1996

                                     Annual

                                     Report


























                                  KSB BANCORP
<PAGE>
LETTER TO SHAREHOLDERS

      April 1, 1997

      Dear Shareholder:

      I am pleased to report to you the  results  of your  Company's  operations
      this past year.  1996 proved to be a true  milestone in the history of the
      Bank as earnings topped the million dollar level for the first time in our
      102 year history.  1996's net operating  income of $1.2 million,  or $3.20
      per share,  was over fifty  percent  ahead of our record  earnings of last
      year. The continued growth in earnings was reflected in an increase in the
      market value of the Company's  stock to $23 per share, a 30% increase over
      last year's value and a 150% increase over our initial  offering  price in
      June 1993 of $9.09 per share (restated to reflect stock dividend).

      We achieved  these results  through our ongoing  strategies of growing the
      loan  portfolio  of the Bank while  striving to gain  efficiencies  in our
      operations.  Our success in these  efforts has been  realized  through the
      dedicated  efforts of the staff at the Bank.  Our employees  have taken on
      the  challenge  of  improving   efficiencies   throughout  the  Bank  with
      remarkable  results.  The Bank's  core  operating  expenses  were  reduced
      throughout  the year;  annual  operating  expenses  (before  FDIC  special
      assessment) decreased by $272,000 or 5.9% from 1995.

      Our  commitment  to our  communities'  economic  growth was evident in the
      $50.6  million in loans  originated  in 1996.  This loan growth  helped to
      increase  the total assets of the Bank to $134.4  million.  The success of
      the Bank's lending continues to hinge on the personalized  approach of our
      lending staff and their  philosophy of being partners with their customers
      in meeting their financial objectives.

      Unfortunately,  1996 was not without its losses.  In June of 1996 the Bank
      lost a dedicated director,  advisor,  and friend when Emil E. (Jay) Winter
      Jr. passed away. In memory of Jay and his late wife,  Katherine (Kay), the
      Bank has  established  a fund at the Kingfield  Elementary  School for the
      purchase of books for their library.

      The banking environment  continues to change rapidly due to regulatory and
      technological  changes as well as competition  from both bank and non-bank
      financial  service  providers.  At  Kingfield  Bank we are  meeting  these
      challenges by maintaining  our strategic  vision of the Bank as a provider
      of high quality, personalized financial services delivered at a reasonable
      return to our shareholders.  The following are several initiatives we have
      undertaken to support these strategies:

      o     In 1996 we began originating Home Equity Loans via the telephone.

      o     Early in 1997 we will  introduce  Peak Phone,  a  telephone  banking
            service allowing customers 24-hour access to our banking services.

      o     In the second  quarter of 1997 the Bank will  install  new  computer
            software  that will allow  mortgage  applicants  to be approved  for
            loans in less than 5 minutes in their homes!

      o     In the  first  quarter  of 1997  we are  implementing  an  intensive
            ongoing  training  program  to  assure  that  our  customer  service
            delivery is second to none.
<PAGE>

      These  initiatives  along with a planned review of our strategic plan will
      help assure that we continue to meet our mission of building the long-term
      value of the Bank to you our  shareholders,  our customers,  our employees
      and the communities we serve.  The board and our staff join me in thanking
      you for your continued support as we pursue these objectives.



      Sincerely,


      /s/John C. Witherspoon
      ----------------------
      John C. Witherspoon
      President/CEO
<PAGE>
      MANAGEMENT'S DISCUSSION AND ANALYSIS

      GENERAL

      KSB  Bancorp  , Inc's  wholly-owned  subsidiary,  "Kingfield  Bank",  is a
      community  Bank  providing  quality,   personalized  Banking  services  to
      individuals and businesses.  In 1996 the Bank operated eight retail branch
      offices located in Franklin,  Somerset and Androscoggin  counties,  Maine.
      The Bank's stated mission is "to continuously improve the Bank's long-term
      value  to  shareholders,  customers,  employees  and  the  communities  it
      serves". Since converting to a stock company in 1993, the Bank has pursued
      its  mission by  utilizing  the  capital  raised in the  offering  to fund
      growth. A total of $61.7 million in deposits were acquired in acquisitions
      of The First Federal  Savings  Association in March 1994, and the purchase
      of four  branches  of Fleet Bank of Maine in March 1995 (two of which were
      subsequently  consolidated  into existing  Kingfield Bank branches).  This
      growth  has  provided  a solid  base  for  earnings  and  proved  to be an
      effective use of the Bank's  capital.  It has also  diversified the Bank's
      markets, reducing its dependence on a predominantly rural geography and an
      economy based primarily on forest  products and tourism.  Since 1994, when
      the  rapid  growth in  deposits  without  corresponding  loan  growth  put
      pressure on the Bank's interest  margins,  the Bank has pursued a strategy
      of  increasing  loan volumes in order to increase the margins of the Bank.
      In 1996 the Bank  originated  $50.6 million in new loans which resulted in
      an increase of $12.6 million in loan  balances.  In addition to the growth
      strategies  implemented,  the  Bank  has  focused  on  reducing  operating
      expenses  and  gaining  efficiencies.  The result of these  efforts  was a
      $272,000  reduction in operating  expenses in 1996 (before a one time FDIC
      assessment of $155,000) and an improvement in the Bank's  efficiency ratio
      from 76% in 1995 to 67% for 1996 (efficiency ratio is defined as operating
      expenses as a percent of net interest  income plus  non-interest  income).
      Although the Bank does not intend to continue the rapid growth of the past
      few years,  we will  continue to use  available  capital to fund growth in
      order to generate the best return to our shareholders.  In 1997 we plan to
      continue to control  expense  levels in order to improve on  efficiencies,
      while  emphasizing  improved  quality service in both our personalized and
      electronic delivery systems.

      MORTGAGE BANKING ACTIVITIES

      Mortgage Banking  activities involve the origination of mortgage loans for
      sale,  either as whole loans or as loans packaged into securities  through
      the Federal Home Loan  Mortgage  Corporation  (FHLMC) or Federal  National
      Mortgage  association  (FNMA).  For the years ended  December 31, 1996 and
      December 31, 1995,  the Bank  originated  $19.2 million and $21.2 million,
      respectively, in one- to four-family mortgage loans. Of these amounts $5.2
      million in 1996 and $7.3  million in 1995 were sold.  The decrease in loan
      volume is related to a soft real estate market, and the Bank's decision to
      exit the Kennebec  County market where it had a salesperson  in 1995.  The
      Bank earns fees and recognizes gains and losses related to the origination
      and sale of mortgage  loans.  These fees and net gains totaled $70,000 for
      the year-ended  1996 and $89,000 for the year-ended  1995. The 1996 figure
      includes $28,000 of net gains recognized pursuant to Financial  Accounting
      Standard 122 (FAS 122) which requires mortgage originators to recognize as
      gains the present  value of future  servicing  rights on loans sold.  This
      rule was adopted by the Bank in 1996.  In addition to income earned on the
<PAGE>
      origination  and sale of loans,  the Bank earns fees for the  servicing of
      loans sold. On December 31, 1996, $78.3 million in loans were serviced for
      others,  which generated  $321,000 in fee income. As of December 31, 1995,
      $81.2  million  in loans were  serviced,  earning  $328,000.  There was no
      significant  effect of FAS 122 on  servicing  income  for  1996.  Mortgage
      banking  activities expose the Bank to interest rate risk between the date
      that  loan  rates are  committed  to a  borrower  and the date the loan is
      closed and sold.  Attempts are made to mitigate this risk through  pricing
      of loan rates,  managing  the volume of loans held for sale and  utilizing
      forward commitments to sell loans.

      COMMERCIAL LENDING ACTIVITIES

      The Bank's  commercial loan portfolio  continued to grow in 1996. The Bank
      originated  $22.8 million in commercial  loans in the year ending December
      31, 1996  resulting  in an increase in  commercial  loan  balances of $7.2
      million or 24.5% over the levels at  year-end  1995.  This  growth was the
      result of an  increased  awareness of the Bank's  personalized  commercial
      loan services in the  Androscoggin  and Somerset county markets as well as
      the southern  Franklin  county area. The vast majority of these loans were
      short-term or  adjustable-rate  loans  indexed to the wall Street  Journal
      prime  rate.  However,  as part of the Bank's  asset/liability  management
      strategies,   the  Bank  originated  some  fixed-rate   commercial   loans
      (generally at higher rates than the  adjustable  loans).  Loan  guarantees
      available  from the Small  Business  Administration  (SBA) and the Finance
      Authority of Maine (FAME) are utilized  when  appropriate  to insure up to
      90% of the risk associated with a portion of the small business loans.

      ASSET LIABILITY MANAGEMENT

      Asset/Liability  management  is the  process  used to  measure  and manage
      exposure to interest rate risk (the effect that a change in interest rates
      will  have on the  interest  rate  spread  of the  Bank).  Adjustable-rate
      mortgages  and  commercial  loans are  originated  in order to shorten the
      repricing  of Bank  assets.  As of December  31, 1996 these loans  totaled
      $45.3 million or 46% of gross loans due after December 31, 1996 (excluding
      loans held for sale).  The Bank's one-year  interest  sensitivity gap as a
      percentage of total assets was a negative 14.4% at December 31, 1996. This
      measurement  is based on an  internal  analysis by Bank  management  which
      includes a subjective  evaluation  of the rate  sensitivity  of the Bank's
      money market and other short-term deposit accounts.  Generally, a negative
      gap  results  in a  decrease  of net  interest  income  in a  rising  rate
      environment. In such a rate environment,  however, the interest rates paid
      on the Bank's passbook  savings and NOW checking  accounts ($35.1 million)
      may not be increased as much as rising rates might indicate,  resulting in
      higher  net  interest  income.  Conversely,  in a  falling  interest  rate
      environment,  rates paid on passbook savings and NOW checking accounts may
      not be lowered as much as a rate  decline  might  indicate,  resulting  in
      lower net interest income.

