown.  Except as stated  below,  the amount of
assets and liabilities  shown which reprice or mature during a particular period
were  determined  in  accordance  with the earlier of term to  repricing  or the
contractual terms of the asset or liability. Fixed-rate Passbook Savings and NOW
accounts,  which  totaled  $21.6  million at December 31, 1996 are assumed to be
withdrawn at the annual  percentage  rates of 17% and 37%,  respectively.  Money
market  accounts  are  assumed to reprice in three  months or less.  Certificate
accounts are assumed to reprice at the date of contractual maturity.  Fixed-rate
mortgages totaling $25.9 million (included in the "Mortgage Loans" category) are
amortized using a constant  prepayment  rate ("CPR") of 11.0 which  approximates
the Bank's prior  experience.  Fixed-rate  loans in "other  loans" are amortized
with the assumption of no prepayment.  Mortgage backed  securities are amortized
using a CPR rate of 11.2.
<PAGE>
<TABLE>
<CAPTION>
                                                                                 At December 31, 1996
                                                              ---------------------------------------------------------
                                                                Over            Over
                                                1 Year         1 Year-         3 Years-       More Than
                                               or Less         3 Years         5 Years         5 Years           Total
                                              ---------       ---------       ---------       ---------       ---------
                                                                         (Dollars in thousands)
<S>                                           <C>             <C>             <C>             <C>             <C>
Interest-earning assets:
  Mortgage loans (1)(2) .................     $  46,376       $  10,240       $   4,904       $  11,010       $  72,530
  Other loans (1) .......................        10,669           8,282           4,398           4,414          27,763
  Interest-bearing deposits .............             2               0               0               0               2
  Mortgage-backed securities ............         6,681           5,618           4,372           5,333          22,004
  Investment securities (3) .............         5,343               0               0               0           5,343
                                              ---------       ---------       ---------       ---------       ---------
    Total interest-earning assets .......        69,070          24,140          13,674          20,757         127,642
                                              ---------       ---------       ---------       ---------       ---------
Less:
  Non-performing loans ..................        (1,381)           (136)            (44)           (331)         (1,895)
  Unearned discount and deferred fees ...          (134)            (30)            (14)            (32)           (209)
                                              ---------       ---------       ---------       ---------       ---------
    Net interest-earning assets .........        67,553          23,974          13,616          20,394         125,538
                                              ---------       ---------       ---------       ---------       ---------
Interest-bearing liabilities:
  Fixed- and variable-rate passbook
    accounts (4) ........................        15,538           1,949           1,342           2,973          21,802
  NOW accounts ..........................         5,208           5,348           2,122           1,397          14,075
  Money market accounts .................         5,701               0               0               0           5,701
  Certificate and club accounts .........        40,689          10,105           8,543               0          59,337
  Borrowings ............................         9,734           2,000           1,452               0          13,186
                                              ---------       ---------       ---------       ---------       ---------
    Total interest-bearing liabilities ..     $  76,870       $  19,402       $  13,459       $   4,370       $ 114,101
                                              ---------       ---------       ---------       ---------       ---------

  Effect of interest rate swaps (5) .....       (10,000)         10,000
                                              ---------       ---------

  Interest sensitivity gap per period ...       (19,317)        (14,572)            157          16,024
                                              =========       =========       =========       =========

  Cumulative interest sensitivity gap ...     $ (19,317)      $  (4,744)      $  (4,587)      $  11,437
                                              =========       =========       =========       =========

  Cumulative interest sensitivity gap as
    a percentage of total assets ........         -14.4%           -3.5%           -3.4%             8.5%

  Cumulative net interest-earning assets
    as a percentage of interest-sensitive
    liabilities .........................          77.8%           95.1%           95.8%          110.0%
---------------------------------
</TABLE>
<PAGE>
(1)For purposes of the GAP analysis, mortgage and other loans are not reduced by
the allowance for loan losses.
(2)Includes Loans Held for Sale of $1,819,000 which are placed in the "1 Year or
less" repricing category.
(3)Includes Federal Home Loan Bank Stock of $1,321,000.
(4)Includes Interest-bearing escrow accounts.
(5)Includes  $5,000,000  interest rate swap maturing  June,  1999 and $5,000,000
floor maturing June, 1998.


Average Balance Sheet

         The  following  table sets forth  certain  information  relating to the
Bank's  average  balance  sheet and  reflects  the  average  yield on assets and
average cost of  liabilities  for the periods  indicated and the average  yields
earned and rates paid.  Such  yields and costs are derived by dividing  interest
income or expense by the average balance of assets or liabilities, respectively,
for the periods presented.
<PAGE>
<TABLE>
<CAPTION>
                                                                              Years Ended December 31, 
                                     -----------------------------------------------------------------------------------------------
                                                 1996                             1995                              1994
                                     -----------------------------   -------------------------------   -----------------------------
                                                         Average                           Average                          Average 
                                     Average               Yield/    Average                Yield/     Average               Yield/
                                     Balance  Interest(1)  Cost      Balance   Interest(1)   Cost      Balance   Interest(1)  Cost
                                     -----------------------------------------------------------------------------------------------
                                                                          (Dollars in Thousands)
<S>                                  <C>        <C>        <C>        <C>        <C>         <C>         <C>      <C>         <C>
Assets: (2)
Interest-earning assets:
  Residential mortgage loans........ $  50,396  $ 4,346     8.62%     $ 44,490   $  3,759     8.45%      $29,790  $  2,403     8.07%
  Commercial loans (3)..............    33,144    3,309     9.98        27,251      2,752    10.10        18,330     1,630     8.89
  Consumer loans....................     9,992    1,020    10.21         9,559      1,027    10.74         5,963       562     9.42
  Investments Available for Sale         7,915      467     5.90         1,071         60     5.60             0         0        0
  Investments to be Held to Maturity    21,808    1,412     6.47        34,156      2,243     6.57        33,340     2,148     6.44
  Interest-bearing deposits.........     1,076       61     5.67           388         20     5.15         1,461        68     4.65
                                     ---------  -------    -----      --------   --------    -----       -------   -------     ----
    Total interest-earning assets      124,331   10,615     8.54       116,915      9,861     8.43        88,884     6,811     7.66
  Non-interest-earning assets.......     6,411                           5,984                             3,575
                                     ---------                        --------                           -------
    Total assets.................... $ 130,742                         122,899                           $92,459
                                     =========                        ========                           =======
Interest-bearing liabilities:
  Regular savings................... $  22,258      626     2.81      $ 23,097        689     2.98       $19,829       591     2.98
  NOW accounts......................    13,144      216     1.64        10,496        160     1.52         6,522       106     1.63
  Money market accounts.............     5,681      211     3.71         4,085        143     3.50         3,364       100     2.97
  Time deposits.....................    58,873    3,431     5.83        52,369      3,033     5.79        41,375     2,014     4.87
  Borrowings........................    11,624      682     5.87        16,082        999     6.21         8,247       456     5.53
                                     ---------  -------    -----      --------   --------    -----       -------   -------     ----
Total int. bearing liabilities......   111,580    5,166     4.63       106,129      5,024     4.73        79,337     3,267     4.12
Non-interest-bearing liabilities....    10,028                           8,809                             5,620
    Stockholders equity.............     9,134                           7,961                             7,502
                                     ---------                        --------                           -------
    Total liabilities and
      Stockholders equity...........  $130,742                        $122,899                           $92,459
                                      ========                        ========                           =======

Net interest income.................             $5,449                 $4,837                            $3,544
                                                 ======                 ======                            ======
Net interest rate spread (4)........                        3.91%                             3.70%                            3.54%
                                                            =====                             ====                             ====
Net interest margin  (5)............                        4.38%                             4.14%                            3.99%
                                                            =====                             ====
Ratio of average interest-earning
  assets to average interest-bearing
  liabilities.......................                        1.11x                             1.10x                            1.12x
                                                            =====                             ====                             ====
--------------------
</TABLE>
<PAGE>
(1)  Interest for purpose of yield  calculations  excludes $80, $119, and $90 of
     loan fees in 1996, 1995 and 1994,  respectively,  and $9, $(-25) and $41 of
     net interest rate swap income in 1996, 1995 and 1994, respectively.
(2)  Loan balances include  non-performing loans of $1,895, $1,645 and $1,365 in
     1996, 1995 and 1994, respectively.
(3)  Includes  $26.8  million  at  December  31,  1996 of loans  for  commercial
     business  purposes  secured  by real  estate  and  non-real  estate  (e.g.,
     equipment) collateral.
(4)  Interest rate spread represents the difference  between the average rate on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(5)  Net interest margin represents net interest income before the provision for
     loan losses divided by average interest-earning assets.
<PAGE>
<TABLE>
<CAPTION>
Actual Balance Sheet

                                                          At December 31,
                                                                1996
                                                    ----------------------------
                                                    Actual                Yield/
                                                    Balance               Cost
                                                    --------             -----
                                                       (Dollars in Thousands)
<S>                                                 <C>                  <C>
Assets: (1)
Interest-earning assets:
  Residential mortgage loans ..................     $ 52,693              8.71%
  Commercial loans (2) ........................       36,653              9.90
  Consumer loans ..............................       10,953             10.16
  Investments Available for Sale ..............        7,452              5.90
  Investments to be Held to Maturity ..........       19,837              6.47
  Interest-bearing deposits ...................            2              5.13
                                                    --------             -----
    Total interest-earning assets .............      127,590              8.66
Other noninterest-earning assets ..............        6,767
                                                    --------              
    Total assets ..............................     $134,357
                                                    ========
Interest-bearing liabilities:
  Regular savings and clubs ...................     $ 21,802              2.77
  NOW accounts ................................       14,075              1.76
  Money market accounts .......................        5,701              3.78
  Time deposits ...............................       59,337              5.73
  Borrowings ..................................       13,186              5.99
                                                    --------             -----
    Total int.-bearing liabilities ............      114,101              4.61
Noninterest-bearing liabilities ...............       10,464
                                                    --------              
    Total liabilities .........................      124,565
Stockholders equity ...........................        9,792
                                                       -----
    Total liabilities and
      Stockholders equity .....................     $134,357
                                                    ========

Interest rate spread (3) ......................                           4.05%
                                                                         =====
Net interest margin (4) .......................                           4.38
                                                                         =====
Ratio of average interest-earning
  assets to average interest-bearing
  liabilities .................................        1.12x
                                                       =====
--------------------
</TABLE>
<PAGE>
(1)  Loan balances include  non-performing loans of $1,895, $1,645 and $1,365 in
     1996, 1995 and 1994, respectively.
(2)  Includes  $29.9  million  at  December  31,  1996 of loans  for  commercial
     business  purposes  secured  by real  estate collateral.
(3)  Interest rate spread represents the difference  between the average rate on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(4)  Net interest margin represents net interest income before the provision for
     loan losses divided by average interest-earning assets.
<PAGE>
Rate/Volume Analysis

