<PAGE>
 
                                         New Hampshire Thrift Bancshares, Inc.
                                    is the parent company for Lake Sunapee Bank,
                                    fsb, a federal stock savings bank providing
                                    financial services throughout central and
                                    western New Hampshire.

                                         The Bank encourages and supports the
                                    personal and professional development of its
                                    employees, dedicates itself to consistent
                                    service of the highest level for all
                                    customers, and recognizes its responsibility
                                    to be an active participant in, and advocate
                                    for, community growth and prosperity.

                                       1
<PAGE>
 
                              ___________________
                               TABLE OF CONTENTS



<TABLE>
<S>                                                     <C>
Selected Financial Highlights............................3
Report to Shareholders...................................4
Management's Discussion and Analysis.....................7
Report of Independent Auditors..........................17
Financial Statements....................................18
Notes to Financial Statements...........................23
Form 10-K...............................................42
Officers and Managers...................................55
Board of Directors......................................55
Information on Common Stock.............................56
Shareholder Information.................................56
</TABLE>

                                       2
<PAGE>
 
                        _______________________________ 
                         SELECTED FINANCIAL HIGHLIGHTS
 
<TABLE> 
<CAPTION>  
FOR THE PERIODS ENDED DECEMBER 31,          1996           1995           1994
------------------------------------------------------------------------------
                                  ($ in thousands, except per share data)
<S>                               <C>               <C>            <C>      
Net Income                        $          611    $     1,245    $     1,582
Earnings Per Share/(1)/           $          .35    $       .73    $       .93
Dividends Declared                $          .50    $       .50    $       .50
Dividend Payout Ratio                     142.86%         68.49%         53.76%
Return on Average Assets                     .24%           .54%           .71%
Return on Average Equity                    3.15%          6.95%          8.76%
 
<CAPTION> 
AS OF DECEMBER 31,                          1996           1995           1994
------------------------------------------------------------------------------
                                 ($ in thousands, except book value data)
<S>                               <C>               <C>            <C> 
Total Assets                      $      264,385    $   258,216    $   233,363
Total Deposits                    $      213,959    $   199,971    $   194,533
Total Securities                  $       27,599    $    28,415    $    20,363
Net Loans                         $      215,899    $   208,169    $   193,810
Federal Home Loan Bank            $       20,174    $    26,936    $    15,211
 Advances
Shareholders' Equity/ (2)/        $       19,194    $    19,544    $    18,253
Book Value of Shares              $        11.26    $     11.57    $     10.92
 Outstanding
Average Equity to Average                   7.51%          7.72%          8.15%
 Assets
Shares Outstanding                     1,704,982      1,689,503      1,670,986
Number of Branch Locations                    10             10             10
</TABLE>


/(1)/  See Note 1 to Consolidated Financial Statements regarding earnings per
share.

/ (2//)/  See Note 13 to Consolidated Financial Statements regarding the
issuance of common stock.

                                       3
<PAGE>
 
                            REPORT TO SHAREHOLDERS 


     We believe that 1996 will turn out to be one of the most pivotal years in
the history of the Bank and the Company.  Never before have so many issues of
strategic importance occurred within such a narrow window of time as they did
during this past year.  There is considerable excitement about the future
prospects as more and more opportunities begin to present themselves to us in
the years ahead.

     From the perspective of our financial performance, consolidated net income
at year-end 1996 was $610,711, or $0.35 per share.  This compares to the 1995
year-end results of $1,244,823, or $0.73 per share.  Earnings for the year were
impacted by a non-recurring $995,000 FDIC deposit insurance recapitalization
assessment, a fourth-quarter charge of $869,979 to the provision for loan
losses, and certain interim expenses directly associated with the acquisition of
Landmark Bank.  Net interest income continues to be a source of strength, rising
by more than $500,000 over the previous twelve-month period.  While the
fundamental improvements in our operating results are more fully detailed in the
Management Discussion and Analysis section immediately following, the financial
stability of the Company is clearly evident when one simply adds back to
earnings the various one-time expenses reflected in the 1996 figures.