      RESULTS OF OPERATIONS

      Net income for 1996 was $1,244,000 or $3.20 per share compared to $823,000
      in 1995 or $2.15 per share.  1996  income was  positively  impacted by the
      effects of a full 12 months  operation of the Fleet Bank of Maine branches
      acquired in March,  1995,  the first full year's  effect of the closure of
      the Bank's Waterville,  Maine branch and the restructuring of the seasonal
      branch at Sugarloaf/USA.  Total assets of the company grew by $9.1 million
      or 7.3% from  $125.2  million at December  31,  1995 to $134.4  million at
<PAGE>
      December 31, 1996.  Total loans  increased by $12.6  million or 14.9% over
      December  31,  1995.  This loan growth  contributed  to an increase in the
      Bank's  margin  from 4.14% in 1995 to 4.38% in 1996,  which  resulted in a
      12.4% or $609,000  increase in net interest  income  before  provision for
      loan losses.  Non-interest  income increased by $17,000 from 1995 ($96,000
      net of the effect of security gains and losses). Service charges and other
      fees were up by $103,000  reflecting the continued  growth of the Bank and
      use of its services. Income related to the fees on origination and sale of
      mortgage  loans which was down $19,000  ($42,000  before the effect of FAS
      122 on net  gains on  sales.)  The  decline  is due in part to the  Bank's
      decision to continue to hold more loans in the portfolio of the Bank, thus
      reducing  the  volume of sales and  income  derived  from such  sales.  In
      addition  mortgage  loan  volume was down from 1995  levels.  Non-interest
      expense decreased by $117,000 from 1995. However,  the Bank incurred a net
      one-time special assessment from the Federal Deposit Insurance Corporation
      ("FDIC")  related  to  the  recapitalization  of the  Savings  Association
      Insurance Fund("SAIF") of $155,000, without which expenses would have been
      reduced by $272,000 or 5.9% from the previous  year.  This  assessment was
      placed on deposits  acquired from the  Resolution  Trust  Corporation  and
      considered to be "SAIF" deposits. The net effect of the assessment will be
      to lower deposit insurance premiums in future years.

      FINANCIAL CONDITION

      Total  assets of the Bank grew by $9.1  million or 7.3% from  December 31,
      1995 to December 31, 1996. Of the asset growth, $12.6 million was in loans
      while investments in mortgage-backed and other securities declined by $1.5
      million and  interest-bearing  deposits  declined by $2.5 million.  Of the
      increase in loan volume,  $5.0 million was  attributable to an increase in
      residential  mortgage loans,  $7.2 million was attributable to an increase
      in commercial  loans,  and $0.5 million was attributable to an increase in
      consumer and other loans. The decline in investments was due to investment
      maturities and principal pay downs on  mortgage-backed  securities.  Total
      deposits grew by $5.7 million or 5.5% during 1996. Borrowings increased by
      $2.2  million  or 20.4%  over 1995 in order to meet  funding  needs of the
      Bank's loan growth.  The Bank's borrowings  consist of advances of various
      maturities from the Federal Home Loan Bank. The Bank's  non-accrual  loans
      increased  from $ 1,645,000 at December 31, 1995 to $1,895,000 at December
      31, 1996. This represents 1.92% and 1.91% of net loans, respectively.  The
      dollar increase can be attributed to the overall  increase in loan volumes
      in 1996.  During 1996,  the Bank incurred loan losses net of recoveries of
      $364,000.  In response to the net losses and the  increased  loan volumes,
      the Bank charged $390,000 to loan loss provision during 1996, resulting in
      an increase in the reserve  balance from  $867,000 at December 31, 1995 to
      $893,000 at December 31, 1996.  In June 1996 the Board of Directors  voted
      to issue a 10% stock dividend in addition to the semi-annual cash dividend
      of $0.10 per share.  This stock  dividend had the effect of increasing the
      number of shares outstanding by 37,305 to a total of 411,055.
<PAGE>
      IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

      In June 1996, the Financial Accounting Standards Board issued Statement of
      Financial  Accounting  Standards (SFAS) No. 125, "Accounting for Transfers
      Servicing  of  Financial  Assets  and   Extinguishment   of  Liabilities",
      effective for financial  statements  for the fiscal year  beginning  after
      December 31, 1996  (excluding  those sections  identified in SFAS No. 127,
      "Deferral of the Effective  Date of Certain  Provisions of Sfas No. 125").
      SFAS No. 125 provides consistent standards for distinguishing transfers of
      financial   assets  that  are  sales  from   transfers  that  are  secured
      borrowings.  The Company  expects the impact of adopting SFAS No. 125 will
      be immaterial to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial and Other Data of the Bank
                                                                                        (in 000's)
Selected Financial Data:                                    1996            1995(4)        1994(4)        1993         1992
----------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>            <C>            <C>          <C>
   Total assets                                           $134,357        $125,233       $113,003       $65,514      $50,093
   Loans receivable, net (1)                                99,197          85,889         68,634        46,661       34,365
   Investment securities available for sale (2)              7,452           8,377             --            --            0
   Investment securities to be held to maturity             18,517          19,102         36,207        14,255       12,572
   Excess of cost over fair value
      of assets acquired                                       620             723            716           322          366
   Deposits (3)                                            110,282         104,702         81,040        46,406       40,648
   Borrowed funds                                           13,186          10,952         23,367        11,220        5,167
   Total equity, substantially restricted                    9,792           8,498          7,621         7,365        3,732

   AVERAGE INTEREST EARNING ASSETS                        $124,331        $116,915        $88,884       $55,149      $44,648
   AVERAGE ASSETS                                          130,742         122,899         92,459        58,526       47,450
   AVERAGE INTEREST BEARING LIABILITIES                    111,580         106,129         79,337        46,468       38,759
   AVERAGE EQUITY                                            9,134           7,961          7,502         5,685        3,508

Selected Operating Data:
   Interest and dividend income                            $10,705          $9,955         $6,942        $4,679       $4,161
   Interest expense                                          5,166           5,025          3,267         1,720        1,852
----------------------------------------------------------------------------------------------------------------------------
Net interest income                                          5,539           4,930          3,675         2,959        2,309
   Less provision for loan losses                              390             315            140           120          222
----------------------------------------------------------------------------------------------------------------------------
   Net interest income after
      provision for loan losses                              5,149           4,615          3,535         2,839        2,087
----------------------------------------------------------------------------------------------------------------------------
Non-interest income
   Net security gains (losses)                                 (47)             32             --            --          188
   Fees on sold loans                                           20              53             93           111          228
   Net gains (losses) on sold loans                             50              36             41           203           57
   Mortgage servicing                                          321             328            306           307          274
   Service charges and fees                                    700             568            440           337          254
   Other                                                        95             105             77            13           16
-----------------------------------------------------------------------------------------------------------------------------
      Total non-interest income                              1,139           1,122            957           971        1,017
----------------------------------------------------------------------------------------------------------------------------
   Non-interest expense
   Salaries and benefits                                     2,051           2,100          2,015         1,312          926
   Occupancy                                                   299             312            270           162          129
   Equipment                                                   629             625            634           367          265
   BIF premium                                                 236             137            151            95           90
   Other                                                     1,246           1,404          1,178           881          674
----------------------------------------------------------------------------------------------------------------------------
      Total non-interest expense                             4,461           4,578          4,248         2,817        2,084
----------------------------------------------------------------------------------------------------------------------------
Income before income taxes                                   1,827           1,159            244           993        1,020
Income tax expense                                             583             336             22           270          369
----------------------------------------------------------------------------------------------------------------------------
   Net income before accounting change                       1,244             823            222           723          651
Change of accounting for income taxes                           --              --             --            --           59
----------------------------------------------------------------------------------------------------------------------------
      Net income                                             1,244             823            222           723          710
============================================================================================================================
<PAGE>
Selected Consolidated Financial and Other Data of the Bank
Selected Financial Data:                                     1996             1995(4)        1994(4)       1993         1992
---------------------------------------------------------------------------------------------------------------------------- 
   Return on average assets   %                               0.95%           0.67%          0.24%         1.24%        1.50%
   Return on average equity                                  13.62           10.34           2.95         12.72        20.24
   Average equity to average assets                           6.99            6.48           8.11          9.71         7.39
   Equity to total assets                                     7.29            6.79           6.74         11.24         7.45
   Tangible equity to tangible assets                         6.86            6.24           6.15         10.80         6.77
   Interest rate spread during period                         3.91            3.70           3.54          4.52         4.23
   Net interest margin (5)                                    4.38            4.14           3.99          5.10         4.86
   Operating expenses to average assets (6)                   3.33            3.73           4.59          4.70         4.25
   Non-accruing loans to net loans (7)(1)                     1.91            1.92           1.99          1.78         1.47
   Non-performing assets to total assets(8)(7)                1.50            1.35           1.22          1.28         1.07
   Allowance for loan losses to
      non-performing loans                                   47.12           52.71          44.95         60.80        84.17
   Allowance for loan losses to total loans (1)               0.89            1.00           0.89          1.08         1.20
   Average interest-earning assets to
      average interest-bearing liabilities                    1.11x           1.10x          1.12x         1.19x        1.15x
   Earnings per Share, restated to reflect 10%
      stock dividend August, 1996                            $3.20           $2.15          $0.59         $1.95          N/A

(1)  Includes loans held for sale
(2)  At market.
(3)  Includes escrows and trustee accounts for sold loans.
(4)  In March, 1994 the Bank acquired one branch with deposits of $42.3 million.
     In March,  1995,  the Bank  acquired  four  branches with deposits of $19.4
     million.
(5)  Calculation  is based upon net interest  income  before  provision for loan
     losses and before  certain loan fees and net income on interest  rate swaps
     divided by average interest-earning assets.
(6)  For  purposes  of  calculating   this  ratio,   operating   expenses  equal
     non-interest  expense less  amortization  of excess of cost over net assets
     acquired.
(7)  Includes  restructured  loans that are performing in accordance  with their
     restructured  terms but whose  interest is recognized on a cash basis only.
     Amounts are $501,000, $765,000, $672,000, $486,000 and $292,000 at December
     31, 1996, 1995, 1994, 1993 and 1992, respectively.
(8)  Non-performing assets consist of non-accruing loans and real estate owned.
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT




      Board of Directors and Stockholders
      KSB Bancorp, Inc. and Subsidiary


      We have  audited the  accompanying  consolidated  statements  of financial
      condition of KSB Bancorp,  Inc. and Subsidiary as of December 31, 1996 and
      1995,  and the  related  consolidated  statements  of  income,  changes in
      stockholders'  equity  and cash  flows for each of the three  years in the
      period  ended  December  31,  1996.  These  financial  statements  are the
      responsibility  of the  Company's  management.  Our  responsibility  is to
      express an opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
      in all  material  respects,  the  consolidated  financial  position of KSB
      Bancorp,  Inc. and  Subsidiary  as of December 31, 1996 and 1995,  and the
      consolidated  results of their  operations,  and their  consolidated  cash
      flows for each of the three years in the period  ended  December 31, 1996,
      in conformity with generally accepted accounting principles.