          The table below sets forth certain  information  regarding  changes in
interest income and interest expense of the Bank for the periods indicated.  For
each  category  of  interest-earning  assets and  interest-bearing  liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes  in  average  volume  multiplied  by old rate);  (ii)  changes in rates
(changes  in rate  multiplied  by old  average  volume);  (iii) the net  change.
Changes attributable to both rate and volume have been allocated proportionately
to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                        ------------------------------------------------------------------------
                                                    1996 vs. 1995                          1995 vs. 1994
                                        -----------------------------------    --------------------------------- 
                                          Increase/(Decrease)      Total        Increase/(Decrease)     Total
                                                Due To            Increase             Due to          Increase
                                         Volume        Rate      (Decrease)     Volume        Rate    (Decrease)
<S>                                     <C>          <C>          <C>          <C>          <C>         <C>
Interest income:
  Residential mortgage loans, net .     $   499      $    88      $   587      $ 1,186      $   170     $ 1,356
  Commercial loans (3) ............         595          (38)         557          793          329       1,122
  Consumer loans ..................          47          (54)          (7)         339          126         465
  Investments Available for Sale ..         383           24          407            0           60          60
  Investment to be Held to Maturity        (811)         (20)        (831)          53           42          95
  Interest-bearing deposits .......          35            6           41          (50)           2         (48)
                                        -------      -------      -------      -------      -------     -------
    Total interest-earning assets .     $   748      $     6      $   754      $ 2,321      $   729     $ 3,050
                                        =======      =======      =======      =======      =======     =======

Interest expense:
  Deposits ........................     $   443      $    16      $   459      $   750      $   464     $ 1,214
  Borrowings ......................        (277)         (40)        (317)         433          110         543
                                        -------      -------      -------      -------      -------     -------
    Total int.-bearing liabilities      $   166      $   (24)     $   142      $ 1,183      $   574     $ 1,757
                                        =======      =======      =======      =======      =======     =======

Net change in interest income .....     $   582      $    30      $   612      $ 1,138      $   155     $ 1,293
                                        =======      =======      =======      =======      =======     =======

</TABLE>
<PAGE>
Lending Activities

         The amount and type of loans  which may be  originated  by the Bank are
subject to certain limitations established by the laws of the State of Maine and
regulations  promulgated  thereunder.  Under  Maine  law,  the Bank has  general
authority  to  originate  and  purchase  loans  secured by real  estate  located
anywhere in New England, or by property located anywhere if the loan is approved
by the Bank's Board of  Directors,  meets the  provisions of Maine law governing
loans to one borrower and does not exceed 10% of the Bank's deposits.  Moreover,
the Bank may  originate  and  purchase  any first  mortgage  loan  permitted  to
federally-chartered  savings  institutions,   which  currently  have  nationwide
lending   authority,   subject   to  the   approval   of   the   Superintendent.
Notwithstanding  these  authorities,  all of the  mortgage  loans in the  Bank's
portfolio  are secured by  properties  located in the State of Maine.  Moreover,
substantially all of the Bank's  non-mortgage  loan portfolio  consists of loans
made to Maine residents and businesses.  The Bank may invest in loans other than
loans secured by real estate, in an aggregate amount not in excess of 40% of its
assets.

         Maine law also imposes  various  limitation on the amount of loans that
may be  made by the  Bank to any one  borrower  and  related  entities.  In this
regard,  Maine law limits loans to one  borrower and related  entities to 20% of
the Bank's  total  capital  and  surplus,  and total loans to one  borrower  and
related  entities in excess of 10% of surplus and capital  must be approved by a
majority of the Board, or by the executive  committee.  In general,  the typical
balance of a loan  extended by the Bank is  significantly  below the  applicable
loan limits imposed by Maine Law.

Loan Portfolio Composition

         The Bank's loan  portfolio  totaled  $99.2 million at December 31, 1996
(including  loans held for sale). As of December 31, 1996,  53.1% of total loans
receivable  consisted of one-to-four  family  residential  loans.  The remaining
loans  consisted of  commercial  business  loans  secured by real estate  ($29.9
million or 30.1%),  commercial  business loans secured by collateral  other than
real estate (e.g.  equipment)  ($6.5 million or 6.6%), and consumer loans ($11.2
million or 11.3%),  consisting of home equity loans,  student loans,  automobile
loans, and other  collateralized  and unsecured loans. At December 31, 1996, the
Bank had loans held for sale of $1.8 million or 1.8% of loans receivable.

         In line with the Bank's  asset/liability  management strategy, the Bank
sells to the secondary  mortgage  market most of the 30-year,  fixed-rate  loans
that it originates which conform to secondary  mortgage market standards.  While
it may hold or sell shorter-term  fixed-rate  loans,  including 10- and 15- year
first  mortgages,  the Bank has recently  been holding these loans in portfolio,
along  with  adjustable-rate  mortgage  loans,  short-term  and  adjustable-rate
commercial  business loans and consumer loans.  The Bank also had $21.9 million,
or 16.3% of its  assets  at  December  31,  1996,  invested  in  mortgage-backed
securities.
<PAGE>
         The  following  table sets  forth the  composition  of the Bank's  loan
portfolio in dollar  amounts and in  percentages  of the  portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
                                                 1996                    1995                       1994
                                        --------------------    ---------------------     --------------------- 
                                                                  (Dollars in Thousand)
<S>                                     <C>           <C>       <C>            <C>        <C>            <C>

Residential mortgage loans:
One- to four-family (1) ...........     $ 49,666       50.1%    $ 44,950        52.3%           6         49.5%
Loans to be sold ..................        1,819        1.8        1,126         1.3        3,746          5.5
Construction ......................        1,208        1.2          963         1.1        2,414          3.5
                                        --------      -----     --------       -----      -------        -----
Total residential mortgage loans ..       52,693       53.1       47,039        54.7       40,176         58.5
                                        --------      -----     --------       -----      -------        -----

Commercial loans
Commercial real estate ............       29,902       30.1       24,313        28.3       19,068         27.8
Other commercial ..................        6,498        6.6        5,410         6.3        3,569          5.2
                                        --------      -----     --------       -----      -------        -----
Total commercial loans ............       36,400       36.7       29,723        34.6       22,637         33.0
                                        --------      -----     --------       -----      -------        -----

Consumer
Home equity lines of credit .......        6,042        6.1        5,189         6.1        4,132          6.0
Collateral loans ..................        4,401        4.4        3.596         4.2        1,392          2.0
Other .............................          763        0.8        1,396         1.6        1,136          1.7
                                        --------      -----     --------       -----      -------        -----
Total consumer loans ..............       11,206       11.3       10,181        11.9        6,660          9.7
                                        --------      -----     --------       -----      -------        -----

Less:
Deferred loan fees and loan premium         (209)      (0.2)        (186)       (0.2)        (226)        (0.3)
Allowance for loan losses .........         (893)      (0.9)        (867)       (1.0)        (613)        (0.9)
                                        --------      -----     --------       -----      -------        -----
Loans receivable, net .............     $ 99,197      100.0%    $ 85,890       100.0%    $ 68,634        100.0%
                                        ========      =====     ========       =====     ========        ===== 


(1)Includes  second  mortgage  loans of  $3,247,000,  $2,884,000 and $170,000 at
December 31, 1996, 1995 and 1994, respectively.
</TABLE>
<PAGE>
        The  following  table sets forth the Bank's loan  originations  and loan
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                   1996        1995        1994
                                                --------    --------    --------
                                                         (In Thousands)
<S>                                             <C>         <C>         <C>
Mortgage loans (gross):
   At beginning of period (1) ..............    $ 71,352      59,244    $ 37,556
        Mortgage loans originated: (2)
          One- to four-family ..............      19,242      21,173      28,452
          Commercial real estate ...........      18,881      10,652       9,225
          Construction .....................         937       2,537       2,327
                                                --------    --------    --------
             Total mortgage loans originated      39,060      34,362      40,004
                                                --------    --------    --------

        Mortgage loans purchased:
          One- to four-family (3) ..........           0       2,290           0
          Commercial real estate (3) .......           0         494           0
                                                --------    --------    --------
             Total mortgage loans purchased            0       2,784           0
                                                --------    --------    --------
             Total mortgage loans originated
                and purchased ..............      39,060      37,146      40,004

        Less:
             Transfer of mortgage loans to
               foreclosed real estate ......          76          73         (23)
             Principal repayments ..........      22,541      17,684       7,265
             Sales of loans ................       5,200       7,281      11,074
                                                --------    --------    --------
        At end of period (2) ...............    $ 82,595    $ 71,352    $ 59,244
                                                ========    ========    ========

Other loans (gross):
        At beginning of period .............    $ 15,591    $ 10,229    $  9,846
          Other loans originated ...........      11,574       8,043       7,722
          Principal repayments .............       9,461       6,237       7,339
          Other loans purchased ............           0       3,695           0
        Other loans sold ...................           0         139           0
                                                --------    --------    --------
        At end of period ...................    $ 17,704    $ 15,591    $ 10,229
                                                ========    ========    ========
------------------------ 
(1)  Includes  loans held for sale at beginning  of 1996,  1995 and 1994 of $1.1
     million, $3.7 million and $5.0 million, respectively.
(2)  Includes loans held for sale at end of 1996, 1995 and 1994 of $1.8 million,
     $1.1 million and $3.7 million, respectively.
(3)  Includes loans acquired through branch acquisition.
</TABLE>
<PAGE>
Loan Maturity

        The following  table shows the maturity of the Bank's loan  portfolio at
December 31, 1996. The table does not include prepayments or scheduled principal
amortization. Prepayments and scheduled principal amortization on mortgage loans
totaled  $22.6  million,  $17.7  million  and $7.3  million  for the years ended
December 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
                                                                            At December 31, 1996
                                             -----------------------------------------------------------------------------------
                                              One-to                                                                    Total
                                               Four         Commercial                     Other        Consumer        Loans
                                              Family        Real Estate   Construction   Commercial      & other      Receivable
                                             ---------        ---------     ---------     ---------     ---------     ----------
                                                                                 (In Thousands)
<S>                                          <C>              <C>           <C>           <C>           <C>           <C>
Amounts due:

        Within 1 year ..................     $     303        $   5,236     $   1,208     $     487     $   1,722     $   8,956
                                             ---------        ---------     ---------     ---------     ---------     ---------
        After 1 year:
          1 to 3 years .................            73            2,363             0         1,551         4,182         8,169
          3 to 5 years .................           878            5,730             0         3,588         4,841        15,037
          5 to 10 ......................         4,605            4,233             0           872           390        10,100
          10 to 20 years ...............        24,229           12,080             0             0            71        36,380
          Over 20 years ................        21,397              260             0             0             0        21,657
                                             ---------        ---------     ---------     ---------     ---------     ---------