     The long-awaited deposit insurance fund resolution was finally approved by
Congress and signed into law on September 30, 1996. The financial impact of this
action meant that our proportionate share of the one-time multi-billion dollar
assessment, paid out in November, was just under $1,000,000. A considerable
amount to be sure, but also an investment in our future because for 1997 and
beyond, the premiums paid for deposit insurance will drop by more than $300,000
on an annual basis. Similar to an annuity, this means that for the single
payment, the Company will effectively receive the benefit of a 30% return every
year from this point forward. In addition, once the deposits from Landmark Bank
have been merged into the Bank, we will see a further benefit from the treatment
of their deposits under a combined premium structure.
                                        
     Earlier in the year, confidential discussions took place between your
Company and representatives of Landmark Bank located in Lebanon, New Hampshire.
Following a period of analysis and review, agreement was reached and a plan for
acquisition and merger was entered into on July 26, 1996. Consistent with our
previously stated goals of seeking out and identifying opportunities for growth
and expansion, the decision to acquire Landmark Bank clearly fulfilled not only
one of our longer-term goals to surpass the $300 million asset mark, but also
brought far greater diversity to our balance sheet in the form of their
commercially-oriented transaction deposit base and their prime-based loan
portfolio. On December 19, 1996, the shareholders of both New Hampshire Thrift
Bancshares, Inc. and Landmark Bank overwhelmingly voted in favor of the
affiliation. Final regulatory approval was received shortly thereafter and the
transaction was officially consummated on January 22, 1997. The immediate result
was a banking franchise with an increased asset base of $315 million, total
loans of $260 million, deposits of $254 million, and combined capital of $23
million.


 ...1996 will turn out to be one of the most pivotal years in the history of the
-------------------------------------------------------------------------------
Bank and the Company.
---------------------

                                       4
<PAGE>
 
     Like most smaller banking institutions located in the Northeast, your
Company continues to face the ever-present challenge of growing the asset base
in an economic environment that currently provides only a minimal level of
opportunity. Thus, while another relatively active year is predicted for
residential mortgage finance, it is clear that a comprehensive strategy must be
developed and implemented to ensure that a consistent level of growth can be
achieved, maintained and sustained over time. To this end, your Company has
embarked upon a strategic planning process that is designed to address the
fundamental issues of who we are, what is our purpose, and where should we be
headed. All pertinent issues have been part of our internal debate and have
helped to crystallize a vision for the future of the organization over the next
few years. In short, your Company envisions itself as the leading independent
provider of financial services throughout the Kearsarge-Lake Sunapee-Upper
Valley Region by delivering exceptional service to an expanding customer base in
a tradition of integrity and personalized style. The underlying premise is that
how we choose to conduct our business is just as important as what we do.
 
     With the support of the Board, we are embarking upon a strategic plan that
will, by the turn of the century, very systematically address the underlying
issues of sustained profitability, capital adequacy, portfolio diversification
and ever-increasing shareholder value. Through a concerted effort to develop a
marketing-based culture, we will be promoting an expanded array of both
traditional and non-traditional banking products and services.
 
     When coupled with our existing relationships with Preferred Investments,
for full-service securities brokerage, and Charter Trust Company, for trusts and
financial planning, the long-term value of the Company can only be further
enhanced.
                                        
     One of the associated issues arising from the deposit insurance resolution
is the fact that much more effort is now being paid to the creation and
development of a unified charter for banks and thrifts. This is of considerable
importance and concern to the Company and one which will receive our special
attention. Our existing charter currently provides for our involvement in a
number of business activities which may be very strategically valuable in the
years ahead.

     Coincident with our expansion planning and deeper penetration into the
Upper Valley markets of Lebanon, Hanover, White River Junction and Norwich, you
should know that we have just recently agreed to establish a new branch bank
within a retail/commercial project, known as Centerra Resource Park & Market,
that is now under development by Dartmouth College and that is located directly
across from the main access road to the newly built Dartmouth Hitchcock Medical
Center complex. This is viewed as a strategic position for us, not only for the
near-term, but as an important element in establishing the Bank on the threshold
of its new marketing effort.
                                        
     While personalized service within a traditional branch bank setting
continues to be the cornerstone of our delivery system, technological advances
must be embraced as
 

 ...opportunities that will have a positive impact upon our employees, the
--------------------------------------------------------------------------------
communities we serve, and our shareholders.
--------------------------------------------