      /s/Berry, Dunn, McNeil & Parker
      -------------------------------
      Berry, Dunn, McNeil & Parker


      Portland, Maine
      January 17, 1997
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition

DECEMBER 31, 1996 AND 1995

ASSETS                                                                               1996               1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>               <C>
Cash and due from banks                                                            $ 2,479,367       $ 2,499,796
Interest-bearing deposits with banks                                                     1,556         2,460,533
Securities available for sale, at market value                                       7,452,341         8,377,279
Securities held to maturity (market value $18,587,246
   and $19,273,234 at 1996 and 1995, respectively)                                  18,516,750        19,102,469
Loans held for sale                                                                  1,819,209         1,126,452

Loans receivable
   Real estate mortgage                                                             50,873,593        45,912,570
   Home equity                                                                       6,041,705         5,189,276
   Installment                                                                       4,401,126         4,494,568
   Commercial                                                                       36,399,651        29,219,882
   Other                                                                               763,332         1,000,256
   Deferred loan origination fees                                                     (209,164)         (186,318)
-----------------------------------------------------------------------------------------------------------------
                                                                                    98,270,243        85,630,234
   Less allowance for possible loan losses                                            (893,456)         (866,770)
-----------------------------------------------------------------------------------------------------------------
         Total loans receivable, net                                                97,376,787        84,763,464
-----------------------------------------------------------------------------------------------------------------

Accrued interest receivable                                                            767,602           815,254
Other real estate owned                                                                116,500            41,177
Federal Home Loan Bank stock                                                         1,320,550         1,320,550
Premises and equipment, net                                                          2,204,415         2,254,408
Goodwill                                                                               619,825           722,873
Deferred tax asset                                                                     464,903           434,776
Cash surrender value of life insurance                                                 554,096           493,759
Other assets                                                                           663,036           820,387
-----------------------------------------------------------------------------------------------------------------
                                                                                  $134,356,937      $125,233,177
=================================================================================================================
<PAGE>
<CAPTION>
Consolidated Statements of Financial Condition (continued)

LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                                     1996               1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>               <C>
Liabilities
   Deposit accounts
      Regular savings                                                            $  21,043,376     $  21,876,031
      Money market accounts                                                          5,700,866         5,762,671
      Time                                                                          59,336,687        55,516,230
      NOW accounts                                                                  14,075,564        12,763,500
      Demand                                                                         9,206,066         7,767,222
-----------------------------------------------------------------------------------------------------------------
         Total deposits                                                            109,362,559       103,685,654

   Advances from Federal Home Loan Bank                                             13,186,000        10,952,000
   Escrows and trustee accounts for sold loans                                         919,254         1,016,254
   Accrued expenses and other liabilities                                            1,096,962         1,081,038
-----------------------------------------------------------------------------------------------------------------
         Total liabilities                                                         124,564,775       116,734,946
-----------------------------------------------------------------------------------------------------------------

Commitments (Note 14)

Stockholders' equity
   Preferred stock, authorized 200,000 shares                                              --                --
   Common stock, par value $.01; authorized 1,200,000 shares,
      issued and outstanding 411,055 shares in 1996 and 1995, restated                   4,111            3,738
   Additional paid-in capital                                                        4,325,499        3,474,940
   Retained earnings                                                                 5,748,714        5,360,257
   Net unrealized loss on securities available for sale,
      net of deferred tax asset of $19,400 and $5,000
      at 1996 and 1995, respectively                                                   (37,760)          (9,532)
-----------------------------------------------------------------------------------------------------------------
                                                                                    10,040,564        8,829,403
   Less remaining obligation under:
      Employee Stock Ownership Plan                                                   (168,840)        (222,966)
      Bank Recognition and Retention Plan                                              (79,562)        (108,206)
-----------------------------------------------------------------------------------------------------------------
         Total stockholders' equity                                                  9,792,162        8,498,231
-----------------------------------------------------------------------------------------------------------------
                                                                                  $134,356,937     $125,233,177
=================================================================================================================
<PAGE>
<CAPTION>
Consolidated Statements of Income

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                                                     1996              1995              1994
-----------------------------------------------------------------------------------------------------------------
Interest and dividend income
   Interest and fees on loans                                     $ 8,756,148       $7,656,814        $4,684,718
   Interest on securities available for sale                          466,560        2,146,754                --
   Interest on securities held to maturity                          1,397,322           60,000         2,199,918
   Dividends                                                           84,501           91,331            56,979
-----------------------------------------------------------------------------------------------------------------
         Total interest and dividend income                        10,704,531        9,954,899         6,941,615
-----------------------------------------------------------------------------------------------------------------

Interest expense
   Interest on deposits                                             4,483,138        4,025,561         2,810,410
   Interest on borrowed funds                                         682,469          998,852           456,306
-----------------------------------------------------------------------------------------------------------------
         Total interest expense                                     5,165,607        5,024,413         3,266,716
-----------------------------------------------------------------------------------------------------------------
         Net interest and dividend income                           5,538,924        4,930,486         3,674,899
   Provision for possible loan losses                                 390,000          315,000           140,000
-----------------------------------------------------------------------------------------------------------------
         Net interest and dividend income after
            provision for possible loan losses                      5,148,924        4,615,486         3,534,899
-----------------------------------------------------------------------------------------------------------------
Noninterest income
   Gain (loss) on disposition of securities                           (46,617)          32,025                --
   Mortgage servicing fees                                            320,522          328,038           306,352
   Service charges and fees                                           699,747          567,836           439,810
   Other                                                              165,268          193,928           210,395
-----------------------------------------------------------------------------------------------------------------
         Total noninterest income                                   1,138,920        1,121,827           956,557
-----------------------------------------------------------------------------------------------------------------
Noninterest expense
   Salaries and benefits                                           $2,050,381       $2,100,216        $2,014,575
   Occupancy                                                          298,835          311,975           270,490
   Equipment                                                          629,391          625,234           633,599
   BIF Premium                                                        236,135          137,100           151,394
   Other                                                            1,246,321        1,403,861         1,178,395
-----------------------------------------------------------------------------------------------------------------
         Total noninterest expense                                  4,461,063        4,578,386         4,248,453
-----------------------------------------------------------------------------------------------------------------
         Income before income taxes                                 1,826,781        1,158,927           243,003
   Income tax expense                                                 582,453          335,964            21,503
-----------------------------------------------------------------------------------------------------------------
         Net income                                                $1,244,328      $   822,963        $  221,500
=================================================================================================================

Net income, per common share, restated                                $  3.20          $  2.15           $  0.59
Weighted average number of shares outstanding, restated               388,794          382,670           376,255 
<PAGE>
<CAPTION>
Consolidated  Statements of Changes in Stockholders' Equity 
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                                                                                               Net
                                                                                               Bank        Unrealized
                                                                               Employee     Recognition      Loss on
                                                Additional                       Stock          and        Securities
                                    Common        Paid-In       Retained       Ownership     Retention      Available
                                     Stock        Capital       Earnings         Plan          Plan         for Sale        Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>       <C>             <C>            <C>            <C>                <C>     <C>
Balances, December 31, 1993         $ 3,738   $  3,410,978    $  4,455,017   $  (343,581)   $ (161,486)        $ --    $  7,364,666)
   Net income                            --             --         221,500            --            --           --         221,500
   Cash dividends declared
      ($.18 per share)*                  --             --         (74,750)           --            --           --         (74,750)
   Payment of obligation
      under Employee Stock
      Ownership Plan                     --         24,612              --        63,920            --           --          88,532
   Bank Recognition and
      Retention Plan                     --             --              --            --        20,616           --          20,616
------------------------------------------------------------------------------------------------------------------------------------

Balances, December 31, 1994           3,738      3,435,590       4,601,767      (279,661)     (140,870)          --       7,620,564
   Net income                            --             --         822,963            --            --           --         822,963
   Cash dividends declared
      ($.18 per share, net
      of dividends on ESOP
      shares)*                           --             --         (64,473)           --            --           --         (64,473)
   Payment of obligation
      under Employee Stock
      Ownership Plan                     --         39,350              --        56,695            --           --          96,045
   Bank Recognition and
      Retention Plan                     --             --              --            --        32,664           --          32,664
   Change in net unrealized loss
      on securities available for
      sale, net of deferred taxes
      of $5,000                          --             --              --            --            --       (9,532)         (9,532)
------------------------------------------------------------------------------------------------------------------------------------

Balances, December 31, 1995           3,738      3,474,940       5,360,257      (222,966)     (108,206)      (9,532)      8,498,231
   Net income                            --             --       1,244,328            --            --           --       1,244,328
   Cash dividends declared
      ($.19 per share, net
      of dividends on ESOP
      shares)*                           --             --         (72,466)           --            --           --         (72,466)
   10% stock dividend                   373        783,032        (783,405)           --            --           --             --
   Payment of obligation
      under Employee Stock
      Ownership Plan                     --         67,527              --        54,126            --           --         121,653
   Bank Recognition and
      Retention Plan                     --             --              --            --        28,644           --          28,644
   Change in net unrealized loss
      on securities available for
      sale, net of deferred taxes
      of $14,400                         --             --              --            --            --      (28,228)        (28,228)
------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996          $4,111     $4,325,499      $5,748,714     $(168,840)    $ (79,562)    $(37,760)     $9,792,162
====================================================================================================================================
*  Restated for a 10% stock dividend declared in 1996.
<PAGE>
<CAPTION>
Consolidated Statements of Cash Flows

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                                                     1996              1995              1994
----------------------------------------------------------------------------------------------------------------- 
<S>                                                               <C>                <C>               <C>
Cash flows from operating activities
   Net income                                                     $ 1,244,328        $ 822,963         $ 221,500
   Adjustments to reconcile net income to net cash
      provided by operating activities
         Depreciation and amortization                                745,293          675,561           447,621
         Decrease in obligation under ESOP and BRP                    150,298          128,708           109,148
         Provision for loan losses                                    390,000          315,000           140,000
         Deferred income taxes                                        (21,857)         (91,045)          (51,807)
         Net gain on sale of loans held for sale                      (49,738)         (35,807)          (40,679)
         Net gain on sale of securities available for sale                 --          (32,025)               --
         Net loss on default of security held to maturity              46,617               --                --
         Net loss on disposal of equipment                                 --           33,250            53,930
         Loss on sale of other real estate owned                       14,204            5,653             3,351
         Other                                                             --               --            (9,047)
         Originations of loans held for sale                       (5,842,269)      (4,626,130)       (9,811,892)
         Proceeds from loans held for sale                          5,199,250        7,281,107        11,073,800
         Decrease (increase) in
            Interest receivable                                        48,726          (81,228)         (342,981)
            Other receivables and prepaid expense                       9,119          116,071           (76,438)
            Cash surrender value of life insurance                    (60,337)         (21,504)         (472,255)
         Increase (decrease) in
            Accrued income taxes payable                              (15,690)           5,189           108,234
            Deferred origination fees                                  22,846          (39,211)          (32,123)
            Accrued expenses and other liabilities                     37,745            9,923           182,043
-----------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                  1,918,535        4,466,475         1,502,405
-----------------------------------------------------------------------------------------------------------------