          Total due after 1 year .......        51,182(1)        24,666             0         6,011         9,484        91,343
                                             ---------        ---------     ---------     ---------     ---------     ---------

          Total amounts due ............        51,485           29,902         1,208         6,498        11,206       100,299

Plus (Less):
        Unearned discounts, premiums and
          deferred loan fees, net ......             0                0             0             0             0          (209)
        Allowance for possible loan
          losses .......................             0                0             0             0             0          (893)
                                             ---------        ---------     ---------     ---------     ---------     ---------

        Loans receivable, net ..........     $  51,485        $  29,902     $   1,208     $   6,498     $  11,206     $  99,197
                                             =========        =========     =========     =========     =========     =========


(1)Includes loans held for sale of $1.8 million.
</TABLE>
<PAGE>
     The following  table sets forth at December 31, 1996,  the dollar amount of
all loans contractually due after December 31, 1997, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>

                                         Contractually Due After December 31, 1997
                                         -----------------------------------------
                                            Fixed        Adjustable        Total
                                           -------        -------        -------
                                                       (In Thousands)
<S>                                        <C>            <C>            <C>
Mortgage loans:
One- to four-family (1) ...........        $27,303        $23,879        $51,182
 Commercial real estate ...........         10,941         13,725         24,666
 Construction .....................              0              0              0
Commercial loans ..................          4,351          1,660          6,011
Consumer loans ....................          4,261          5,223          9,484
                                           -------        -------        -------

 Total loans receivable ...........         46,856         44,487         91,343
                                           =======        =======        =======

--------------
(1)Includes loans held for sale of $1.8 million.
</TABLE>

One- to Four- Family Mortgage Loans

     The Bank offers first mortgage loans secured by one- to four-family,  owner
occupied  residences,  including  condominium units, in the Bank's lending area.
Loan  originations  are generally  obtained from existing or past  customers and
members  of the local  community  located  in the Bank's  primary  market  area.
Substantially all of the 30-year one- to four- family residential mortgage loans
that  conform to FHLMC,  GNMA and FNMA  guidelines  are sold into the  secondary
mortgage  market.  10- and 15- year  conforming  mortgage  loans  may be held in
portfolio.

     Upon receipt of a completed loan  application  from a prospective  borrower
for a loan secured by one- to  four-family  residential  real  estate,  a credit
report is ordered,  income and certain  other  information  is verified  and, if
necessary,  additional financial  information is requested.  An appraisal of the
real estate  intended to secure the proposed loan is required.  It is the Bank's
policy to obtain title insurance  and/or title  certification on all real estate
first  mortgage  loans.  Borrowers  must also obtain hazard  insurance  prior to
closing.  Borrowers  generally  are required to advance funds on a monthly basis
together  with each  payment of  principal  and  interest  to a mortgage  escrow
account  from which the Bank makes  disbursements  for items such as real estate
taxes and hazard insurance premiums.

     The Bank generally makes one- to four-family  residential mortgage loans in
amounts up to 80% of the  appraised  value of the secured  property.  Originated
mortgage loans in the Bank's portfolio  generally  include  due-on-sale  clauses
which provide the Bank with the contractual  right to deem the loan  immediately
due and  payable  in the event  that the  borrower  transfers  ownership  of the
property  without  the  Bank's  consent.  It is the  Bank's  policy  to  enforce
due-on-sale provisions.
<PAGE>
Loan Authority Policy

     The Bank maintains a Board Loan Committee consisting of the President, Vice
Presidents of Commercial and Retail  Lending and one or more outside  Directors.
The  committee  has the  authority  to approve  loans  that do not  specifically
conform  to loan  policy  and loans in  excess  of  $250,000. 

Construction Lending

     Generally,  the Bank's  construction loans consist of loans to borrowers to
purchase land and build a primary residence or second home. The Bank requires an
appraisal of the property and the loan amount cannot exceed 80% of the appraised
value of the property to be built.  The Bank also requires lien waivers prior to
disbursing  funds  on  construction  loans.   Generally  the  same  underwriting
requirements of one- to four-family loans are applied to construction loans.

Commercial Business Lending

     The Bank  offers  loans to small  businesses  to finance  the  purchase  or
expansion of, or to provide operating capital for, a business.  Generally, these
loans are secured by real estate and/or other business  assets.  The borrower is
required to complete an application, which consists of a financial statement and
the  two  prior  years'  income  statements  on  the  business  as  well  as the
individual.  An analysis is done of the ability of the cash flow of the business
to repay the debt. Generally,  the loan cannot exceed 80% of the appraised value
of the real estate  assets  securing  the loan.  The Bank also  offers  lines of
credit,  both secured and unsecured,  to businesses to finance  receivables  and
seasonal  cash flow  needs.  These  lines of credit are  reviewed  annually  and
renewed  based  upon an  analysis  similar  to that done when the loan was made.
Generally,  the interest  rate  applicable  to  commercial  business  loans is a
prime-based  rate,  adjusting  monthly or fixed for a period not exceeding  five
years and adjusting thereafter.

     Commercial  business  loans are  generally  viewed as  exposing a lender to
greater risk than residential real estate loans. In particular, the repayment of
interest  and  principal,  in  accordance  with the terms of the loan,  is often
dependent on the generation by the business of sufficient operating income.
<PAGE>
Consumer Lending

     The Bank offers loans to consumers  to purchase  automobiles,  recreational
vehicles and finance other needs. These loans generally are one to four years in
length and are amortized over the term of the loan. The Bank requires  borrowers
to  complete an  application  and  performs a credit  analysis,  which  includes
obtaining a credit report and  verifying  the income of the  borrower.  The Bank
also offers second mortgage loans as well as home equity lines of credit secured
by a first or second  mortgage on a principal  or second  residence.  Generally,
these loans are  originated in loan amounts up to 75% of the appraised  value of
the home (less  pre-existing  liens).  However,  in  instances  where a borrower
qualifies,  the Bank may loan up to 90% of the  home's  value.  The home  equity
lines of credit carry a variable interest rate, adjusting monthly,  based on the
prime rate.

     The Bank is also involved in other lending, such as loans to municipalities
and other municipal entities for tax anticipation notes, short-term construction
of infrastructure, and other needs.

Investments

     The Bank invests in U.S.  Government and government  agency notes and bonds
as well as  mortgage-backed  securities.  Certain of the Bank's  mortgage-backed
securities  have been  converted  from loans  originated by the Bank as a way of
improving  the  liquidity  and reducing  the credit risk on these  loans.  As of
December 31, 1996,  substantially all of the Bank's  mortgage-backed  securities
were  guaranteed  or insured  by FNMA,  GNMA or FHLMC.  The market  value of the
Bank's mortgage-backed securities was approximately $22.0 million as of December
31, 1996, and the recorded book value was $21.9 million.


Delinquencies and Classified Assets

     Delinquent  Loans.  Delinquencies  on all loans are reviewed monthly by the
Board of Directors.  The Bank's collection procedures include sending a past due
notice to the borrower on the 17th day of non-payment,  making telephone contact
with the borrower,  and sending a letter when the loan is 30 days delinquent.  A
Notice of Intent to Foreclose is sent by the 60th day of  delinquency.  When the
borrower is  contacted,  the Bank  attempts to obtain full payment of the amount
past due.  However,  the Bank  generally  will seek to reach  agreement with the
borrower on a forbearance plan to avoid foreclosure.

     It is the policy of the Bank to discontinue  the accrual of interest on any
loan that is 90 days or more past due. The Bank, historically,  has not incurred
any significant  losses on delinquent one- to four-family  residential  mortgage
loans.
<PAGE>
Most loan  delinquencies  are cured within 90 days and no legal action is taken.
In the case of a mortgage  loan, if the  delinquency  exceeds 90 days,  the Bank
institutes  measures to enforce its remedies  resulting from the default.  As to
FHA and VA  mortgage  loans,  the  Bank  follows  notification  and  foreclosure
procedures prescribed by FHA and VA.

     Classified  Assets. The Bank is required to have a system of classification
of loans and other assets, such as debt and equity securities,  considered to be
of lesser quality as "substandard",  "doubtful" or "loss" by the paying capacity
and net worth of the obligor or the collateral  pledged,  if any.  "Substandard"
assets  include  those  characterized  by the  "distinct  possibility"  that the
insured  institution  will  sustain  "some  loss"  if the  deficiencies  are not
corrected.  Assets classified as "doubtful" have all of the weaknesses  inherent
in those  classified  "substandard",  with  the  added  characteristic  that the
weaknesses   present  make   "collection   or   liquidation  in  full,"  "highly
questionable  and  improbable,"  on  the  basis  of  currently  existing  facts,
conditions,  and  values.  Assets  classified  as "loss"  are  those  considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of specific  loss reserve is not  warranted.  Assets
which do not currently expose the insured  institution to a sufficient degree of
risk to  warrant  classification  in one of the  aforementioned  categories  but
possess  credit  deficiencies  or  potential   weaknesses  are  required  to  be
designated "special mention".

     When  an  insured   institution   classifies   problem   assets  as  either
"substandard" or "doubtful," it is required to establish general  allowances for
losses in an amount deemed prudent by management.  General allowances  represent
loss  allowances  which have been  established  to recognize  the inherent  risk
associated with lending activities, but which, unlike specific allowances,  have
not been allocated to particular  problem  assets.  When an insured  institution
classifies  problem  assets as  "loss," it is  required  either to  establish  a
specific  allowance  for  losses  equal to 100% of the  amount  of the  asset so
classified or to charge-off such amount. An  institutions's  determination as to
the  classification of its assets and the amount of its valuation  allowances is
subject to review by the FDIC and the state, which can require the establishment
of additional  general or specific loss allowances.  The Bank regularly  reviews
the  assets  in  its   portfolio  to  determine   whether  any  assets   require
classification in accordance with applicable regulations.