                                       5
<PAGE>
 
the continued proliferation of personal computers find their way into more and
more homes.  As a direct result of the Technology Committee, we were able to
introduce "telephone-banking" to our customers during mid-1996 and now find
that, on average, more than 500 transactions per day are efficiently handled
without impacting our personnel, leaving them more available to address the
individual needs of those customers whose issue cannot be handled otherwise.
This has proven to be an effective tool that better serves our banking
constituencies.  While we recognize that institutions like ours cannot afford to
financially support the "first-wave" of new technology, future enhancements to
our products and services will include check imaging, relationship statements,
and full-service debit cards.  Additionally, we are very much aware of the
"Year-2000 Compliant" concerns as they relate to date processing and information
systems world-wide and have been assured by all of our providers that the
solutions are well in hand.

     Looking forward, we see numerous potential opportunities that will have a
positive impact upon our employees, the communities we serve, and our
shareholders.  While early 1997 will be somewhat affected by the assimilation of
Landmark Bank into Lake Sunapee Bank and the capital deployed to make the
acquisition will need to be rebuilt in a timely fashion, it is evident to all
involved that we should be able to witness the initial financial and operating
benefits of this acquisition by year-end 1997.

     As we continue to build upon our strengths, we must also acknowledge the
valuable role you hold as shareholders of the Company and recognize our
responsibility to maintain a policy of current income through the payment of
consistent dividends and growth in per share value over time.  It is interesting
to note as we complete our first decade as a public company, that the original
investors have realized a total annualized return of 11.41%.  Assuming the
reinvestment of dividends, a $1,000 investment made in 1986 would be valued at
$2,141 as of December 31, 1996.

     In conclusion, we must also recognize the effort and dedication of our
employees and Board of Directors and to once again express our sincere
appreciation for the continued support and confidence that is evidenced by both
our customers and shareholders alike.



John J. Kiernan
Chairman of the Board



Stephen W. Ensign
Vice Chairman of the Board,
President and Chief Executive Officer



Stephen R. Theroux
Executive Vice President and
Chief Financial Officer


 ...original investors have realized a total annualized return of 11.41%.
-------------------------------------------------------------------------

                                       6
<PAGE>
 
                ===============================================
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
 
GENERAL
                             
     The Company's profitability is derived from its only subsidiary, Lake
Sunapee Bank, fsb (the "Bank"). The Bank's earnings in turn are generated from
the difference between the yield on its loan and investment portfolios and the
cost of its deposit accounts and borrowings. These core earnings are
supplemented by loan origination fees, retail banking service fees, and gains on
security transactions.

     In 1996, the Company earned $610,711, or $.35 per share, compared to
$1,244,823, or $.73 per share in 1995. The decline in earnings can be traced to
two events. First, the Bank paid a one-time premium assessment of $995,000 to
the Federal Deposit Insurance Corporation (FDIC) as part of the recapitalization
of the Savings Insurance Fund (SAIF). If the Bank had not made this payment, net
earnings would have been approximately $1,276,711, or $.74 per share. The Bank
also expensed $1,660,741 to the Provision for Loan Losses in 1996, compared to
$1,163,710 in 1995. This increase occurred because of the write-down of the
Bank's remaining real estate development loans and the taking of a more
aggressive posture in the methodology used in determining the Bank's General
Allowance for Loan Losses. This is discussed in greater detail under the section
entitled, "Provision for Loan Losses."
 
     On July 26, 1996, the Bank announced its intention to acquire Landmark
Bank, located in Lebanon , NH. The combination of the two banks was completed on
January 22, 1997. This transaction increased the Bank's assets by approximately
$51,000,000. The Bank expects the acquisition to be accretive to earnings in
1997.
 
FINANCIAL CONDITION
 
     Total assets increased by $6,169,267, or 2.39% from $258,216,077 to
$264,385,344. Total loans increased from $210,676,325 to $219,206,929 or 4.05%.
The table on page 15 illustrates the maturities of the loan portfolio at
December 31, 1996. Real estate loans increased by $8,828,880, or 5.01% from
$176,153,471 to $184,982,351. The Bank also increased the net level of loans
sold into the secondary market by approximately $8,000,000. At December 31,
1996, the Bank had $52,165,252 in its servicing portfolio. The Bank expects to
continue to sell fixed rate loans into the secondary market in order to manage
interest rate risk. Adjustable rate mortgages comprise 83% of the Bank's real
estate mortgage loan portfolio. This is consistent with prior years.