Cash flows from investing activities
   Net decrease (increase) in interest-bearing deposits with banks  2,458,977       (2,440,068)          (20,465)
   Proceeds from maturities and principal payments on
      securities held to maturity                                   5,730,367        4,343,000         6,545,192
   Purchase of securities held to maturity                         (5,364,445)              --       (28,599,749)
   Proceeds from maturities and principal payments on
      securities available for sale                                   860,627          227,549                --
   Proceeds from sale of securities available for sale                     --        4,030,625                --
   Net increase in loans                                          (13,142,669)     (13,745,541)      (23,278,090)
   Capital expenditures                                              (318,563)        (321,512)       (1,005,071)
   Purchase of FHLB stock                                                  --         (167,200)         (594,950)
   Net decrease (increase) in other assets                             68,330           18,236           (59,500)
   Proceeds from sale of other real estate owned                       26,973           37,783            20,000
-----------------------------------------------------------------------------------------------------------------
         Net cash used by investing activities                     (9,680,403)      (8,017,128)      (46,992,633)
-----------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                                                     1996              1995              1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>                <C>    
Cash flows from financing activities
   Cash received through branch acquisition                        $     --      $ 12,314,461       $41,751,343
   Net increase (decrease) in time deposit accounts                 3,820,457        5,348,492        (8,184,415)
   Net increase (decrease) in other deposit accounts                1,856,448       (1,364,578)          180,348
   Net increase (decrease) in FHLB advances                         2,234,000      (12,415,000)       12,147,000
   Net increase (decrease) in escrow accounts                         (97,000)         245,366           314,957
   Cash dividends paid                                                (72,466)         (64,473)          (74,750)
-----------------------------------------------------------------------------------------------------------------
      Net cash provided by financing activities                     7,741,439        4,064,268        46,134,483
-----------------------------------------------------------------------------------------------------------------
      Net increase (decrease) in cash and cash equivalents            (20,429)         513,615           644,255
Cash and cash equivalents, beginning of year                        2,499,796        1,986,181         1,341,926
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                             $2,479,367    $   2,499,796       $ 1,986,181
================================================================================================================= 

Supplemental disclosures of cash flow information
   Cash paid during the year for
         Interest                                                  $5,200,515     $  5,058,469       $ 3,181,058
================================================================================================================= 
         Income taxes, net of refunds                              $  620,000     $    333,610       $   (34,143)
================================================================================================================= 

The Company had the following noncash transactions
   Cost of securities held to maturity transferred to
      securities available for sale                                $      --      $ 12,529,371       $        --
   Net increase (decrease) required by Statement of
      Financial Accounting Standards 115
         Unrealized loss on securities available for sale             (42,629)         (14,532)               --
         Deferred income tax assets                                    14,400            5,000                --
         Net unrealized loss on securities available for sale          28,229            9,532
         Net transfer from loans to other real estate owned           116,500           72,913            23,351 

</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1996, 1995 and 1994



Nature of Business

      KSB Bancorp,  Inc. (the Company) provides a full range of banking services
      to individual and corporate  customers through its subsidiary and branches
      located in Franklin,  Kennebec,  and Androscoggin counties. The Company is
      subject to the  regulations  of certain  state and  federal  agencies  and
      undergoes periodic examination by those regulatory authorities.

1.    Summary of Significant Accounting Policies

      Use of Estimates

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

      Principles of Consolidation

      The accompanying consolidated financial statements include the accounts of
      KSB Bancorp, Inc. and its wholly-owned subsidiary,  Kingfield Savings Bank
      (the Bank). All significant  intercompany  balances and transactions  have
      been eliminated in the accompanying consolidated financial statements.

      Cash and Cash Equivalents

      For the purpose of  presentation  in the  consolidated  statements of cash
      flows, cash and cash equivalents include cash on hand and amounts due from
      banks.

      Securities

      The Bank's investment accounting policies are as follows:
      Securities  Available for Sale:  Securities  available for sale consist of
      securities that the Bank  anticipates  could be made available for sale in
      response to changes in market interest rates,  liquidity needs, changes in
      funding sources and other similar  factors.  These assets are specifically
      identified  and are carried at fair value.  Amortization  of premiums  and
      accretion  of  discounts  are  recognized  in  interest  income  using the
      interest method over the period to maturity.  Unrealized holding gains and
      losses for these assets,  net of related  income taxes,  are excluded from
      earnings  and are  reported  as a net  amount in a separate  component  of
      stockholders'  equity.  When decline in market value is  considered  other
      than temporary,  the loss is recognized in the consolidated  statements of
<PAGE>
 1. Summary of Significant Accounting Policies (Continued)

      income,  resulting  in the  establishment  of a new  cost  basis  for  the
      security. Securities Held to Maturity: Securities held to maturity consist
      of  securities  purchased  for which the Bank has the positive  intent and
      ability to hold such securities until maturity.  Securities  classified as
      held to  maturity  are  carried  at cost,  adjusted  for  amortization  of
      premiums  and  accretion  of  discounts.  When  decline in market value is
      considered   other  than   temporary,   the  loss  is  recognized  in  the
      consolidated statements of income, resulting in the establishment of a new
      cost basis for the security. Market values of securities are determined by
      prices obtained from independent market sources.

      Loans Held for Sale

      Mortgage loans  originated  and intended for sale in the secondary  market
      are  carried  at the  lower  of  cost or  estimated  market  value  in the
      aggregate.  Net unrealized losses are recognized in a valuation  allowance
      by charges to income.

      Loan Servicing

      SFAS No. 122,  "Accounting for Mortgage Servicing Rights",  was adopted at
      January 1, 1996.  The cost of mortgage  servicing  rights is  amortized in
      proportion to, and over the period of,  estimated net servicing  revenues.
      Impairment  of mortgage  servicing  rights is  assessed  based on the fair
      value of those rights.  Fair values are estimated  using  discounted  cash
      flows based on a current  market  interest rate. For purposes of measuring
      impairment,  the rights are stratified based on the following  predominant
      risk characteristics of the underlying loans:  interest rate, fixed versus
      variable  rate  and  period  of  origination.  The  amount  of  impairment
      recognized  is the  amount by which  the  capitalized  mortgage  servicing
      rights  for  a  stratum  exceed  their  fair  value.  The  amortized  cost
      approximates  fair value at December 31, 1996. The impact of adopting SFAS
      No. 122 was immaterial to the financial statements.

      Loans Receivable

      Loans  receivable  that  management has the intent and ability to hold for
      the foreseeable  future or until maturity or pay-off are reported at their
      outstanding principal balance adjusted for any charge-offs,  the allowance
      for loan losses,  and any deferred fees or costs on originated  loans. The
      allowance  for loan losses is increased by charges to income and decreased
      by charge-offs, net of recoveries. Management's periodic evaluation of the
      adequacy  of  the  allowance  is  based  on  the  Bank's  past  loan  loss
      experience,  known and inherent risks in the portfolio, adverse situations
      that may affect the borrower's  ability to repay,  the estimated  value of
      any underlying  collateral,  and current economic  conditions.  Management
      believes that the allowance for loan losses is adequate.  While management
      uses available information to recognize losses on loans, changing economic
      conditions  and the economic  prospects of the borrowers  may  necessitate
      future additions to the allowance.  SFAS No. 114, "Accounting by Creditors
      for  Impairment  of a Loan," as amended by SFAS No.  118,  "Accounting  by
      Creditors for Impairment of a Loan - Income  Recognition and Disclosures,"
      was adopted at January 1, 1995.  Under this Standard,  loans considered to
      be impaired are reduced to the present value of expected future cash flows
      or to the  fair  value of  collateral,  by  allocating  a  portion  of the
<PAGE>
 1. Summary of Significant Accounting Policies (Continued)

      allowance for loan losses to such loans.  If these  allocations  cause the
      allowance  for loan  losses to  require  an  increase,  such  increase  is
      reported  as loan loss  provision.  There  was no effect on the  financial
      statements  in adopting  this  Standard for 1995.  The carrying  values of
      impaired loans are periodically adjusted to reflect cash payments, revised
      estimates  of future cash flows,  and  increases  in the present  value of
      expected cash flows due to the passage of time. Cash payments representing
      interest income are reported as such.  Other cash payments are reported as
      reductions  in carrying  value.  Increases  due to changes in estimates of
      future  payments are reported as loan loss  provision  and  decreases  are
      reported as reductions in loan loss provision.  Uncollectible  interest on
      loans that are contractually past due is charged off. The loan is returned
      to accrual status when, in management's  judgment,  the borrower's ability
      to make periodic interest and principal payments is back to normal.  Until
      the loan is  returned  to accrual  status,  all  payments  are  applied to
      principal.

      Loan Origination Fees and Related Costs

      Loan fees and certain direct loan origination costs are deferred,  and the
      net fee or cost is recognized  as an  adjustment to interest  income using
      the interest method over the contractual  life of the loans,  adjusted for
      estimated   prepayments   based  on  the  Bank's   historical   prepayment
      experience.

      Real Estate Owned

      Real estate properties  acquired through,  or in lieu of, loan foreclosure
      are  initially  recorded at the lower of cost or fair value at the date of
      foreclosure.  Costs relating to  improvement of property are  capitalized,
      whereas costs relating to the holding of property are expensed. Valuations
      are periodically  performed by management,  and an allowance for losses is
      established  by a charge to operations if the carrying value of a property
      exceeds its fair market value less estimated costs to sell.

      Premises and Equipment

      Premises and equipment and related  improvements  are stated at cost, less
      accumulated  depreciation  and  amortization.  Premises and  equipment are
      depreciated by the straight-line and accelerated  methods over the assets'
      estimated  useful  lives.  Leasehold  improvements  are  amortized  by the
      straight-line method over the lease terms.