     As of December 31, 1996 the Bank had total  classified and special  mention
assets of $1.5 million,  of which  $200,000  were  classified  "substandard"  or
"doubtful."  Special  mention  assets totaled $1.3 million at December 31, 1996,
which included $1.1 million of commercial business loans.
<PAGE>
              At December 31, 1996, 1995 and 1994,  delinquencies  in the Bank's
portfolio were as follows:
<TABLE>
<CAPTION>



                                                         At December 31, 1996                       At December 31, 1995  
                                             -----------------------------------------   ---------------------------------------
                                                 60-89 Days            90 Days or More       60-89 Days          90 Days or More  
                                             -------------------   -------------------   ------------------  -------------------
                                             Number    Principal   Number   Principal    Number   Principal  Number    Principal    
                                               of       Balance      of        Balance     of      Balance     of       Balance     
                                             Loans     of Loans     Loans    of Loans     Loans   of Loans    Loans    of Loans 
                                             -----     --------     -----    --------     -----   --------    -----    -------- 
                                                                          (Dollars in Thousands)
<S>                                           <C>        <C>        <C>        <C>        <C>       <C>       <C>       <C>
Mortgage:
 One- to four-family ....................        6       $343          9       $301         14      $590         6      $232
 Construction ...........................        0          0          0          0          0         0         0         0
 Commercial .............................        3        261          3        424          4       163         8       556
                                              ----       ----       ----       ----       ----      ----      ----      ----
 Total mortgage loans ...................        9        604         12        725         18       753        14       788

Other commercial ........................        2          5          0         00          5        42         2        59
Consumer ................................       20         31          9         18         46        41        14        33
                                              ----       ----       ----       ----       ----      ----      ----      ----

 Total all loans ........................       31       $640         21       $743         69      $836        30      $880
                                              ====       ====       ====       ====       ====      ====      ----      ====

Delinquent loans to total loans .........                0.64%                 0.74%                0.99%               1.04%
<CAPTION>
                                                At December 31, 1994 
                                      -------------------------------------                               
                                         60-89 Days        90 Days or More   
                                      -------------------------------------                                       
                                      Number  Principal   Number  Principal          
                                        of     Balance      of      Balance                                
                                       Loans   of Loans   Loans    of Loans                       
                                       -----   --------   -----    --------                       
<S>                                   <C>        <C>      <C>        <C>
Mortgage:                          
 One- to four-family.............        3       $148       12       $414       
 Construction....................        0          0        0          0      
 Commercial......................        1         17        9        162      
                                       ---       ----      ---       ----      
 Total mortgage loans............        4        165       21        576      
                                                                               
Other commercial.................        1         11        3         77      
Consumer.........................       22        164       11         40      
                                       ---       ----      ---       ----      
                                                                               
 Total all loans.................       27       $340       35       $693      
                                       ===       ====      ===       ====      
                                                                               
Delinquent loans to total loans                  0.50%               1.01%                
                                                                               
</TABLE>
<PAGE>
     The following table sets forth information regarding non-accrual loans. The
Bank  discontinues  accruing  interest on loans ninety days or more past due, at
which time all accrued but uncollected interest is reversed.  In addition,  some
restructured  loans which are now current  continue as  non-accrual  loans until
such time as the borrower has demonstrated a continued capacity to keep the loan
current.  Interest income under the original terms of non-accruing loans for the
year ended December 31, 1996 would have been $203,800.  Interest income on loans
that were  non-accruing  at December 31, 1996 that was included in income during
1996 was $135,178.
<TABLE>
<CAPTION>

                                                         At December 31,
                                                 ------------------------------
                                                  1996        1995        1994
                                                 ------      ------      ------
                                                     (Dollars in Thousands)
<S>                                              <C>         <C>         <C>
Non-accruing mortgage loans delinquent
 more than 90 days .........................     $1,341      $  788      $  576
Non-accruing other loans delinquent more
 than 90 days ..............................         53          92         117
Non-accruing loans other than loans
 90 days or more delinquent ................        501         765         672
                                                 ------      ------      ------

 Total non-performing loans ................      1,895       1,645       1,365

Total foreclosed real estate, net of
 related allowance for losses ..............        117          41          12
                                                 ------      ------      ------

 Total non-performing assets ...............     $2,012      $1,686      $1,377
                                                 ------      ------      ------

Non-performing loans to net loans ..........       1.91%       1.92%       1.99%

Total non-performing assets to total assets        1.50%       1.35%       1.22%
</TABLE>


Allowance for Loan Losses

     The allowance for loan losses is  established  through a provision for loan
losses  based  on  management's  evaluation  of the  risk  inherent  in its loan
portfolio and the general economy.  Such evaluation,  which includes a review of
all loans on which full collectibility may not be reasonably assured,  considers
among other  matters,  the  estimated  net  realizable  value of the  underlying
collateral,  economic  conditions,  historical  loan loss  experience  and other
factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.
<PAGE>
     The  following  table sets forth certain  information  regarding the Bank's
allowance for possible loan losses at the dates indicated.
<TABLE>
<CAPTION>
                                              At or for the year ended December 31,
                                              -------------------------------------
                                                  1996        1995        1994
                                                 -----       -----       -----
                                                     (Dollars in Thousands)
<S>                                              <C>         <C>         <C>

Balance at beginning of period .............     $ 867       $ 613       $ 504
Gross charge-offs:
 Commercial business .......................       (94)         (2)        (16)
 Commercial real estate ....................      (223)        (36)        (10)
 Residential mortgage ......................       (19)        (10)         (2)
 Consumer ..................................       (65)        (47)         (8)
                                                 -----       -----       -----
   Total charge-offs .......................      (401)        (95)        (36)
                                                 -----       -----       -----

Gross recoveries:
 Commercial business .......................         0          32           3
 Commercial real estate ....................        27           0           0
 Residential mortgage ......................         0           0           0
 Consumer ..................................        10           2           2
                                                 -----       -----       -----
   Total recoveries ........................        37          34           5
                                                 -----       -----       -----

Net charge-offs ............................      (364)        (61)        (31)
                                                 -----       -----       -----

Provision for loan losses ..................       390         315         140
                                                 -----       -----       -----

Balance at end of year .....................     $ 893       $ 867       $ 613
                                                 =====       =====       =====

Ratio of net charge-offs during the
 period to average loans outstanding
 during the period .........................      0.39%       0.08%       0.06%
                                                 =====       =====       =====

Ratio of allowance for loan losses to
 gross loans receivable at the end
 of period .................................      0.89%       1.00%       0.89%
                                                 =====       =====       =====

Ratio of allowance for loan losses to
 non-performing loans at end of
 period ....................................     47.12%      52.71%      44.95%
                                                 =====       =====       =====
</TABLE>
<PAGE>
     The  following  table sets forth the  allocation  of the allowance for loan
losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
                                                                 At December 31,
                                   -----------------------------------------------------------------------     
                                          1996                      1995                      1994
                                   --------------------      --------------------      -------------------
                                            % of Loans                % of Loans              % of Loans
                                              In Each                   In Each                  In Each
                                            Category to               Category to              Category to
                                   Amount   Total Loans      Amount   Total Loans      Amount  Total Loans
                                   ------   -----------      ------   -----------      ------  -----------
                                                            (Dollars in Thousands) 
<S>                                 <C>        <C>            <C>        <C>            <C>        <C>     
Commercial business ...........     $161         6.5          $120         6.2%         $ 69         5.1%
Commercial real estate ........      488        29.8           541        28.0           369        27.5
Residential mortgage ..........      207        52.5           150        54.1           140        57.8
Consumer ......................       37        11.2            56        11.7            35         9.6
                                    ----       -----          ----       -----          ----       -----
Total allowance for loan losses     $893       100.0%         $867       100.0%         $613       100.0%
                                    ====       =====          ====       =====          ====       =====
</TABLE>
     When reviewing the adequacy of the allowance for loan losses, the amount of
impaired loans is also taken into consideration. The Bank adopted SFAS Statement
No. 114,  "Accounting  by Creditors for Impairment of a Loan" and SFAS Statement
No. 118,  "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures" as of January 1, 1995.

     Within  the  context of SFAS 114 and 118,  certain  loan  categories  which
represent groups of smaller balance homogeneous loans are collectively evaluated
and excluded from the provision of the standards.  The Bank has determined  that
those categories include residential real estate loans,  consumer loans and Visa
loans.  The standards are applied to loans  categorized  as commercial  and real
estate commercial.

                        Impaired Loans: December 31, 1996 

     Commercial            47,484       Based on fair value of collateral
     R/E Commercial       897,623       Based on fair value of collateral
                          --------
     Total                945,107
                          =======

     When,  during  the  term of a loan,  it  becomes  apparent  that  the  loan
principal or interest may not be repaid  according to its original  term or some
event impacts the sufficiency of the collateral,  it is considered  impaired and
is normally  placed on  non-accrual  status.  Criteria  used when  reviewing for
impairment  include: a loan that is past due more than 90 days, a loan that must
be  renegotiated  as a result of the  borrower's  inability to meet the original
loan contract,  or the loan officer is aware of other circumstances  relating to
the individual  borrower,  the collateral,  or economic  circumstances which may
result in  difficulty  collecting  the loan  principal  and  interest.  The risk
factors in an impaired loan situation vary based on the category of the loan and
the  collateral  involved.  Loans in the  commercial  category  vary in terms of
underlying  collateral and therefore  usually carry a higher degree of risk even
though policy guidelines may require a collateral position with an adequate loan
to value ratio.  Real Estate commercial loans normally have real property as the
primary collateral, therefore risk of loss is minimized.
<PAGE>
     It is the Bank's  policy that accrual of interest on loans be  discontinued
when, in the opinion of management, there is an indication that the borrower may
be unable to meet payments as they become due.  Although  interest income is not
accrued on loans  reclassified  to non-accrual  status,  interest  income may be
recognized on a cash basis.  A loan will  generally be recognized as impaired if
it is 90 days past due and on non-accrual  status.  It should be noted, that the
adoption of Statement 114 has had no effect on Industry Guide 3 disclosures.

     In  determining  whether  or not an  impaired  loan  should be  charged-off
management  will  consider  both the  adequacy of the  collateral  and the other
resources of the borrower.  If the collateral is insufficient and collectibility
is highly unlikely, the loan is charged-off.

Investment Activities

     It is the Bank's policy to reinvest all available funds in a prudent manner
which will provide for the safety of the funds, the liquidity requirement of the
Bank, and the highest yield.  Safety and liquidity standards are not compromised
in favor of increased rates of return. In determining its investments,  the Bank
considers  investment type, credit quality and maturity of investments,  as well
as the maximum credit exposure to one obligor at any one time.  Consideration is
also  given  to  each  investment's  risk-weight  as  determined  by  regulatory
risk-based capital guidelines.  Prior to 1991, the Bank had actively invested in
equity  securities for the purpose of  diversifying  its portfolio and enhancing
yield.  Due to the growth in assets related to the branch  acquisitions  and the
correspondent  need to maintain adequate capital ratios, the Bank liquidated its
equity  securities  portfolio.  The Bank has received  approval from the FDIC to
retain  its  authority  to invest  in equity  securities.  See  "Regulation  and
Supervision - Federal Deposit  Insurance  Corporation  Improvement Act of 1991 -
Restrictions Upon State-Chartered Banks."