     Investments decreased by $475,266, or 1.68% from $28,266,003 to $27,790,737
(at amortized cost). The Bank's net unrealized loss of $192,179 at December 31,
1996 compares to last year's net unrealized gain of $148,596. This change of
$340,775 in market value reflects the increase in interest rates during 1996 and
the resultant drop in bond values.

     Real estate owned and property acquired in settlement of loans decreased by
$260,707, or 26.49% to $723,478. This total reflects $473,219 , or 65.41% , in
market value for the remaining seven lots at Blye Hill Landing in Newbury, NH.
During 1996, six real estate owned properties totaling $413,330, were sold.

     Deposits increased by $13,987,974, or 7.00% to $213,958,895 from
$199,970,921. Customers continued to place funds in Certificates of Deposit
(CDs) with CDs comprising 49.89% of total deposits versus 46.61% last year.
Total CDs increased by $13,529,233 or 14.51% to $106,740,465.
                                                  
     Advances from the Federal Home Loan Bank (FHLB) decreased by $6,762,143, or
25.10% to $20,174,025 from $26,936,168. The Bank was able to fund its loan
growth through deposit growth and utilize excess funds to pay-down FHLB
advances.
                                                  
LIQUIDITY AND CAPITAL RESOURCES                   
                                                  
     The Bank is required to maintain a 5% ratio of liquid assets to net
withdrawable funds. At year-end 1996, the Bank's ratio of 12.16% exceeded
regulatory requirements for long-term liquidity.

     The Bank's source of funds comes primarily from net deposit inflows, loan
amortizations, principal pay downs from loans, sold loan proceeds, and advances
from the FHLB. At December 31, 1996 the Bank had approximately $50,000,000 in
additional borrowing capacity from the FHLB.

                                       7
<PAGE>
 
               ================================================
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
 
  
     At December 31, 1996, the Company's shareholders' equity totaled
$19,193,690 or 7.26% of total assets, compared to $19,544,005 or 7.57% of total
assets at year-end 1995. The decrease of $350,315 reflects net income of
$610,711, the payment of $847,066 in common stock dividends, the repurchase of
3,251 shares of stock at a cost of $43,482, the exercise of 18,730 of stock
options in the amount of $72,903, a gain of $81,392 on the sale of treasury
stock, and the recording of $127,179 in net unrealized losses on securities
classified as available for sale. As interest rates moved upward throughout
1996, the Bank's bond portfolio decreased in value. Although the Bank normally
intends to hold these bonds to maturity, past practice has been to sell bonds
under certain circumstances. Accordingly, the bonds are classified as available
for sale. These bonds are "marked-to-market" causing the unrealized loss to be
recorded, net of the effect of income taxes, in shareholders' equity.
 
     On December 23, 1996, the Bank received authorization from the Office of
Thrift Supervision to dividend $1,800,000 to the Company. The purpose of this
upstream was to fund the cash portion of the Landmark acquisition. On February
16, 1996, the Bank paid a dividend of $1,000,000 to the Company. Approximately
$17.9 million in capital remains at the Bank level, and $1.3 million at the
Company at December 31, 1996.
 
     Net cash provided by operating activities was $3,841,010 in 1996 versus
$1,243,025 in 1995. This change is mostly attributable to a receivable of
approximately $1.2 million from the disposition of available for sale securities
as of December 31, 1995. Proceeds were received January 2, 1996.
 
     Net cash flows from investing activities amounted to negative $9,401,970 in
1996 compared to negative $20,810,142 in 1995. Funds used in lending activities
were $9,539,579 in 1996 compared to $15,384,264 in 1995. Net funds used in
securities activities amounted to ($ 401,271) in 1996 compared to $5,976,005 in
1995. These two areas accounted for the bulk of the change in investing
activities.
 