      Goodwill

      The  excess of cost  over  fair  value of net  assets  acquired  in branch
      acquisitions is amortized to expense using the  straight-line  method over
      ten years.  On an ongoing  basis,  management  reviews the  valuation  and
      amortization of goodwill to determine possible impairment.
<PAGE>
      1. Summary of Significant Accounting Policies (Concluded)  

      Income Taxes

      Deferred  tax  assets  and  liabilities   are  determined   based  on  the
      differences  between the  financial  statement and tax bases of assets and
      liabilities  using  enacted  tax rates in effect for the year in which the
      differences are expected to reverse.  Principal timing differences include
      depreciation,  provision  for  loan  losses,  and  the  deferral  of  loan
      origination fees.

      Financial Instruments with Off-Balance Sheet Risk

      The Company uses  off-balance  sheet financial  instruments as part of its
      asset/liability management activities. The Company does not intend to sell
      any of these instruments.  Interest rate swap agreements are accounted for
      using the accrual method. Net interest income (expense) resulting from the
      differential  between exchanging floating and fixed-rate interest payments
      is recorded on a current  basis.  Interest  rate floors are  contracts  in
      which a floor is  established  at a specified rate and period of time. The
      premium  paid  for the  contract  is  amortized  over its  life.  Any cash
      payments received are recorded as an adjustment to net interest income. In
      the ordinary  course of business the Company has entered into  off-balance
      sheet  financial  instruments  consisting of commitments to extend credit,
      commitments under credit card arrangements,  commercial letters of credit,
      and standby letters of credit. Such financial  instruments are recorded in
      the financial statements when they are funded or related fees are incurred
      or received.

      Earnings Per Share

      The earnings  per share  computation  is based upon the  weighted  average
      number of shares of stock outstanding during the period.  Only ESOP shares
      that have been  committed to be released are  considered  outstanding.  In
      1996,  the  Company  declared  a 10%  stock  dividend.  Earnings  and cash
      dividends per share have been retroactively  restated for 1995 and 1994 to
      reflect the stock dividend.
<PAGE>
2.    Securities

      Debt and  equity  securities  have  been  classified  in the  consolidated
      statements of financial  condition  according to management's  intent. The
      carrying  amount  of  securities  and  their  approximate  fair  values at
      December 31 follow:
<TABLE>
<CAPTION>

                                                Gross                   Gross
                                              Amortized              Unrealized             Unrealized                Fair
                                                Cost                    Gains                 Losses                  Value
------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                      <C>                    <C>                   <C>              
     Available for Sale:
     1996
     U.S. Government agency securities
        and obligations                      $ 3,999,921              $    1,594             $    2,452            $ 3,999,063
     Mortgage-backed securities                3,509,581                      --                 56,303              3,453,278
------------------------------------------------------------------------------------------------------------------------------
                                             $ 7,509,502              $    1,594             $   58,755            $ 7,452,341
==============================================================================================================================

     1995
     U.S. Government agency securities
        and obligations                      $ 3,999,048              $    3,497             $    9,264            $ 3,993,281
     Mortgage-backed securities                4,392,763                      --                  8,765              4,383,998
------------------------------------------------------------------------------------------------------------------------------
                                             $ 8,391,811              $    3,497             $   18,029            $ 8,377,279
==============================================================================================================================

     Held to Maturity:
     1996
     Corporate bonds                       $      21,611              $       54             $       --            $    21,665
     Mortgage-backed securities               16,728,785                 160,288                108,438             16,780,635
     REMIC                                     1,766,354                  18,592                     --              1,784,946
------------------------------------------------------------------------------------------------------------------------------
                                           $  18,516,750              $  178,934             $  108,438            $18,587,246
==============================================================================================================================

     1995
     Corporate bonds                       $      95,421              $    1,135             $       --            $    96,556
     Mortgage-backed securities               16,967,991                 236,186                 95,625             17,108,552
     REMIC                                     2,039,057                  29,069                     --              2,068,126
------------------------------------------------------------------------------------------------------------------------------
                                           $  19,102,469              $  266,390             $   95,625            $19,273,234
==============================================================================================================================
</TABLE>

      Mortgage-backed  securities  are subject to risk of  prepayment  which can
      affect the yields  realized on the  securities by increasing or decreasing
      the period over which  premiums and discounts  are  recognized in interest
      income.
<PAGE>
2.    Securities (concluded)

      The  scheduled  maturities  of  securities  at December 31,  1996,  are as
follows:
<TABLE>
<CAPTION>

                                                       Held to Maturity                              Available for Sale
------------------------------------------------------------------------------------------------------------------------------
                                              Amortized                 Fair                 Amortized                Fair
                                                Cost                    Value                  Cost                   Value
------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                     <C>                         <C>                    <C>
     Due in one year or less             $            --         $            --             $1,499,921             $1,497,500
     Due from one to five years                3,120,769               3,091,671              2,500,000              2,501,563
     Due from five to ten years                7,097,461               7,104,536              3,509,581              3,453,278
     Due after ten years                       8,298,520               8,391,039                     --                     --
------------------------------------------------------------------------------------------------------------------------------
                                             $18,516,750             $18,587,246             $7,509,502             $7,452,341
==============================================================================================================================
</TABLE>
      Expected  maturities will differ from contractual  maturities as borrowers
      may have the right to call or prepay  obligations  with or without call or
      prepayment  penalties.  The FASB  Implementation  Guide  for SFAS No.  115
      allowed an entity to change the classification of its securities from held
      to maturity to available  for sale from  November 15, 1995 to December 31,
      1995. The Bank reclassified  investments with a cost of $12,529,371 and an
      unrealized  loss of  $26,236  to  available  for sale for  asset/liability
      management reasons.  Gross realized gains on sale of securities  available
      for sale were $32,025 for 1995. No securities available for sale were sold
      in 1996.  The Bank realized a loss of $46,617 on the default of a security
      held to maturity in 1996.  The Bank has  pledged  $6,550,000  of its FHLMC
      mortgage-backed securities against public unit deposits.

3.    Loans Receivable

      Activity in the allowance for loan losses is summarized as follows for the
      years ended December 31:
<TABLE>
<CAPTION>
                                                                       1996             1995              1994
------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>               <C>
         Balance at beginning of year                               $ 866,770       $  613,600        $  504,200
         Provision charged to income                                  390,000          315,000           140,000
         Loans charged off                                           (400,684)         (95,742)          (35,112)
         Recoveries on loans previously charged off                    37,370           33,912             4,512
------------------------------------------------------------------------------------------------------------------
            Balance at end of year                                  $ 893,456       $  866,770        $  613,600
================================================================================================================== 
</TABLE>
<PAGE>
3.    Loans Receivable (concluded)

      Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
                                                                                       1996              1995
------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>               <C>
         Average investment in impaired loans                                       $1,126,828        $  964,342
         Interest income recognized on impaired loans including
            interest income recognized on cash basis                                   105,397            83,924
         Interest income recognized on impaired loans on cash basis                     99,637            81,573
      Information  regarding  allowance  for loan losses  allocated  to impaired
         loans at December 31, is as follows:
         Balance of impaired loans                                                  $  945,107        $1,204,645
         Less portion for which no allowance for loan losses
            is allocated                                                              (779,036)         (839,353)
------------------------------------------------------------------------------------------------------------------
         Portion of impaired loan balance for which an allowance
            for loan losses is allocated                                            $  166,071        $  365,292
================================================================================================================== 
         Portion of allowance for loan losses allocated to the
            impaired loan balances                                                  $   92,542        $  173,923
================================================================================================================== 
</TABLE>
      Loans placed on nonaccrual status amounted to $1,894,503,  $1,645,262, and
      $1,364,720,  at December  31,  1996,  1995 and 1994,  respectively.  Gross
      interest  income that would have been recorded under the original terms of
      such loans and the interest income actually recognized for the years ended
      December 31 are summarized below:
<TABLE>
<CAPTION>
                                                                     1996              1995              1994
------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>               <C>
      Interest income that would have been recorded                  $203,800         $198,247          $120,568
      Interest income recognized                                      135,178          129,730            80,566
------------------------------------------------------------------------------------------------------------------
      Interest income foregone                                       $ 68,622         $ 68,517          $ 40,002
==================================================================================================================
</TABLE>
<PAGE>
4.    Loan Servicing

      Mortgage  loans  serviced for others are not included in the  accompanying
      statement of financial  condition.  The unpaid principal  balance of these
      loans is  $78,287,014  and  $81,219,879  at  December  31,  1996 and 1995,
      respectively.  The Bank recognizes a loan servicing fee for the difference
      between the principal and interest  payment  collected on the loan and the
      payment remitted to the investor.  Custodial escrow balances maintained in
      connection with the foregoing loan servicing were $460,166 and $648,627 at
      December 31, 1996 and 1995,  respectively.  Mortgage  servicing  rights of
      $28,615  were  capitalized  in 1996  and are  included  in  other  assets.
      Amortization of mortgage servicing rights was $903 in 1996.
 
5.    Premises and Equipment

      Premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>

                                                                                       1996              1995
---------------------------------------------------------------------------------------------------------------- 
<S>                                                                                <C>               <C>
      Land and improvements                                                        $   310,889       $   310,889
      Bank buildings and leasehold improvements                                      1,552,031         1,540,365
      Furniture and fixtures                                                         2,187,846         1,905,114
---------------------------------------------------------------------------------------------------------------- 
                                                                                     4,050,766         3,756,368
      Less accumulated depreciation                                                  1,846,351         1,501,960
---------------------------------------------------------------------------------------------------------------- 
                                                                                    $2,204,415        $2,254,408
================================================================================================================
</TABLE>
      Depreciation expense was $368,556,  $375,994, and $239,867, in 1996, 1995,
      and  1994,  respectively.  The Bank is  committed  under a  noncancellable
      operating  lease with a term greater than one year at one of its branches.
      Future minimum rental  commitments  under this operating lease through the
      year 2000 are approximately $4,000 per year. The related rent expense, net
      of sublease income, was $1,226,  $21,025,  and $50,737, in 1996, 1995, and
      1994, respectively.