     The following table sets forth certain  information  regarding the carrying
and market  values of the Bank's  investment  securities  portfolio at the dates
indicated:
<TABLE>
<CAPTION>
                                                                      At December 31,
                                            --------------------------------------------------------------------
                                                     1996                    1995                    1994
                                            --------------------    --------------------    -------------------- 
                                            Carrying      Market    Carrying      Market    Carrying      Market
                                              Value       Value       Value       Value       Value       Value
                                             -------     -------     -------     -------     -------     -------
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>
Interest-earning deposits:
   Certificates of deposit .............     $     0     $     0     $     0     $     0     $     0     $     0
   Overnight funds .....................           2           2       2,461       2,461          20          20
                                             -------     -------     -------     -------     -------     -------
         Total interest-bearing deposits     $     2     $     2     $ 2,461     $ 2,461     $    20     $    20
                                             =======     =======     =======     =======     =======     =======
Investment securities:
   Available for sale ..................     $ 7,452     $ 7,452     $ 8,377     $ 8,377     $     0     $     0
   To be Held to Maturity (1) ..........      19,837      19,908      20,423      20,594      37,360      35,496
                                             -------     -------     -------     -------     -------     -------
         Total investment securities....     $27,289     $27,360     $28,800     $28,971     $37,360     $35,496
                                             =======     =======     =======     =======     =======     =======
                                                                                                          
(1)  Includes  stock  in the  FHLB  of  Boston  of  $1,320,550,  $1,320,550  and
$1,153,350 at December 31, 1996, 1995 and 1994, respectively.
</TABLE>
<PAGE>
     The table  below sets forth  certain  information  regarding  the  carrying
value,   weighted  average  yields  and  maturities  of  the  Bank's  investment
securities at December 31, 1996. 

Investment Securities Available for Sale
<TABLE>
<CAPTION>
                                                              Approximate     Weighted
                                                  Carrying      Market         Average
                                                   Value        Value           Yield
                                                   -----        -----           -----
<S>                                               <C>           <C>             <C>
U.S. Government and agency obligations
   Due in one year or less .................      $4,000        $3,999          5.78%
   Due from one to five years ..............           0             0             0
   Due from five to ten years ..............       3,510         3,453          6.05
   Due after 10 years ......................           0             0             0
                                                   -----         -----           
   Total Investment Securites 
      Available for Sale....................       7,510         7,452          5.90%
                                                   -----         -----           
</TABLE>
Investment Securities to be Held to Maturity
<TABLE>
<CAPTION>
                                                                   Approximate      Weighted
                                                   Carrying           Market        Average
                                                     Value            Value          Yield
                                                     -----            -----          -----
<S>                                                <C>              <C>             <C>
U.S. Government and agency obligations
   Due in one year or less..........               $     0          $     0             0%
   Due from one to five years                        3,121            3,092          5.85
   Due from five to ten years.......                 6,250            6,286          6.62
   Due after ten years..............                 8,277            8,369          6.73
                                                    ------           ------            
   Total............................                17,648           17,747          6.53%
                                                    ------           ------            
Other
   Due in one year or less (1)                       1,321            1,321          6.40%
   Due from one to five years                            0                0              0
   Due from five to ten years.......                   847              819          5.16
   Due after ten years..............                    21               21          7.78
                                                    ------           ------            
   Total............................                 2,189            2,161          5.93%
                                                    ------           ------            
   Total Investment securities
       to be Held to Maturity.......               $19,837          $19,908          6.47
                                                   =======          =======           
---------------------------------------
(1) Represents stock in the FHLB of Boston
</TABLE>

There  were no  investment  securities  (exclusive  of  obligations  of the U.S.
Government and agencies) issued by any one entity with a total carrying value in
excess of 10% of stockholders' equity at December 31, 1996.
<PAGE>
Source of Funds

General.  Deposits,  advances  from  the FHLB of  Boston,  loan  repayments  and
retained earnings are the primary source of the Bank's funds for use in lending,
investment and for other general purposes.

Deposits.  The Bank  offers a  variety  of  deposit  accounts  having a range of
interest rates and terms. The Bank's deposits consist of passbook savings,  NOW,
money  market and  certificate  accounts.  The flow of  deposits  is  influenced
significantly  by  general  economic  conditions,  changes  in money  market and
prevailing  interest  rates and  competition.  The Bank's  deposits are obtained
primarily  from the areas in which its  branches  are  located.  The Bank relies
primarily on customer service and long-standing  relationships with customers to
attract and retain deposits.  Certificate accounts in excess of $100,000 are not
actively solicited by the Bank.
<PAGE>
The following table sets forth the  distribution of the Bank's deposit  accounts
at the dates indicated and the weighted  average nominal  interest rates on each
category  of deposits  presented.  Management  does not believe  that the use of
year-end  balances  resulted  in any  material  difference  in  the  information
presented.
<TABLE>
<CAPTION>
                                                 1994                          1996                           1994
                                    ----------------------------    --------------------------    ----------------------------- 
                                                         Weighted                       Weighted                       Weighted
                                                 Percent  Average              Percent   Average              Percent   Average 
                                                 Of Total Nominal              of Total  Nominal              of Total  Nominal
                                      Amount     Deposits  Rate     Amount     Deposits   Rate     Amount     Deposits   Rate
                                      ------     --------  ----     ------     --------   ----     ------     --------   ----
                                                                      (Dollars in Thousands)
<S>                                 <C>          <C>       <C>     <C>           <C>      <C>     <C>           <C>      <C>
Savings and transaction accounts:
     Commercial NOW .............   $  5,693       5.2%    2.64%   $  4,094       3.9%    2.34%   $  1,458       1.8%    1.74%
     NOW ........................      8,382       7.6     1.15       8,670       8.3     1.32       4,956       6.1     1.59
     Regular Savings (1) ........     21,802      19.8     2.77      22,548      21.5     3.00      21,352      26.3     2.98
     Money market ...............      5,701       5.2     3.78       5,763       5.5     3.95       3,171       3.9     2.98
     Demand deposits (1) ........      9,367       8.4        0       8,111       7.7        0       6,201       7.7        0
                                    --------     -----             --------     -----             --------      ----      
              Total .............     50,945      46.2     2.57      49,186      47.0     2.71      37,138      45.8     2.70
                                    --------     -----             --------     -----             --------      ----      

Certificate accounts:
     Three month ................        944       0.9     4.30       1,498       1.4     5.23         166       0.2     3.26
     Six month ..................     10,710       9.7     4.81       5,945       5.7     5.41       6,093       7.5     3.55
     Twelve month ...............     12,166      11.0     5.09      12,577      12.0     5.77       7,738       9.5     4.26
     Eighteen month .............      3,765       3.4     5.59       3,635       3.5     5.23           0       0       0
     Two to five years ..........     13,728      12.5     6.36      13,813      13.2     6.35      13,159      16.2     5.42
     IRA ........................     18,024      16.3     6.29      18,048      17.2     6.39      16,746      20.7     5.56
                                    --------     -----             --------     -----             --------      ----      
              Total .............     59,337      53.8     5.73      55,516      53.0     6.03      43,902      54.2     4.93
                                    --------     -----             --------     -----             --------      ----      

Total deposits (1)...............    110,282     100.0%    4.43%   $104,702     100.0%    4.62%    $81,040     100.0%    4.01%
                                     =======     =====             ========     =====              =======     =====      

(1) Includes escrow and trustee accounts on sold loans.
</TABLE>
<PAGE>
     At December 31, 1996, the Bank had outstanding $6.6 million in time deposit
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
                                                                       Amount
                                                                  (In thousands)
<S>                                                                   <C>
Maturity Period
Three months or less..............................................    $2,359
Over three through six months.....................................     1,445
Over six through 12 months........................................     1,576
Over 12 months....................................................     1,265
                                                                       -----
Total.............................................................    $6,645
                                                                      ======
</TABLE>
Borrowings

     The  borrowings  utilized by the Bank primarily have been advances from the
FHLB of Boston. In addition, the Bank has in the past utilized borrowings in the
form of repurchase  agreements,  secured by United  States  Government or agency
securities, through a nationally recognized investment firm.

The following table sets forth certain information  regarding borrowed funds for
the dates indicated:
<TABLE>
<CAPTION>
                                            At or for the year ended December 31,
                                            -------------------------------------
                                                1996        1995          1994
                                              --------     --------     --------
                                                     (Dollars in Thousands)
<S>                                           <C>          <C>          <C>

Total borrowings:
 Average balance outstanding ............     $11,624      $16,082      $ 8,247
 Maximum amount outstanding at any
   month-end during the period ..........      13,186       26,037       23,367
 Balance outstanding at end of period ...      13,186       10,952       23,367
 Weighted average interest rate during
   the period ...........................        5.87%        6.21%        5.53%
 Weighted average interest rate at end
   of period ............................        5.99%        6.02%        6.26%

</TABLE>
Subsidiaries

     The  Bank  is  the  only  subsidiary  of  the  Company.  The  Bank  has  no
subsidiaries.

                           REGULATION AND SUPERVISION 

General

     The Bank is a  Maine-chartered  savings  bank and its deposit  accounts are
insured up to applicable  limits by the FDIC primarily  under the Bank Insurance
Fund  ("BIF").  The Bank is subject to extensive  regulation by the FDIC, as the
<PAGE>
deposit insurer,  and the State of Maine Bureau of Banking ("Bureau").  The Bank
must file reports with the Bureau and the FDIC  concerning  its  activities  and
financial  condition,  in addition to obtaining  regulatory  approvals  prior to
entering into certain transactions such as mergers with or acquisitions of other
depository institutions. There are periodic examinations by the FDIC to test the
Bank's  compliance  with various  regulatory  requirements.  This regulation and
supervision  establishes  a  comprehensive  framework of  activities  in which a
savings  Bank can engage and is intended  primarily  for the  protection  of the
insurance  fund  and  depositors.   The  regulatory  structure  also  gives  the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement  activities and examination  policies,  including  policies with
respect to the  classification  of assets and the establishment of adequate loan
loss reserves for regulatory purposes.  Any change in such regulation could have
material  adverse  impact on the Company and the Bank and their  operations  and
stockholders.  The Company is also required to file certain  reports  with,  and
otherwise  comply with the rules and  regulations  of the Federal  Reserve Board
(the  "FRB"),  the State of Maine  Bureau of  Banking,  and the  Securities  and
Exchange Commission (the "SEC") under the federal securities laws.

Maine Law

The  Superintendent  of the Maine Bureau of Banking is vested with the authority
to regulate  and  supervise  banks  which are  chartered  under  Maine law.  The
Superintendent  is required to examine each state  chartered  bank at least once
every  thirty-six  months.  The   Superintendent's   approval  is  required  for
establishing  or  closing  branches,  for  merging  with  other  banks  and  for
undertaking  many  other  activities.  Any Maine  bank that does not  operate in
accordance with the Superintendent's regulations,  policies and directive may be
sanctioned for noncompliance.

Maine-chartered savings banks have lending,  investment and other powers similar
to those  authorized for  federally-chartered  savings  institutions,  including
commercial  lending  authority and the ability to offer  personal and commercial
checking and NOW  accounts,  and have  virtually  the same powers as  commercial
banks. To the extent authorized by the Superintendent,  Maine-chartered  savings
banks   have  all   lending,   investment   and  other   powers   possessed   by
federally-chartered savings institutions based in Maine.