     In 1996, net cash provided by financing activities was $5,570,412 compared
to $22,306,826 in 1995. As mentioned above, the Bank utilized the increase of
$13,987,974 in deposits to fund the pay-off of FHLB advances and investing
activities.
                                                  
     The Bank expects to be able to fund loan demand and other investing
activities, including the cash portion of Landmark Bank purchase, during 1997 by
continuing to use the FHLB's advance program, as well as funds provided from
customer deposits. Management is not aware of any trends, events, or
uncertainties that will have or that are reasonably likely to have a material
effect in the Company's liquidity, capital resources or results of operations.

     As part of the Financial Institution Reform, Recovery, and Enforcement Act
of 1989 (FIRREA), banks are required to maintain core capital, leverage ratio,
and total risk based capital of 4.00%, 4.00%, and 8.00%, respectively. As of
December 31, 1996, the Bank's ratios were 6.76%, 6.76%, and 12.00%,
respectively, well in excess of the regulators' requirements.

     Book value per share was $11.26 at December 31, 1996 versus $11.57 per
share at December 31, 1995. The change in the market value of the Bank's
investment security portfolio and the decrease in retained earnings, when
coupled with an increase of 15,479 shares outstanding, caused the drop in book
value per share.
                                                  
IMPACT OF INFLATION                               
                                                  
     The financial statements and related data are prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars and
current market value, for certain loans and investments, without considering
changes in the relative purchasing power of money over time due to inflation.

     Unlike other companies, virtually all of the assets and liabilities of a
bank are monetary in nature. As a result, interest rates have a far more
significant impact on a bank's performance than the effects of the

                                       8
<PAGE>
 
               ================================================
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
 
 
general level of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the price of goods and services, since
such prices are affected by inflation. In the current interest rate environment,
liquidity and the maturity structure of the Bank's assets and liabilities are
important to the maintenance of acceptable performance levels.
                             
INTEREST RATE SENSITIVITY    
                             
     Management has continued to utilize asset/liability management as a
strategy in monitoring the interest rate risk. The strategy of matching rate-
sensitive assets with similar liabilities stabilizes profitability during
periods of interest rate fluctuations.
                             
     The Bank's one-year Gap at December 31, 1996 was -9.58%, compared to the
December 31, 1995 Gap position of-6.69%. The Bank continues to offer adjustable
rate mortgages which reprice at one, three, and five year intervals. In
addition, from time to time, the Bank sells fixed-rate mortgages into the
secondary market in order to minimize interest rate risk.
 
     The Bank's Gap, of approximately negative nine percent at December 31,
1996, means net interest income would increase if interest rates trended
downward. The opposite would occur if interest rates were to rise. Management
feels that maintaining the Gap within ten points of the parity line provides
adequate protection against severe interest rate swings. In an effort to
maintain the Gap within ten points of parity, the Bank utilizes the Federal Home
Loan Bank advance program to control the repricing of a segment of liabilities.

     At December 31, 1996, the Bank's interest earning assets scheduled to
reprice within one year or less totaled $121.9 million, or 48.56% of earning
assets compared to $128.8 million, or 53.55% of earning assets at December 31,
1995. At December 31, 1996, interest bearing liabilities, which were scheduled
to reprice within one year, amounted to $146.0 million, or 62.86% of interest
bearing liabilities as compared to $144.9 million, or 64.25% of interest bearing
liabilities as of December 31, 1995.
                                                  
NET INTEREST INCOME                               
                                                  
     Net interest income for the year ended December 31, 1996 increased by
$511,721, or 6.50%, to $8,379,707. The increase can be attributed to the
increased volume of the Bank's loan portfolio. Total interest income increased
by $1,237,914, or 7.09%, with 62.12% attributed to the increase in volume, and
37.88% related to the change in interest rates.

     Total interest expense increased $726,193, or 7.57%, with 13.09% attributed
to the increased volume of both deposits and FHLB advances, and 86.91% related
to the rise in interest rates. Despite the rise in interest rates, the Bank's
cost of funds increased slightly to 4.54% during 1996 from 4.50% in 1995, as the
Bank's deposits as a percentage of total interest bearing liabilities increased
from 88.13% in 1995 to 91.38% in 1996. Advances typically are higher costing
funding instruments. In 1996, the cost of advances was 5.86% compared to 6.42%
in 1995. Deposits' cost in 1996 was 4.36% versus 4.27% in 1995. As a result, the
Bank's spread increased to 3.13% at December 31, 1996 compared to 3.08% at
December 31, 1995.