6.    Branch Acquisitions

      On March 10, 1995,  the Bank acquired four western Maine branches of Fleet
      Bank of Maine. The acquisition was accounted for under the purchase method
      of accounting for business combinations. The following is a summary of the
      transaction:
<TABLE>
<CAPTION>
<S>                                              <C>

      Loans acquired, net of premium             $   6,688,629
      Fixed assets                                     393,321
      Other assets                                     168,356
      Deposits and accrued interest assumed        (19,447,282)
      Other liabilities                               (117,485)
--------------------------------------------------------------- 
      Net cash received                           $(12,314,461)
===============================================================
</TABLE>
<PAGE>
6.    Branch Acquisitions (concluded)

      On March 18, 1994,  the Bank acquired a branch office in Lewiston,  Maine,
      from the Resolution Trust  Corporation.  The acquisition was accounted for
      under  the  purchase  method  of  accounting  for  business  combinations.
      Earnings of the  acquired  branch,  from the date of  acquisition  through
      December 31, 1994, are included in the  consolidated  statement of income.
      The following is a summary of the transaction:
<TABLE>
<CAPTION>
<S>                                               <C>

      Loans acquired                              $     93,082
      Goodwill                                         478,000
      Deposits and accrued interest assumed        (42,322,425)
--------------------------------------------------------------- 
      Net cash and cash equivalents received      $(41,751,343)
===============================================================
</TABLE>
      Goodwill  for  branches  acquired  in 1995  and in  prior  years  is being
      amortized  using the  straight-line  method  over ten years.  Amortization
      charged to operations was $103,047,  $101,240, and $104,790 in 1996, 1995,
      and 1994, respectively.
 
7.    Deposits

      At December 31, 1996,  the  scheduled  maturities  of time deposits are as
      follows:
<TABLE>
<CAPTION>
<S>                                                <C>
      1997                                         $40,688,965
      1998                                           5,689,187
      1999                                           4,414,030
      2000                                           7,645,966
      2001 and thereafter                              898,539
-------------------------------------------------------------- 
                                                   $59,336,687
============================================================== 
</TABLE>
      The aggregate  amount of short-term  jumbo  certificates of deposit,  each
      with a minimum denomination of $100,000,  was $6,644,804 and $3,968,476 at
      December 31, 1996 and 1995, respectively.
 
8.    Advances from Federal Home Loan Bank

      Advances from Federal Home Loan Bank (FHLB) are summarized as follows:
<TABLE>
<CAPTION>
                                           Interest Rates
                                        at December 31, 1996            1996                   1995
------------------------------------------------------------------------------------------------------- 
<S>                                           <C>                    <C>                    <C>
     Fixed advances                           5.30 - 6.11%           $10,952,000            $10,952,000
     Variable advance                           7.32                   2,234,000                --
------------------------------------------------------------------------------------------------------- 
                                                                     $13,186,000            $10,952,000
=======================================================================================================
</TABLE>
<PAGE>
8.    Advances from Federal Home Loan Bank (concluded)


      Pursuant  to   collateral   agreements   with  the  FHLB,   advances   are
      collateralized  by all stock in the FHLB,  qualifying first mortgage loans
      and securities available for sale.

      Advances at December 31, 1996, mature as follows:
<TABLE>
<CAPTION>
<S>                                                 <C>
      1997                                          $9,734,000
      1998                                           1,000,000
      2000                                           1,000,000
      2001                                           1,452,000
</TABLE>

9.    Income Taxes

      Actual tax expense  differs from the expected tax expense  computed at the
      federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>

                                                                       1996              1995              1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>               <C>
      Provision for income taxes at statutory rates (34%)            $621,100         $394,000          $ 82,600
      Add (deduct)
      Pass-through tax credit from investment                         (82,700)         (82,700)          (82,700)
      State income tax, net of federal taxes                           15,400           12,120             7,340
      Nontaxable income                                               (12,200)         (16,700)          (16,000)
      Nondeductible expenses                                           41,000           32,500            26,600
      Dividends received deduction                                         --               --            (1,900)
      Other                                                              (147)          (3,256)            5,563
-----------------------------------------------------------------------------------------------------------------
                                                                     $582,453         $335,964          $ 21,503
=================================================================================================================
</TABLE>
<PAGE>
      9. Income Taxes (concluded)

      The components of income tax expense are:
<TABLE>
<CAPTION>

                                                                      Federal            State           Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>              <C> 
      1996
         Current                                                    $ 580,994         $ 23,316         $ 604,310
         Deferred                                                     (21,857)              --           (21,857)
---------------------------------------------------------------------------------------------------------------------------
      Total                                                         $ 559,137         $ 23,316         $ 582,453
---------------------------------------------------------------------------------------------------------------------------

      1995
         Current                                                    $ 408,639         $ 18,370         $ 427,009
         Deferred                                                     (91,045)              --           (91,045)
---------------------------------------------------------------------------------------------------------------------------
      Total                                                         $ 317,594         $ 18,370         $ 335,964
---------------------------------------------------------------------------------------------------------------------------

      1994
         Current                                                    $  62,217         $ 11,093         $  73,310
         Deferred                                                     (51,807)              --           (51,807)
---------------------------------------------------------------------------------------------------------------------------
      Total                                                         $  10,410         $ 11,093         $  21,503
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

      The tax effect of  temporary  differences  which give rise to the deferred
      income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
                                                                           1996                         1995
---------------------------------------------------------------------------------------------------------------------------
                                                                   Asset        Liability        Asset       Liability
---------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>            <C>          <C>
      Accrued liabilities and
         unearned income                                        $  97,278       $     --       $105,150     $      --
      Allowance for possible
         loan losses                                              303,775         65,790        294,700        57,200
      Interest on nonaccrual loans                                 21,260             --         16,350            --
      Goodwill, amortization,
         and depreciation                                          17,600            815         10,976         3,274
      Loans held for sale                                           5,590             --          2,600            --
      Change in method of
         accounting for tax from
         cash basis to accrual basis                                   --         55,580             --        74,100
      Unrealized loss on securities
         available for sale                                        19,400              --         5,000            --
      Other                                                          --            32,659            --        26,400
---------------------------------------------------------------------------------------------------------------------------
                                                                 $464,903       $154,844       $434,776     $ 160,974
===========================================================================================================================
</TABLE>
<PAGE>
      No valuation allowance is deemed necessary for the deferred tax asset.
      The Bank is  allowed  a  special  bad debt  deduction  based on  specified
      experience  formulas and subject to certain limitations based on aggregate
      loans and savings account  balances at the end of the year. If the amounts
      that qualify as deductions  for federal income tax purposes are later used
      for  purposes  other than bad debt  losses or the Bank  fails to  maintain
      certain loan and savings  account  levels,  the amounts  become subject to
      federal income tax at the then current  corporate rate.  Retained earnings
      at December 31, 1996 and 1995,  includes $222,000 for which federal income
      tax has not been provided.

10.   Related Parties

      The Bank has entered into  transactions  with its  directors and principal
      officers and their affiliates  (related parties).  The aggregate amount of
      loans to such related  parties at December 31, 1996, was $145,740.  During
      1996, new loans to such related parties amounted to $19,652 and repayments
      amounted to $53,801.

11.   Regulatory Matters

      The  Bank  is   subject  to  various   regulatory   capital   requirements
      administered  by the federal  banking  agencies.  Failure to meet  minimum
      capital   requirements  can  initiate  certain   mandatory--and   possibly
      additional discretionary--actions by regulators that, if undertaken, could
      have a direct material effect on the Bank's  financial  statements.  Under
      capital  adequacy  guidelines  and the  regulatory  framework  for  prompt
      corrective  action,  the Bank must meet specific  capital  guidelines that
      involve  quantitative  measures  of the Bank's  assets,  liabilities,  and
      certain  off-balance-sheet items as calculated under regulatory accounting
      practices.  The Bank's capital amounts and classification are also subject
      to  qualitative  judgments  by  the  regulators  about  components,   risk
      weightings,  and  other  factors.  Quantitative  measures  established  by
      regulation to ensure capital adequacy require the Bank to maintain minimum
      amounts  and  ratios  (set  forth in the table  below) of total and Tier I
      capital  (as  defined  in the  regulations)  to  risk-weighted  assets (as
      defined),  and of Tier I  capital  (as  defined)  to  average  assets  (as
      defined).  Management  believes,  as of December 31,  1996,  that the Bank
      meets all capital  adequacy  requirements  to which it is  subject.  As of
      December 31, 1996, the most recent  notification  from the Federal Deposit
      Insurance  Corporation  categorized the Bank as well capitalized under the
      regulatory  framework for prompt  corrective  action. To be categorized as
      well capitalized,  the Bank must maintain minimum total risk-based, Tier I
      risk-based,  and Tier I leverage  ratios as set forth in the table.  There
      are no  conditions  or events  since  that  notification  that  management
      believes  have  changed  the  institution's  category.  The Bank's  actual
      capital amounts and ratios are also presented in the table.
<PAGE>
11.   Regulatory Matters (concluded)
<TABLE>
<CAPTION>
                                                                                                              To Be Well
                                                                                                           Capitalized Under
                                                                                     For Capital           Prompt Corrective
                                                              Actual              Adequacy Purposes        Action Provisions
                                                         Amount      Ratio       Amount        Ratio       Amount      Ratio
---------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>     <C>             <C>       <C>            <C>
      As of December 31, 1996:

         Total Capital to Risk Weighted Assets
         Consolidated                                  $10,065,793   11.5%   <179>$6,982,720 <179>8.0%       N/A
         Bank                                           9,851,000    11.3%   <179> 6,982,720 <179>8.0% <179>$8,728,400<179>10.0%
         Tier I Capital to Risk Weighted Assets
         Consolidated                                   9,172,337    10.4%   <179> 3,491,360 <179>4.0%       N/A
         Bank                                           8,958,000    10.2%   <179> 3,491,360 <179>4.0% <179> 5,237,040<179> 6.0%
         Tier I Capital to Average Assets
         Consolidated                                   9,172,337     6.8%   <179> 5,359,480 <179>4.0%       N/A
         Bank                                           8,958,000     6.7%   <179> 5,359,480 <179>4.0% <179> 6,699,350<179> 5.0%

      As of December 31, 1995:

         Total Capital to Risk Weighted Assets
         Consolidated                                  $ 8,642,000   11.2%   <179>$6,173,760 <179>8.0%       N/A
         Bank                                           8,456,000    11.0%   <179> 6,173,760 <179>8.0% <179>$7,717,200<179>10.0%
         Tier I Capital to Risk Weighted Assets
         Consolidated                                   7,775,358    10.1%   <179> 3,086,880 <179>4.0%       N/A
         Bank                                           7,589,000     9.8%   <179> 3,086,880 <179>4.0% <179> 4,630,320<179> 6.0%
         Tier I Capital to Average Assets
         Consolidated                                   7,775,358     6.1%   <179> 5,066,560 <179>4.0%       N/A
         Bank                                           7,589,000     6.0%   <179> 5,066,560 <179>4.0% <179> 6,333,200<179> 5.0%

</TABLE>
      The ability of the bank to pay  dividends to the parent is also subject to
      the minimum  regulatory  capital  requirements.  At December 31, 1996, the
      amount available for dividends by the bank was  approximately  $1,937,000.
      On  September  30,  1996,  federal  legislation  was passed  relating to a
      special deposit  insurance  assessment on deposits  insured by the Savings
      Association  Insurance  Fund  (SAIF).  Although  deposits  in the Bank are
      insured by the Bank Insurance  Fund,  the Bank had acquired  deposits in a
      1994 branch  acquisition  which are still  considered SAIF deposits.  As a
      result of the legislation, the Bank was charged approximately $155,000 for
      the special assessment on SAIF deposits in 1996.