     The Bureau of Consumer  Credit  Protection  administers  the Maine Consumer
Credit Code, which regulates  broadly all consumer  lending  transactions in the
State of Maine, as well as home solicitation  sales and the offering of consumer
credit insurance.

Federal Deposit Insurance Corporation Improvement Act of 1991

     On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") became law. While FDICIA primarily  addresses  additional
sources of funding for the BIF,  which insures the deposits of commercial  banks
and  savings  banks,  it also  imposes  a number  of new  mandatory  supervisory
measures on commercial banks, savings banks and savings associations.
<PAGE>
     FDICIA requires financial  institutions to take certain actions relating to
their  internal  operations,  including:  providing  annual reports on financial
condition and management to the appropriate federal banking  regulators,  having
an annual independent audit of financial  statements performed by an independent
public  accountant and  establishing an independent  audit  committee  comprised
solely of  outside  directors.  FDICIA  also  imposes  certain  operational  and
managerial  standards on financial  institutions  relating to internal controls,
loan documentation,  credit underwriting,  interest rate exposure, asset growth,
compensation,  fees and benefits.  The federal banking  agencies,  including the
FDIC, have adopted guidelines implementing these standards.

     Pursuant to FDICIA, the banking agencies have issued a regulation requiring
all  financial  institutions  to adopt a written  policy  governing  real estate
lending.  The  regulation  requires  that  such  policy  address   underwriting,
documentation,  approval and reporting  standards and portfolio  diversification
and  administration  requirements  for real estate  loans,  so as to provide for
prudent and sound  lending  practices.  The policy  also must take into  account
guidelines  issued  by  the  banking  agencies  governing  such  policies.   The
guidelines suggest maximum loan-to-value ratios for all real estate loans, other
than permanent financing on one- to four-family  residences,  and provide limits
and  requirements  on loans that exceed those  limits.  

Restrictions Upon State-Chartered Banks.

     FDICIA added new Section 24 to the Federal Deposit  Insurance Act (the "FDI
Act"),  which  generally  limits the activities and equity  investments of state
chartered,   FDIC  insured  savings  banks  and  their   subsidiaries  to  those
permissible  for national banks and their  subsidiaries,  unless such activities
and investments are  specifically  exempted by Section 24 or consented to by the
FDIC. In October 1992, the FDIC adopted final  regulations  governing the equity
investments of FDIC insured savings banks,  effective on December 9, 1992, which
generally  prohibit equity investments by such banks and require the divestiture
of such  investments by December 19, 1996.  Section 24 provides an exception for
investments  in common and  preferred  stocks  listed on a  national  securities
exchange or the shares of registered  investment  companies by a bank if (1) the
bank held such types of  investments  during the 14-month period from  September
30, 1990 through November 26, 1991, (2) the state in which the bank is chartered
permitted  such  investments as of September 30, 1991, and (3) the bank notifies
the FDIC and obtains approval from the FDIC to make or retain such  investments.
Upon receiving such FDIC approval,  an  institution's  investment in such equity
securities will be subject to an aggregate limit up to its core capital. Section
24 also contains an exception for certain  majority  owned  subsidiaries.  Banks
holding impermissible  investments that do not receive FDIC approval must submit
to the FDIC a plan for divestiture of such  investments as quickly and prudently
as possible. The Bank applied for, and received, FDIC approval to invest in such
otherwise  impermissible  equity  investments.  The Bank currently has no equity
securities portfolio.

     The FDIC has also  adopted  final  regulations  pertaining  to the activity
restrictions  imposed  upon  insured  savings  banks and their  subsidiaries  by
Section 24. The FDIC will not approve an activity  that it determines to present
a significant  risk to the FDIC insurance  funds.  Management  believes that its
activities are of  types permissible under FDICIA.
<PAGE>
Risk-Based Premiums

     FDICIA required the FDIC to issue  regulations,  effective by no later than
January 1, 1994, which establish a system for setting deposit insurance premiums
based  upon the risks a  particular  bank or  savings  association  poses to the
deposit insurance funds.

     The FDIC has adopted  rules to  implement a risk-based  assessment  system.
Under  the  rule,  the FDIC  assigns  an  institution  to one of  three  capital
categories consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized,   and  one  of  the  three   supervisory   subcategories.   An
institution's  assessment  rate depends on the capital  category and supervisory
category to which it is assigned.  Assessment  rates  currently range from 0% of
deposits for an institution in the highest category (i.e.,  well capitalized and
favorable  supervisory  rating) to 0.27% of  deposits  for  institutions  in the
lowest category (i.e.,  undercapitalized and substantial  supervisory  concern).
The Bank's  deposit  insurance  assessment  will  depend upon the  category  and
subcategory to which the Bank is assigned by the FDIC. The supervisory  subgroup
to which an institution is assigned by the FDIC is  confidential  and may not be
disclosed;   the  Bank  qualifies  as   "well-capitalized"   under  the  capital
categories.  Any increase in insurance  assessments could have an adverse effect
on the earnings of the Bank.

Prompt Corrective Action.

     FDICIA also establishes a system of prompt corrective action to resolve the
problems  of  undercapitalized  institutions.  The  FDIC,  FRB,  Office  of  the
Comptroller of the Currency ("COC") and the Office of Thrift Supervision ("OTS")
have adopted  final rules,  effective  December  19,  1992,  which  require such
regulators  to  take  certain  supervisory   actions  against   undercapitalized
institutions,  the severity of which  depends upon the  institution's  degree of
capitalization.   The  adopted  rules  create  five  categories   consisting  of
"well-capitalized,"  "adequately capitalized," "significantly  undercapitalized"
and  "critically-undercapitalized."  Regulatory  action taken will depend on the
level of  capitalization  of the institution and may range from  restrictions on
capital  distributions  and dividends to seizure of the institution.  Generally,
subject to a narrow exception,  FDICIA requires the banking regulator to appoint
a receiver or conservator for an institution that is critically undercapitalized
within 90 days after becoming critically undercapitalized. FDICIA authorizes the
banking  regulators to specify the ratio  tangible  equity to assets at which an
institution  becomes  critically-undercapitalized  and requires that ratio be no
less than 2% of assets.

     The final rule also allows the regulator to downgrade an  institution  that
meets  certain  minimum  capital  requirements  but is otherwise in a "less than
satisfactory"   condition,   which  may  result  in  an  otherwise   "adequately
capitalized"    institution    with   other   problems   being   classified   as
"undercapitalized."

     The final rule adopted by the FDIC, on September 15, 1992, to implement the
prompt corrective action section of FDICIA,  generally  provides that an insured
institution  that has  risk-based  capital of less than 8.0% or a leverage ratio
that is less than 4.0% would be considered to be "undercapitalized",  an insured
institution that has risk-based  capital less than 6.0% or a leverage ratio that
is less than 3.0% would be  considered to be  "significantly  under-capitalized"
<PAGE>
and an insured  institution that has a tangible capital to assets ratio equal to
or less than 2% would be deemed to be "critically  undercapitalized." Generally,
under  the   rule,   an   insured   institution   that  is   "undercapitalized,"
"significantly  under-capitalized,"  or  "critically  undercapitalized"  becomes
immediately  subject  to certain  regulatory  restrictions,  including,  but not
limited   to,   restrictions   on   growth,   investment   activities,   capital
distributions,  and affiliate transactions.  The filing of a capital restoration
plan, which must be guaranteed by the parent holding company,  is also required.
In addition,  "critically  undercapitalized"  institutions  must  receive  prior
written approval from the FDIC to engage in any material  transaction other than
in the normal  course of  business.  The Bank's  capital  ratios  (see  "Capital
Maintenance") qualify it for "well-capitalized" status.

Insurance of Deposit Accounts

      Under the current risk-based deposit insurance premium structure,  insured
institutions  will pay a premium  ranging  from  0.00% of  deposits  to 0.27% of
deposits depending on the institution's FDIC risk  classification.  See "Federal
Deposit Insurance  Corporation  Improvement Act of 1991 - Risk-Based  Premiums."
The FDIC is authorized to raise  premiums for BIF members if the BIF is expected
to be at levels less than its required  reserve  ratio.  The FDIC has  exercised
this  authority  several times in the past and may raise BIF insurance  premiums
again in the near  future.  If such action is taken by the FDIC it could have an
adverse  effect on the  earnings of the Bank.  Included in the 1996 amount was a
one-time assessment of $175,807 on the SAIF-attributed  deposits acquired by the
Bank in 1994. This further resulted in a refund of the 4th quarter assessment of
$20,492.

     During 1994 and until May 1995, the Bank paid insurance  premiums under the
risk-based system of .23% of deposits. At that time the BIF was determined to be
adequately  capitalized  and  assessments on BIF deposits were  restructured  to
range from 0.0% to 0.27%. As a well  capitalized  Bank, the Bank was assessed at
0% for the period from June through December 1995 on its BIF deposits.  Pursuant
to the Bank  acquisition  of First Federal of Lewiston in 1994, an  attributable
portion of those  deposits are insured under the Savings  Association  Insurance
Fund  ("SAIF").  Prior to May 1995, the Bank's  SAIF-attributable  deposits were
assessed at the same rate as its BIF deposits.  The Bank's attributable deposits
totalled  $33.4  million in 1995 and were  assessed at 0.23%.  The Bank paid the
SAIF  assessment  rate on these deposits  through the 3rd quarter of 1996 when a
special FDIC assessment was levied. The Bank paid a total of $236,135 in federal
deposit  insurance  premiums to the BIF for the year ended  December 31, 1996 as
compared to $137,100 in 1995. The  SAIF-attributable  deposit amount is adjusted
each year according to the Bank's overall  deposits growth (not including growth
attributable to mergers or acquisitions). The Bank's attributable deposit amount
for 1996 was $35.1  million and for 1997 is $29.5  million.  In 1997,  under the
current schedule for  "well-capitalized"  banks, the Bank would pay a 0.00% FDIC
assessment rate on it's BIF and  SAIF-attributed  deposits,  a 0.013%  Financing
Corporation  (FICO)  assessment on BIF deposits and a 0.046% FICO  assessment on
SAIF-attributed deposits.

     Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding  that the  institution  has engaged in unsafe or unsound  condition to
continue operations, or has violated any applicable law, regulation, rule, order
or condition  imposed by the FDIC.  The  management of the Bank does not know of
any practice,  condition or violation  that might lead to termination of deposit
insurance. At December 31, 1996, the Bank's capital exceeded the minimum capital
requirements imposed by the FDIC.
<PAGE>
Capital Maintenance

     The Bank is  subject to  capital  requirements  imposed by the FDIC and the
Superintendent,  which at the  present  time are  substantially  identical.  The
failure  to  satisfy  capital  requirements  can  result  in  severe  regulatory
sanctions.  The Bank's capital  currently is  significantly in excess of federal
and state requirements.