The following table sets forth the average yield on loans and investments, the
average interest rate paid on deposits and borrowings, the net interest rate
margin, and the net yield on interest earning assets for the periods indicated:

                                           1996    1995     1994    1993    1992
                                        ----------------------------------------
Yield on loans                            7.86%   7.71%    7.10%   7.49%   8.68%
                                                                        
Yield on investment securities            6.35%   6.53%    6.14%   5.68%   6.65%
                                                                        
Combined yield on loans and investments   7.67%   7.58%    7.00%   7.28%   8.42%
                                                                        
Cost of deposits                          4.36%   4.27%    3.63%   3.81%   4.76%
                                                                        
Cost of borrowings                        5.86%   6.42%    4.29%   4.55%   8.00%
                                                                        
Combined cost of deposits and borrowings  4.54%   4.50%    3.67%   3.83%   4.88%
                                                                        
Interest rate spread                      3.13%   3.08%    3.33%   3.45%   3.54%
                                                                        
Net interest yield                        3.44%   3.42%    3.61%   3.75%   3.79%

                                       9
<PAGE>
 
               ===============================================
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
 
The following table shows the Bank's interest rate sensitivity table at December
31, 1996:

<TABLE> 
<CAPTION> 
                                     0-3          3-6         6 MONTHS-        1-3        BEYOND
                                    MONTHS       MONTHS        1 YEAR         YEARS       3 YEARS       TOTAL
                               -------------------------------------------------------------------------------
                                                               ($ in thousands)
<S>                            <C>             <C>          <C>            <C>          <C>          <C>   
Interest earning assets:

  Loans                           $  30,220    $  22,968    $    53,804    $  60,743    $  50,623    $ 218,358

  Investments                        10,428          652          3,852       10,342        7,460       32,734
                               -------------------------------------------------------------------------------  
Total                             $  40,648    $  23,620    $    57,656    $  71,085    $  58,083    $ 251,092
                               -------------------------------------------------------------------------------
 
Interest bearing liabilities:

 Deposits                         $  70,320    $  23,193    $    31,339    $  59,805    $  18,713    $ 203,370

 Repurchase agreements                8,663            -              -            -            -        8,663

 Borrowings                           4,400        3,060          5,000        7,331          388       20,179

                               -------------------------------------------------------------------------------
Total                             $  83,383    $  26,253    $    36,339    $  67,136    $  19,101    $ 232,212
                               -------------------------------------------------------------------------------
Period sensitivity gap            $ (42,735)   $  (2,633)   $    21,317    $   3,949    $  38,982    $  18,880
 
Cumulative sensitivity            $ (42,735)   $ (45,368)   $   (24,051)   $ (20,102)   $  18,880    $  18,880

Cumulative sensitivity

  gap as a percent of

  earning assets                     -17.02%      -18.07%         -9.58%       -8.01%        7.52%        7.52%
</TABLE>

Note:  The Bank has used industry decay formulae in establishing repricing
periods for savings and NOW accounts.

                                       10
<PAGE>
 
               ================================================ 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

The following table presents, for the periods indicated, the total dollar amount
of interest income from earning assets and the resultant yields as well as the
interest paid on interest bearing liabilities, and the resultant costs:

<TABLE> 
<CAPTION> 
YEAR ENDED DECEMBER 31,                  1996                            1995                                   1994
                             -----------------------------    --------------------------------   ---------------------------------
                                AVERAGE/(1)/       YIELD/      AVERAGE/(1)/            YIELD/       AVERAGE/(1)/           YIELD/
                                BALANCE  INTEREST   COST        BALANCE     INTEREST    COST         BALANCE     INTEREST  COST
                             ------------------------------   --------------------------------   ---------------------------------
                                                                 ($ in thousands)
<S>                          <C>         <C>       <C>        <C>           <C>         <C>      <C>          <C>         <C>   
Assets:
Interest earning assets:
  Loans /(2)/                $  213,473  $  16,776   7.86%    $  205,548    $  15,846   7.71%    $   186,651  $  13,251   7.10%
  Investment securities and
     other/ (3)/                 30,348      1,928   6.35%        24,790        1,620   6.53%         21,033      1,292   6.14%
                             ---------------------            -----------------------            ----------------------
  Total interest earning
     assets                     243,821     18,704   7.67%       230,338       17,466   7.58%        207,684     14,543   7.00%
                             ---------------------            -----------------------            ----------------------  