12.   Employee Benefit Plans

      Number of shares and per share  conversion  price have been restated for a
      10% stock dividend in 1996.

      401(k) Plan

      The Bank has a 401(k)  defined  contribution  plan for  employees  meeting
      certain service requirements.  The Bank makes contributions based on wages
      of the qualified employees. Total 401(k) contribution expense was $50,494,
      $43,693, and $38,705, in 1996, 1995, and 1994, respectively.
<PAGE>
      Employee Stock Ownership Plan

      The Bank established an employee stock ownership plan and trust (ESOP) for
      employees meeting certain service requirements. The ESOP purchased 9.9% or
      40,694 shares of the common stock issued during 1993 using funds loaned by
      the Company. Interest earned on the loan amounted to $13,114, $16,246, and
      $19,418 in 1996, 1995, and 1994, respectively. The shares purchased by the
      ESOP are held in a suspense  account  and  released  annually in an amount
      proportionate  to the annual  repayment of the loan.  Contributions to the
      ESOP and shares  released  from the  suspense  account  are  allocated  to
      eligible employees on the basis of compensation in the year of allocation.
      The Bank's  contributions  to the ESOP are not fixed, so benefits  payable
      under the ESOP  cannot be  estimated.  Commencing  January 1,  1994,  ESOP
      expense is recognized using the average fair value of the shares committed
      to be released during the period.  The difference between the average fair
      value  and the  cost of the  shares  is  recorded  to  additional  paid-in
      capital.  Total ESOP expense was $121,653,  $96,045, and $88,532 for 1996,
      1995, and 1994, respectively.  As of December 31, 1996, 22,125 shares have
      been allocated and the remaining 18,569 shares are suspense shares held by
      the ESOP.  The fair value of unearned ESOP shares at December 31, 1996, is
      $429,876. Dividends paid on allocated shares are recorded against retained
      earnings.

      Bank Recognition and Retention Plan

      The Bank also  established Bank Recognition and Retention Plans (BRRPs) as
      a method of  providing  officers  and other  employees  of the Bank with a
      proprietary  interest in the Company.  The Bank  contributed  funds to the
      recognition plans to enable them to acquire,  in aggregate,  approximately
      4.0% of the shares of common stock. The Bank recognizes expense related to
      the plan based on the vesting  schedule.  The plan awarded 3,844 shares in
      1995 and 9,865  shares to  officers in 1994.  In  addition,  2,733  shares
      covered by the  recognition  plans have been  reserved for future  awards.
      Participants are vested at a rate of 20% per year commencing one year from
      the date of the award.  Total expenses related to these plans was $28,644,
      $32,664, and $20,616 for 1996, 1995, and 1994, respectively.

      Stock Option Plan

      The Board of Directors of the Bank adopted the 1993 Incentive Stock Option
      Plan and has reserved 27,957 shares for issuance thereunder. All employees
      are  eligible  to  participate  in the  stock  option  plan.  The Board of
      Directors granted options to officers to purchase a total of 23,513 shares
      at an exercise price equal to the per share  conversion  purchase price of
      $9.09.  An additional  4,444 shares have been reserved for grants to other
      employees.  Options  are  exercisable  on  a  cumulative  basis  in  equal
      installments  at a rate of 20% per year  commencing one year from the date
      of the grant.  No options were granted or exercised in 1996 and 1995.  The
      Board of  Directors  of the Bank  adopted  the 1993 Stock  Option Plan for
      Outside Directors and has reserved 13,200 shares for issuance  thereunder.
      Under the Directors'  Plan, each outside director was granted an option to
      purchase 1,650 shares of common stock, except the chairman of the Board of
      Directors,  who was  granted  an  option to  purchase  3,300  shares.  The
      exercise  price is equal to the per  share  conversion  purchase  price of
      $9.09.  Options for the  remaining  1,650  shares have been  reserved  for
      future grants.  Options are immediately  exercisable  upon the date of the
      grant. No options were granted or exercised in 1996 and 1995.
<PAGE>
13.   Other Noninterest Expense

      Other noninterest  expense amounts are summarized as follows for the years
      ended December 31:
<TABLE>
<CAPTION>


                                                                       1996              1995              1994
----------------------------------------------------------------------------------------------------------------
<S>                                                               <C>              <C>               <C>
      Printing, postage, stationery and supplies                  $   239,749      $   264,209       $   200,991
      Advertising and promotion                                       117,806          140,931           158,890
      Data processing                                                 145,324          169,682           190,667
      Professional fees                                               136,556          194,597           166,482
      Meetings and training                                            63,172           52,737            72,489
      Insurance                                                        24,872           26,480            30,465
      Amortization                                                    103,047          101,241           104,791
      Loss on disposal of equipment                                        --           33,250            53,930
      Other                                                           415,795          420,734           199,690
----------------------------------------------------------------------------------------------------------------
                                                                   $1,246,321       $1,403,861        $1,178,395
================================================================================================================
</TABLE>

14.   Financial Instruments With Off-Balance-Sheet Risk

      The Bank is a party to financial instruments with  off-balance-sheet  risk
      in the  normal  course  of  business  to meet the  financing  needs of its
      customers. These financial instruments are commitments to originate loans,
      interest  rate  swaps and  floors.  The  instruments  involve,  to varying
      degrees, elements of credit risk in excess of the amount recognized in the
      consolidated  statement of  financial  condition.  The Bank's  exposure to
      credit  loss  in the  event  of  nonperformance  by the  other  party  for
      commitments to extend credit is represented  by the  contractual  notional
      amount of those  instruments.  The Bank's  exposure  to credit loss in the
      event of  nonperformance  by the other  party to  interest  rate swaps and
      floors is limited to the other party's obligation to pay the Bank interest
      based on the notional amount of the instrument.  The Bank follows the same
      credit policies in making  commitments  and conditional  obligations as it
      does for on-balance-sheet  instruments,  including requiring collateral or
      other security to support financial instruments with credit risk.
<PAGE>
      Loan Commitments

      Commitments to extend credit are agreements to lend to a customer provided
      there  is no  violation  of any  condition  established  in the  contract.
      Commitments  generally have fixed  expiration  dates or other  termination
      clauses and may require  payment of a fee.  Since many of the  commitments
      are  expected to expire  without  being drawn upon,  the total  commitment
      amounts do not necessarily  represent future cash  requirements.  The Bank
      evaluates each customer's  creditworthiness  on an individual  basis.  The
      amount of collateral  obtained is based on management's  credit evaluation
      of  the  borrower.   Collateral  held  varies  but  may  include  accounts
      receivable,   inventory,   property  and  equipment  and  income-producing
      commercial  properties.  Loan commitments on undisbursed loans and letters
      of credit to originate loans at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S>                                               <C>

      Real estate lines of credit                 $  7,344,392
      Commercial lines of credit                     4,168,213
      Construction loans                               776,216
      Consumer lines of credit                         730,161
      Commercial letters of credit                     166,400
-------------------------------------------------------------- 
                                                   $13,185,382
==============================================================
</TABLE>
      Commitments to originate loans at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S>                                                 <C>

      First mortgage fixed rate loans               $  165,050
      Variable rate commercial loans                   864,000
-------------------------------------------------------------- 
                                                    $1,029,050
==============================================================
</TABLE>

      Interest Rate Swap

      The Bank is party to interest rate swap  agreements  with the Federal Home
      Loan  Bank  totaling  a  notional  amount  of  $7,000,000  on  which it is
      obligated to pay interest based on the  three-month  LIBOR rate,  adjusted
      quarterly,  and  receives a  fixed-rate  payment.  A  $2,000,000  contract
      matures  November  1997. The variable rate was 5.50% at December 31, 1996,
      and the  Bank  receives  payments  based  on a fixed  rate of  4.91%.  The
      remaining  contract dated June 1996 is for $5,000,000  maturing June 1999,
      on which the Bank receives  payments  based on a fixed rate of 6.63%.  The
      variable  rate was 5.563% at  December  31,  1996.  The Bank has  utilized
      interest  rate swaps to partially  protect its net interest  income stream
      against the effects of falling rates on  prime-based  loans.  The notional
      amount is a figure  used to  calculate  settlement  payments  and does not
      represent  exposure  to credit  loss.  Interest is paid to the Bank on the
      interest  rate  swaps and the Bank pays  interest  quarterly.  The Bank is
      exposed  to loss  of net  interest  receivable  should  the  counter-party
      default.  Net  interest  expense  on the swaps was  $24,822  in 1995.  Net
      interest  income  earned on the swaps was $9,047  and  $40,655 in 1996 and
      1994, respectively.
<PAGE>
      Interest Rate Floor

      The Company has an interest rate floor contract in the notional  amount of
      $5,000,000  on which it receives the excess of the strike  rate,  6%, over
      the three-month LIBOR rate, adjusted quarterly.  The floor matures in June
      1998.

      Other

      The Bank services  approximately $45 million of Federal Home Loan Mortgage
      Corporation  (FHLMC)  loans.  The Bank is liable to FHLMC for any interest
      which becomes delinquent.

15.   Significant Group Concentrations of Credit Risk

      Most of the Bank's business activity is in rural areas of Maine, where the
      resort  and  logging  industries  predominate.  Accordingly,  the  Bank is
      dependent  on the  health of these  industries  for  continued  profitable
      operations.  However,  the Bank has  diversified  into the  central  Maine
      regions. In addition, the Bank services approximately $78 million of loans
      previously  originated  and  sold  by the  Bank.  The  Bank's  policy  for
      requiring  collateral  is to  obtain  security  in  excess  of the  amount
      borrowed.  The  amount of  collateral  obtained  is based on  management's
      credit  evaluation of the borrower.  The Bank requires  appraisals of real
      property  held as  collateral.  For consumer  loans,  the Bank will accept
      security  which has a title  certificate.  Collateral  held for commercial
      loans may include accounts receivable,  inventory,  property and equipment
      and income-producing properties. The contractual amounts of credit-related
      financial  instruments such as commitments to extend credit and letters of
      credit  represent  the  amounts of  potential  accounting  loss should the
      contract be fully drawn upon, the customer  default,  and the value of any
      existing collateral become worthless.