     The FDIC has issued regulations that require BIF-insured banks, such as the
Bank, to maintain minimum levels of capital. The regulations establish a minimum
leverage  capital  requirement  of not less than 3% core capital to total assets
for banks in the strongest  financial  and  managerial  condition,  with a CAMEL
Rating of 1 (the  highest  examination  rating of the FDIC for  banks).  For all
other banks, the minimum  leverage capital  requirement is 3% plus an additional
cushion of at least 100 to 200 basis  points.  Core  capital is comprised of the
sum of common  stockholders'  equity,  non-cumulative  perpetual preferred stock
(including  any  related   surplus)  and  minority   interests  in  consolidated
subsidiaries,  minus all  intangible  assets  (other than  qualifying  servicing
rights).  At December 31, 1996, the Bank's ratio of core capital to total assets
equalled 6.7%, which exceeded the minimum leverage requirement.

     The FDIC  also  requires  that  savings  banks  meet a  risk-based  capital
standard.  The risk-based  capital  standard  requires the  maintenance of total
capital  (which  is  defined  as core  capital  and  supplementary  capital)  to
risk-weighted  assets of 8%. In determining the amount of risk-weighted  assets,
all assets,  including  certain  off-balance  sheet assets,  are multiplied by a
risk-weight of 0% to 100%,  based on the risks the FDIC believes are inherent in
the type of asset.  The  components  of core  capital  are  equivalent  to those
discussed  earlier  under  the  3%  leverage  requirement.   The  components  of
supplementary  capital currently include cumulative  perpetual  preferred stock,
subordinated  debt and  intermediate  preferred stock and allowance for loan and
lease losses.  Allowance for loan and lease losses  includable in  supplementary
capital is limited to a maximum of 1.25% of gross risk-weighted assets. Overall,
the amount of capital counted toward supplementary capital cannot exceed 100% of
core capital.

     At December 31, 1996, the Bank's total risk-based  capital to risk-weighted
assets was 11.3%, which exceeded the FDIC risk-based capital requirements.

Loans-to-One-Borrower Limitations

     With certain limited  exceptions,  a Maine  chartered  savings bank may not
make a loan or extend credit  (including  lease financing) to a single borrower,
together with their related  interests,  in excess of 20% of the bank's  capital
and  surplus,  while loans to a single  borrower,  together  with their  related
entities, in excess of 10% of capital and surplus requires the prior approval of
the majority of the Board of Directors, or of the executive committee.  The Bank
currently complies with all applicable loans-to-one-borrower limitations.
<PAGE>
Community Reinvestment Act

     Under the  Community  Reinvestment  Act  ("CRA"),  as  implemented  by FDIC
regulations,  a savings institution has a continuing and affirmative  obligation
consistent  with its safe and sound  operation  to help meet the credit needs of
its entire community,  including low and moderate income neighborhoods.  The CRA
does not  establish  specific  lending  requirements  or programs for  financial
institutions nor does it limit an institution's  discretion to develop the types
of products  and  services  that it believes  are best suited to its  particular
community,  consistent  with the CRA. The CRA requires the FDIC,  in  connection
with its  examination  of a savings  institution,  to assess  the  institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. Effective
July 6, 1990, public disclosure of an institution's CRA rating is required.  The
FDIC provides a written evaluation of an institution's CRA performance utilizing
a four-tiered descriptive rating system which replaced the five-tiered numerical
rating system. The Bank has an outstanding CRA rating.

Federal Reserve System

     Under FRB regulations, the Bank is required to maintain noninterest-earning
reserves  against its transaction  accounts  (primarily NOW and regular checking
accounts). The Federal Reserve Board regulations generally require that reserves
of 3% must be maintained against aggregate transaction accounts of $49.3 million
or less (subject to adjustment by the FRB), and a reserve of $1.5 million,  plus
10%  (subject to  adjustment  by the FRB between 8% and 14%) of that  portion of
total transaction accounts in excess of $49.3 million. The first $4.4 million of
otherwise  reservable  balances (subject to adjustments by the FRB) are exempted
from the reserve  requirements.  The Bank is in  compliance  with the  foregoing
requirements. Because required reserves must be maintained in the form of either
vault  cash,  a  non-interest-bearing  account  at a Federal  Reserve  Bank or a
pass-through  account  as  defined  by the  FRB,  the  effect  of  this  reserve
requirement is to reduce the Bank's interest-earning assets.

Bank Holding Company Regulation

     On May 7, 1993,  the  Company  received  approval  from the FRB to become a
registered bank holding company pursuant to the Bank Holding Company Act of 1956
("BHCA")  by  acquiring  all of the  common  stock of the Bank.  The  Company is
subject to  examination,  regulation and periodic  reporting  under the BHCA, as
administered by the FRB.

     The Company is required to obtain the prior  approval of the FRB to acquire
all, or  substantially  all, of the assets of any bank or bank holding  company.
Prior FRB  approval  is required  for the Company to acquire  direct or indirect
ownership  or  control  of any  voting  securities  of any bank or bank  holding
company if,  after  giving  effect to such  acquisition,  it would,  directly or
indirectly,  own or control  more than 5% or any  voting  shares of such bank or
bank holding company.  The BHCA also prohibits the acquisition by the Company of
more than 5% of the voting shares,  or substantially  all the assets,  of a bank
located  outside the State of Maine unless such an acquisition  is  specifically
authorized by the laws of the state in which such bank is located. Maine banking
law permits the interstate  acquisition of banking  institutions by bank holding
companies on a nationwide  basis. See "-Acquisition of the Company." In addition
to the approval of the FRB, before any bank acquisition can be completed,  prior
approval  thereof may also be required to be obtained from other agencies having
supervisory   jurisdiction   over  the  bank  to  be  acquired,   including  the
Superintendent.
<PAGE>
     The status of the Company as a registered  bank holding  company  under the
BHCA does not exempt it from  certain  federal  and state  laws and  regulations
applicable to corporations  generally,  including,  without limitation,  certain
provisions of the federal securities laws.

     In addition,  a bank holding company is generally  prohibited from engaging
in, or  acquiring  direct or  indirect  control  of,  any  Company  engaged  in,
non-banking  activities.  One of the principal exceptions to this prohibition is
for activities  found by the FRB to be so closely related to banking or managing
or controlling banks as to be a proper incident  thereto.  Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking  are;  (i) making or  servicing  loans;  (ii)  performing  certain  data
processing services; (iii) providing discount brokerage services; (iv) acting as
fiduciary,  investment  or  financial  advisor;  (v)  leasing  personal  or real
property; (vi) making investments in corporations or projects designed primarily
to  promote  community   welfare;   and  (vii)  acquiring  a  savings  and  loan
association.

     Subsidiary  banks  of  a  bank  holding  company  are  subject  to  certain
quantitative and qualitative  restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or provision of a letter
of credit on behalf of the bank holding company or its subsidiaries,  and on the
investment in or  acceptance of stocks or securities of such holding  company or
its subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve  Act and FRB  regulations  limit the amount of, and  establish  required
procedures and credit  standards with respect to, loans and other  extensions of
credit to  officers,  directors  and  principal  shareholders  of the Bank,  the
Company,  any  subsidiary of the Company and related  interests of such persons.
Moreover, subsidiaries of bank holding companies are prohibited from engaging in
certain tie-in  arrangements ( with the Company or any of its  subsidiaries)  in
connection with any extension of credit, lease or sale of property or furnishing
of services.

     The Company and its subsidiary,  the Bank, are affected by the monetary and
fiscal policies of various agencies of the United States  Government,  including
the FRB. In view of changing conditions in the national economy and in the money
markets,  it is impossible for  management of the Company to accurately  predict
future changes in monetary  policy or the effect of such changes on the business
or financial condition of the Company or the Bank.
<PAGE>
Restrictions on the Acquisition of the Company

     Under the Federal  Change in Bank Control Act  ("CIBCA"),  a notice must be
submitted  to the FRB if any person  (including  a company),  or group acting in
concert,  seeks to acquire 10% or more of the  Company's  shares of Common Stock
outstanding,  unless  the FRB finds  that the  acquisition  will not result in a
change in control of the  Company.  Under the CIBCA,  the FRB has 60 days within
which  to act on  such  notices,  taking  into  consideration  certain  factors,
including  the  financial  and  managerial   resources  of  the  acquiror,   the
convenience and needs of the communities served by the Company and the Bank, and
the antitrust effects of the acquisition. Under the BHCA, any Company would also
be required to obtain prior approval from the FRB before it may obtain "control"
of the Company within the meaning of the BHCA.  Control  generally is defined to
mean the  ownership  or power to vote 25  percent or more of any class of voting
securities  of the Company or the ability to control in any manner the  election
of  a  majority  of  the  Company's   directors.   See  "-Bank  Holding  Company
Regulation."

     Under Maine law, the Superintendent must approve the following transactions
prior to  consummation:  (1) the  acquisition  of control  of a Maine  financial
institution  or Maine  financial  institution  holding  company by any person or
company;  (2) the  acquisition  of more than 5% of the voting  shares of a Maine
financial  institution  holding company by a financial  institution or financial
institution  holding  company;  and (3) the  acquisition  of more than 5% of the
voting  shares  of  a  financial  institution,   the  operations  of  which  are
principally  conducted  outside  the  State  of  Maine,  by  a  Maine  financial
institution or a Maine financial institution holding company. In addition to the
foregoing, any person or company which acquires directly or indirectly more than
5% of the voting shares of a Maine  financial  institution or a Maine  financial
institution  holding company must file with the Superintendent  within five days
of the acquisition a statement containing information specified under Maine law,
which is  comparable to that required to be set forth in a statement on Schedule
13D under the Exchange Act.

                           FEDERAL AND STATE TAXATION 

Federal Taxation

     General. The Company and the Bank will report their income on a fiscal year
basis  using the  accrual  method of  accounting  and will be subject to federal
income taxation in the same manner as other  corporations  with some exceptions,
including  particularly  the  Bank's  addition  to its  reserve  for  bad  debts
discussed below.  The following  discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive  description of the tax rules
applicable to the Bank or the Company.

     Bad Debt Reserves. Savings institutions such as the Bank which meet certain
definitional  tests  primarily  relating to their assets and the nature of their
business  ("qualifying  thrifts")  are  permitted to establish a reserve for bad
debts  and to  make  annual  additions  thereto,  which  additions  may,  within
specified formula limits,  be deducted in arriving at their taxable income.  The
Bank's deduction with respect to "qualifying  loans" (generally loans secured by
certain interests in real property), may be computed using a percentage based on
the Bank's actual loss experience.
<PAGE>
     Distributions.  To the  extent  that (i) the Bank's  reserve  for losses on
qualifying  real property  loans exceeds the amount that would have been allowed
under the experience method and (ii) the Bank makes "nondividend  distributions"
to stockholders  that are considered to result in distributions  from the excess
bad debt  reserve  or the  supplemental  reserve  for  losses on loans  ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income.  Non-dividend  distributions include distributions
in  excess  of  the  Bank's  current  and  accumulated   earnings  and  profits,
distributions in redemption of stock,  and  distributions in partial or complete
liquidation.  However,  dividends  paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve.