 
Non-interest earning assets:
 Cash                             5,964                            5,976                               5,782
                                                                                    
  Other non-interest earning
     assets/ (4)/                 8,425                            8,285                               7,512
                             ----------                       ----------                         -----------               
  Total non-interest earning
     assets                      14,389                           14,261                              13,294
                             ----------                       ----------                         -----------   
Total                        $  258,210                       $  244,599                         $   220,978
                             ==========                       ==========                         ===========
 
Liabilities and Shareholders'
     Equity:
Interest bearing liabilities:
  Savings deposits           $   96,062      2,607   2.71%    $   96,698    $   2,855   2.95%    $   107,592  $   2,996   2.78%
  Time deposits                  98,248      5,877   5.98%        88,310        5,065   5.74%         68,250      3,344   4.90%
  Repurchase agreements           4,922        203   4.12%         4,702          177   3.76%          2,218        115   5.18%
  Other borrowed funds           27,960      1,638   5.86%        23,388        1,501   6.42%         13,815        592   4.29%
                             ---------------------            -----------------------            ----------------------
  Total interest bearing
     liabilities                227,192     10,325   4.54%       213,098        9,598   4.50%        191,875      7,047   3.67%
                             ---------------------            -----------------------            ----------------------  
Non-interest bearing
     liabilities:
  Demand deposits                 6,983                            7,050                               7,005
  Other                           4,656                            5,570                               4,028
                             ----------                       ----------                         -----------   
                                 11,639                           12,620                              11,033
Shareholders' Equity             19,379                           18,881                              18,070
                             ----------                       ----------                         -----------   
Total                        $  258,210                       $  244,599                         $   220,978
                             ==========                       ==========                         ===========
Net interest income/interest
     rate spread                         $   8,379   3.13%                  $   7,868   3.08%                 $   7,496   3.33%
                                         =================                  =================                 =================
Net earning balance/net yield
     on earning assets       $   16,629              3.44%    $   17,240                3.42%    $    15,809              3.61%
                             ============================     ===============================    ==============================
</TABLE>

/(1)/ Monthly average balances have been used for all periods.  Management does
not believe that the use of month-end balances instead of daily average balances
caused any material difference in the information presented.

/(2)/ Loans include 90 day delinquent loans which have been placed on a non-
accruing status.  Management does not believe that including the 90 day
delinquent loans in loans caused any material difference in the information
presented.

/(3)/ Investment securities and other includes tax -exempt investment
securities.  Management does not believe that including tax exempt investment
securities in investments securities and other caused any material difference in
the information presented.

/(4)/ Other non-interest earning assets includes non-earning assets and real
estate owned.

                                       11
<PAGE>
 
               ================================================ 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in volume
and rates.  The net change attributable to changes in both volume and rate,
which cannot be segregated, has been allocated proportionately to the change due
to volume and the change due to the rate.
 
 
                                          YEAR ENDED DECEMBER 31, 1996 VS. 1995
                                                     INCREASE (DECREASE)
                                                           DUE TO
                                                 VOLUME        RATE      TOTAL
                                              --------------------------------
                                                       ($ in thousands)
Interest income on loans                     $   448         $   482    $   930
Interest income on investments                   321             (13)       308
                                             ---------------------------------- 
     Total interest income                       769             469      1,238
                                             ----------------------------------
 
Interest expense on savings deposits             (23)           (226)      (249)
Interest expense on time deposits                398             414        812
Interest expense on repurchase                     3              23         26
 agreements
Interest expense on borrowings                  (284)            421        137
                                             ----------------------------------
     Total interest expense                       94             632        726
                                             ----------------------------------
     Net interest income                     $   675         $  (163)   $   512
                                             ================================== 
 