16.   Fair Value Disclosures of Financial Instruments

      The following  disclosures  are made in accordance  with the provisions of
      SFAS No. 107  "Disclosures  About Fair  Value of  Financial  Instruments,"
      which requires the disclosure of fair value information about both on- and
      off-balance  sheet  financial  instruments  where  it  is  practicable  to
      estimate  that value.  Fair value is defined in SFAS No. 107 as the amount
      at which an instrument could be exchanged in a current transaction between
      willing parties, other than in a forced or liquidation sale. In accordance
      with  the  provisions  of SFAS No.  107,  the  estimated  fair  values  of
      deposits,  credit card loans and residential real estate mortgage loans do
      not take into  account the fair values of long-term  relationships,  which
      are integral  parts of the related  financial  instruments.  The disclosed
      estimated fair values of such instruments would increase  significantly if
      the fair values of the long-term relationships were considered. The use of
      different  assumptions (e.g.,  discount rates and cash flow estimates) and
      estimation  methods  could  also have a  significant  effect on fair value
      amounts.  Accordingly,  the estimates presented herein are not necessarily
      indicative of the amounts the Company  could  realize in a current  market
      exchange.  Because SFAS No. 107 excludes certain financial instruments and
      all  nonfinancial  instruments  from  its  disclosure  requirements,   any
      aggregation  of the fair value amounts  presented  would not represent the
      underlying  value of the Company.  A summary of the carrying values of the
      Company's  significant  on-balance sheet financial instruments at December
      31, 1996, is as follows:
<PAGE>
      16.         Fair Value Disclosures of Financial Instruments (concluded)

<TABLE>
<CAPTION>

                                                         December 31, 1996                  December 31, 1995
                                                       Carrying        Fair               Carrying       Fair
                                                         Value         Value                Value        Value
----------------------------------------------------------------------------------------------------------------- 
<S>                                                <C>              <C>                <C>           <C>
      Assets
         Cash and due from banks1                  $   2,480,923    $  2,480,923       $  4,960,329  $  4,960,329
         Securities available for sale(1)              7,452,341       7,452,341          8,377,279     8,377,279
         Securities to be held to maturity(2)         18,516,750      18,587,246         19,102,469    19,273,234
         Loans receivable, net of allowance
            and discounts(3)                          97,376,787      98,631,000         84,763,464    86,200,000
         Loans held for sale(2)                        1,819,209       1,835,648          1,126,452     1,139,555
         Federal Home Loan Bank stock(1)               1,320,550       1,320,550          1,320,550     1,320,550
         Accrued interest receivable1                    767,602         767,602            815,254       815,254

      Liabilities
         Deposits4                                   109,362,559     109,879,022        103,685,054   104,517,352
         Advances from Federal Home
            Loan Bank5                                13,186,000      13,161,429         10,952,000    10,986,000
         Escrows and trustee accounts for
            sold loans1                                  919,254         919,254          1,016,254     1,016,254
         Accrued interest payable(1)                      62,518          62,518             76,511        76,511
</TABLE>

      Valuation Methods and Assumptions

      (1)   Fair value equals or approximates carrying value.
      (2)   Based on quoted market prices of similar instruments.
      (3)   Fair  values  of  commercial  term  loans  were  estimated  using  a
            discounted cash flow model.  Certain  residential  real estate loans
            were valued based on quoted  market  prices of similar  loans,  with
            adjustments  for differences in loan  characteristics.  For consumer
            loans,  whose current  weighted - average coupons and remaining term
            to maturity  approximate  the current  market  conditions,  carrying
            values were used as an  approximation  of fair value. For loans with
            interest  rates which  change  within six months  (such as, lines of
            credit  and  time   notes),   carrying   values   were  used  as  an
            approximation of fair values.
      (4)   Fair  values of  certificates  of deposit  were  estimated  based on
            discounted  cash  flows  using  current  rates for  certificates  of
            similar remaining maturity. For all other deposits,  carrying values
            were used as an approximation of their fair values.
      (5)   Fair values of advances  were  estimated  based on  discounted  cash
            flows  using  current  rates  for  advances  of  similar   remaining
            maturity.
<PAGE>
16.         Fair Value Disclosures of Financial Instruments (concluded)

      The estimated  fair values of the Company's  off-balance  sheet  financial
      instruments are as follows:
<TABLE>
<CAPTION>


                 Notional                                                   Maturity                      Market
                 Principal                  Contract Date                     Date                         Value
---------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                           <C>                              <C>
            Interest Rate Swaps
             December 31, 1996
                $2,000,000               November 15, 1993             November 15, 1997                $ (16,254)
                 5,000,000               June 21, 1996                 June 21, 1999                       55,600
---------------------------------------------------------------------------------------------------------------------------
                $7,000,000                                                                              $  39,346
===========================================================================================================================

             December 31, 1995
                $2,000,000               November 15, 1993             November 15, 1997                $ (21,623)

             December 31, 1994
                $2,000,000               February 21, 1992             February 21, 1995                $(183,084)
                 2,000,000               November 15, 1993             November 15, 1997                   15,734
---------------------------------------------------------------------------------------------------------------------------
                $4,000,000                                                                              $(167,350)
===========================================================================================================================

            Interest Rate Floor
             December 31, 1996
                $5,000,000               June 20, 1996                 June 24, 1998                    $  30,828
===========================================================================================================================
</TABLE>
17.   Recent Accounting Developments

      In June 1996, the Financial Accounting Standards Board issued Statement of
      Financial  Accounting  Standards (SFAS) No. 125, "Accounting for Transfers
      and  Servicing of Financial  Assets and  Extinguishment  of  Liabilities,"
      effective for financial  statements  for the fiscal year  beginning  after
      December 31, 1996  (excluding  those sections  identified in SFAS No. 127,
      "Deferral of the Effective  Date of Certain  Provisions of SFAS No. 125").
      SFAS No. 125 provides consistent standards for distinguishing transfers of
      financial   assets  that  are  sales  from   transfers  that  are  secured
      borrowings.  The Company  expects the impact of adopting SFAS No. 125 will
      be immaterial to the financial statements.
<PAGE>


Information

Board of Directors

Winfield F. Robinson, Chairman
Vice President of United Timber Corp.

John C. Witherspoon
President/CEO
Kingfield Bank

William P. Dubord
Attorney

G. Norton Luce
Retired Gas Company Owner

Roger G. Spear
CFO, University of Maine at Farmington

Theodore C. Johanson
President, Falcon Shoe Company



Annual Meeting

The Annual  Meeting is scheduled for Wednesday, 
May 7, 1997, 5:30 p.m., at the
Winters Inn, Kingfield, Maine.



Stock Listing

The common stock is traded over-the-counter on
the NASDAQ Small Cap Market System under
the ticker symbol KSBK.



Officers of the Bank

Gerard Belanger, Vice President
Gordon A. Flint, Vice President
Robert D. Stone, Vice President
John E. Thien, Vice President/Treasurer


<PAGE>



Price Range of Stock

Set forth below is the quarterly high and low bid
price for the common stock
since the beginning of the year.

Quarter Ending:
March 31, 1996 High: $20.75/Low: $18.13
June 30, 1996 High: $22.25/Low: $19.38
September 30, 1996 High $22.50/Low $21.00
December 31, 1996 High: $26.00/Low $21.25

Number of Shares Outstanding and Shareholders

At March 1, 1997, KSB Bancorp, Inc. had 411,055 shares
of  $.01  par  value  common  stock  outstanding,  owned 
by approximately 356 shareholders of record, including
brokerage firms, banks and registered clearing agencies
acting as nominees for an indeterminate number of
beneficial owners. KSB Bancorp, Inc. pays a semi-annual
cash dividend of $0.10 per share.

Inquiries

Shareholder Information
Attn: Jennifer L. Piekart
KSB Bancorp, Inc.
P.O. Box 105
Kingfield, ME 04947
207-265-2181
The  Annual  Report on Form  10-KSB, 
filed with the Securities and Exchange
Commission, is available to shareholders
without charge upon written request.

Auditors

Berry, Dunn, McNeil & Parker
P.O. Box 1100, Portland, ME 04101

Transfer Agent & Registrar

Registrar and Transfer Company
10 Commerce Drive, Cranford, NJ 07016

Corporate Securities Counsel

John J. Gorman, Esq.
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W., Suite 400
Washington, DC 20015


<PAGE>


                   The Board of Directors would like to thank
                        the employees of Kingfield Bank



Kingfield Office
      Donna Chase
      Cynthia Gilmore
      Susan Haines
      Donna Pelletier
      Debra Sills
      Brenda Thompson
Stratton Office
      Debora Dudley
      Bette Meyer
      Linda Shane
      Wendy Wyman
Bingham Office
      Kathleen Barrett
      Mary Brown
      Phebe Durgin
      Todd Marlowe
Retail/Commercial Lending
      Carla Allen
      Gerard Belanger
      Charles Bergman
      Jenni Brown
      Sally Dwyer
      Gordon Flint
      Shelly Henderson
      Wendy Hinkley
      Marcelle Labbe
      Mary Miller
      Cindy Spencer
Rangeley Office
      Justine Amerault
      M. Rachel Lee
      Gillian Trapp
      Sheila Waldeck
Phillips Office
      Shelly Abbott
      Elizabeth Cram
      Dawn Field
      Linda Toothaker


<PAGE>


Strong Office
      Crystal Cook
      Sandy Cavanagh
      Loretta Deming
      Lynn Vashaw
Farmington Office
      Kathleen Mason
      Laurie Maxim
      Nancy Richard
      Nancy Richardson
      Marcus Rowe
Administration/Finance
      Linda Manning
      Jennifer Piekart
      John Thien
      John Witherspoon
Lewiston Office
      Nancy Brown
      Katherine Fales
      Cynthia Hoyt
      Elizabeth Lyons
      Mary McKinley
      Roger Roy
      Melissa Saucier
Operations
      Mark Brooks
      Darcy Evans
      Linda Frost
      Jacqueline Garey
      Michelle Mason
      Jeannine McGraw
      Karen Moore
      Pauline Nadeau
      Anne Parent
      Karen Stewart
      Robert Stone
      Timothy Thompson


<PAGE>


                            Kingfield Bank Locations


                    Bingham                         207-672-5541
                    Farmington                      207-778-0302
                    Kingfield                       207-265-2181
                    Lewiston                        207-784-7376
                    Phillips                        207-639-2851
                    Rangeley                        207-864-3321
                    Stratton                        207-246-2181
                    Strong                          207-684-5501
                    1-800-962-0070