     The amount of additional taxable income created from an Excess Distribution
is an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if, after the Conversion, certain portions
of the Bank's  accumulated  tax bad debt reserve are used for any purpose  other
than to absorb  qualified bad debt losses,  such as for the payment of dividends
or other  distributions  with  respect to the Bank's  capital  stock  (including
distributions  upon redemption or liquidation),  approximately  one and one-half
times the amount so used would be includable in gross income for federal  income
tax  purposes,  assuming a 34%  corporate  income tax rate  (exclusive  of state
taxes). See "Regulation and Supervision" and "Dividend Policy" for limits on the
payment of dividends of the Bank. The Bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.

     Corporate  Alternative  Minimum  Tax.  For taxable  years  beginning  after
December 31, 1986,  the Internal  Revenue Code of 1986,  as amended (the "Code")
imposes a tax on alternative  minimum  taxable income ("AMTI") at a rate of 20%.
The excess of the bad debt reserve  deduction  using the  percentage  of taxable
income  method  over the  deduction  that  would have been  allowable  under the
experience  method is treated as a preference item for purposes of computing the
AMTI.  Only 90% of AMTI can be  offset by net  operating  loss  carryovers.  For
taxable years beginning after December 31, 1989, the adjustment to AMTI based on
book  income  will  be an  amount  equal  to  75%  of  the  amount  by  which  a
corporation's  adjusted current  earnings  exceeds its AMTI (determined  without
regard to this adjustment and prior to reduction for net operating losses).

     Dividends  Received  Deduction and Other  Matters.  The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.  The corporate dividends received deduction is
generally 70% in the case of dividends  received from unaffiliated  corporations
with which the  Company  and the Bank will not file a  consolidated  tax return,
except  that if the  Company  and the Bank own more  than 20% of the  stock of a
corporation  distributing  a  dividend,  80% of any  dividends  received  may be
deducted.

State and Local Taxation


     The Bank and the Company are subject to a separate  state  franchise tax in
lieu of state corporate  income tax. For tax years beginning on or after January
1, 1986, the amount of the tax is the sum of 1% of Maine net income and $.08 per
$1,000  of  Maine  assets  as  defined  in  Maine  law.  Maine  assets  are  the
corporation's total end of the year assets as reported on the federal income tax
return.  Maine net income is the corporation's net income or loss as reported on
the federal income tax return which is apportioned to Maine under Maine law. The
Bank is not currently under audit with respect to its Maine income tax returns.
<PAGE>
                            MANAGEMENT OF THE COMPANY 

Senior Officers Who Are Not Directors

The  following  table  sets  forth  certain  information  as of Dec.  31,  1996,
regarding the senior officers of the Bank who are not also Directors.
<TABLE>
<CAPTION>

     Name                      Age         Positions Held With the Bank
     ----                      ---         ----------------------------
<S>                            <C>         <C>
John E. Thien                  47          Vice President and Treasurer
Gordon A. Flint                50          Vice President-Commercial Lending
Robert D. Stone                48          Vice President-Operations
Gerard R. Belanger             52          Vice President-Commercial Lending
</TABLE>

Biographical Information of Senior Officers Who Are Not Directors

     Set forth below is certain  information with respect to the senior officers
of  the  Company  and  the  Bank.  Unless  otherwise  indicated,  the  principal
occupation listed for each person below has been his or her principal occupation
for the past five years.

     Gordon A. Flint  joined the Bank in  September  1992 as Vice  President  of
Commercial  Lending/Branch  Administration.  Prior to his  association  with the
Bank,  Mr. Flint was vice  president of Private  Banking and regional  executive
officer of the Western Maine region of Fleet Bank of Maine.

     John E.  Thien  joined  the  Bank in May  1992  as Vice  President  and was
appointed Treasurer in January 1993. Prior to joining the Bank, Mr. Thien served
as treasurer  from  1979-1992  at American  Bank,  FSB of Sanford  ("American"),
located in Sanford, ME. In 1990, the OTS placed American in receivership and the
Resolution Trust  Corporation  (the "RTC") took control of the institution.  Mr.
Thien remained with American through its resolution in March 1992, and served as
president of the Bank under the RTC.

     Robert D. Stone  joined the Bank in  February  1994 as Vice  President  and
Regional Executive Officer,  and is responsible for all activities  conducted at
the Bank's Lewiston  location,  including Bank  operations and data  processing.
Prior to joining the Bank, Mr. Stone was a technology  consultant from 1992-1994
and Senior Vice President, New England Operations, of Fleet Financial Group from
1972-1992.

     Gerard R.  Belanger  joined  the Bank in April 1994 as Vice  President  and
Commercial  Lending  Officer.  Prior to joining the Bank, Mr.  Belanger was Vice
President and  Commercial  Lending  Officer for Fleet Bank and its  predecessors
from 1963-1994.
<PAGE>
Item 2.       Properties

     The Bank  conducts its business  through  eight  branch  locations  and one
seasonal location, as indicated below:
<TABLE>
<CAPTION>

                       Net Book Value              Leased or            Lease
Location                 at 12/31/96                 Owned            Expiration
--------                 -----------                 -----            ----------
<S>                        <C>                       <C>               <C>
Main Street
Kingfield, ME              $317,535                  Owned

Main Street
Stratton, ME               64,284                    Owned

Main Street
Phillips, ME               78,139                    Owned

Main Street
Rangeley, ME               183,298                   Owned

Sugarloaf/USA
Carrabassett
Valley, ME                 31,920                    Owned

Routes 2&4
Farmington, ME             146,573                   Leased            2/28/03

Route 201
Bingham, ME                143,809                   Owned

Main Street
Strong, ME                 84,957                    Owned

110 Canal Street
Lewiston, ME               382,437                   Owned
                        ----------
Total Net Book
Value                   $1,432,952
                        ==========

</TABLE>

Item 3.       Legal Proceedings

     The Bank is not  involved  in any  pending  legal  proceedings  other  than
routine legal proceedings occurring in the ordinary course of business, which in
the aggregate  involve amounts which are believed by management to be immaterial
to the financial condition of the Bank.

Item 4.       Submission of Matters to a Vote of Security Holders

     Not Applicable.
<PAGE>
                                     PART II

Item 5.       Market for Common Equity and Related Stockholder Matters

     The inside back cover of the Company's  1996 Annual Report to  Stockholders
is herein incorporated by reference.

Item 6.       Management's Discussion and Analysis of Plan of Operation

     Pages 2 through 6 of the Company's  1996 Annual Report to  Stockholders  is
herein incorporated by reference.

Item 7.       Financial Statements

     See Item 13.

Item  8.      Changes In and  Disagreements  With  Accountants on Accounting and
              Financial Disclosure

     There has been no current  report on Form 8-K filed  within 24 months prior
to the  date of the most  recent  financial  statements  reporting  a change  in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.

                                    PART III

Item 9.       Directors,  Executive  Officers,  Promoters  and Control  Persons;
              Compliance with Section 16(a) of the Exchange Act

     Information concerning directors, executive officers, promoters and control
persons of the Registrant is incorporated herein by reference from the Company's
definitive  Proxy Statement for the Annual Meeting of Stockholders to be held on
May 7,  1997,  a copy of which  will be filed not later  than 120 days after the
close of the fiscal year.

Item 10.      Executive Compensation

     Information  concerning  executive  compensation is incorporated  herein by
reference from the Company's  definitive  Proxy statement for the Annual Meeting
of  Stockholders  to be held on May 7,  1997,  a copy of which will be filed not
later than 120 days after the close of the fiscal year.

Item 11.      Security Ownership of Certain Beneficial Owners and Management

     Information  concerning security ownership of certain beneficial owners and
management is  incorporated  herein by reference  from the Company's  definitive
Proxy  statement  for the Annual  Meeting of  Stockholders  to be held on May 7,
1997,  a copy of which  will be filed not later than 120 days after the close of
the fiscal year.

Item 12.      Certain Relationships and Related Transactions

     Information  concerning certain  relationships and related  transactions is
incorporated  herein by reference from the Company's  definitive Proxy statement
for the Annual  Meeting  of  Stockholders  to be held on May 7, 1997,  a copy of
which will be filed not later than 120 days after the close of the fiscal year.
<PAGE>
Item 13.      Exhibits and Reports on Form 8-K

     (a)      The following documents are filed as a part of this report:

     (1)  Consolidated  Financial  Statements of the Company are incorporated by
reference  to the  following  indicated  pages  of the  1996  Annual  Report  to
Stockholders.


     Independent Auditors' Report

     Consolidated Statements of Financial Condition as of
     December 31, 1996 and 1995

     Consolidated Statements of Income for the Years Ended
     December 31, 1996, 1995 and 1994

     Consolidated Statements of Stockholders' Equity for
     the Years Ended December 31, 1996, 1995, and 1994

     Consolidated Statements of Cash Flows for the Years
     Ended December 31, 1996, 1995 and 1994

     Notes to Consolidated Financial Statements

<PAGE>
     The remaining information appearing in the Annual Report to Stockholders is
not  deemed to be filed as part of this  report,  except as  expressly  provided
herein.

     (2) All schedules are omitted  because they are not required or applicable,
or the required information is shown in the consolidated financial statements or
the notes thereto.

     (3)      Exhibits

     (a)      The following exhibits are filed as part of this report.

              3.1     Certificate of Incorporation of KSB Bancorp, Inc.*
              3.2     Bylaws of KSB Bancorp, Inc.*
              4.0     Stock Certificate of KSB Bancorp, Inc.*
              10.1    Form of Kingfield  Savings Bank  Recognition and Retention
                      Plan and Trust**
              10.3    Form of KSB  Bancorp,  Inc.  1993  Incentive  Stock Option
                      Plan.**
              10.4    Form of KSB  Bancorp,  Inc.  1993  Stock  Option  Plan for
                      Outside Directors.**
              11.0    Computation of earnings per share,  incorporated herein by
                      reference  to  Note  1  to  the   Consolidated   Financial
                      Statements  on  page  13 of  the  1996  Annual  Report  to
                      Stockholders attached hereto as Exhibit 13.
              13.0    1996 Annual Report to Stockholders (filed herewith).
              21.0    Subsidiary information is incorporated herein by reference
                      to "Part I - Subsidiaries."
              27.0    Financial Data Schedule.

---------------
*    Incorporated  herein by reference  into this  document from the Exhibits to
     Form  S-1,  Registration  Statement,  initially  filed on March  18,  1993,
     Registration No. 33-59744.
**   Incorporated  herein by reference  into this  document from the Exhibits to
     the 1994 Proxy Statement, filed on April 4, 1994.

     (b)      Reports on Form 8-K.

              None