                                          YEAR ENDED DECEMBER 31, 1995 VS. 1994
                                                   INCREASE (DECREASE)
                                                         DUE TO
                                                 VOLUME        RATE      TOTAL
                                              --------------------------------
                                                      ($ in thousands)
Interest income on loans                     $ 1,404         $ 1,192    $ 2,596
Interest income on investments                   242              86        328
     Total interest income                     1,646           1,278      2,924
                                             ----------------------------------
 
Interest expense on savings deposits            (356)            215       (141)
Interest expense on time deposits              1,087             634      1,721
Interest expense on repurchase                    83             (20)        63
 agreements
Interest expense on borrowings                   530             379        909
     Total interest expense                    1,344           1,208      2,552
                                             ----------------------------------
     Net interest income                     $   302         $    70    $   372
                                             ================================== 

                                       12
<PAGE>
 
               ================================================
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

 
PROVISION FOR LOAN LOSSES
                                        
     The Bank considers many factors in determining the allowance for loan
losses. These include the risk and size characteristics of loans, the prior
years' loss experience, the levels of delinquencies, the prevailing economic
conditions, the number of foreclosures, unemployment rates, interest rates, and
the value of collateral securing the loans. No changes were made to the Bank's
procedures with respect to maintaining the loan loss allowances as a result of
any regulatory examinations. However, the Bank increased the risk factor on its
general allowance from 0.25% to 0.50% . This change required an additional
provision of approximately $550,000 to General Allowance for Loan Loss Reserves.
                                        
     Additionally, the Bank's commercial loan officers review the financial
condition of commercial loan customers on a monthly basis and perform visual
inspections of facilities and inventories. The Bank also has an internal audit
and compliance program. Results of the audit and compliance programs are
reported directly to the Audit Committee of the Bank's Board of Directors.
                                        
     The allowance for loan losses at December 31, 1996 was $2,158,026, compared
to $1,828,060 at year-end 1995. The allowance in 1996 includes $1,801,589 in
general reserves as compared to $1,200,000 in 1995. As a result of charge-offs
in 1996, the Bank expensed to the provision for loan losses $1,660,741, in 1996,
as compared to $1,163,710, in 1995. Net charged-off loans during 1996 amounted
to 0.63% of average loans, as compared to 1.02% in 1995. The allowance
represented 0.98% of total loans at year-end 1996 versus 0.87% at year-end 1995.
The allowance for loan losses as a percentage of non-performing assets was
91.43% at December 31, 1996 compared to 75.36% at December 31, 1995. The
allowance for loan losses as a percentage of non-performing assets (less real
estate owned) and troubled debt restructured was 131.53% at December 31, 1996
compared to 126.82% at December 31, 1995. Please refer to Note 4 "Loans
receivable", in the Consolidated Financial Statements for information regarding
SFAS 114 and 118.
                                       
     Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention do not result from trends or uncertainties which the Bank
reasonably expects will materially impact future operating results, liquidity,
or capital resources.
                                       
     As of December 31, 1996, there were no other loans not included in the
table or discussed above where known information about the possible credit
problems of borrowers caused management to have doubts as to the ability of the
borrower to comply with present loan repayment terms and which may result in
disclosure of such loans in the future.
                                       
     Total classified loans, excluding special mention, as of December 31, 1996
and 1995 were $5,254,069 and $6,049,066, respectively. Total nonperforming
assets amounted to $2,343,898 and $2,425,650 for the respective years. Loans
classified as 90 day delinquent increased to $787,930, which includes $723,595
of conventional real estate loans, at December 31, 1996 compared to $1,144,293
and $1,132,475 at December 31, 1995, respectively.

                                       13
<PAGE>
 
               ================================================
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
 
The following table sets forth the breakdown of non-performing assets:

<TABLE> 
<CAPTION> 
                                                    1996            1995           1994          1993          1992
                                          ------------------------------------------------------------------------- 
<S>                                       <C>             <C>             <C>            <C>           <C>   
90 Day delinquent loans/(1)/              $      787,930  $    1,144,293  $      23,825  $    288,663  $    152,692
Non-earning assets/(2)/                          848,942         297,172      1,692,608       501,408     1,388,864
Real estate owned                                707,026         984,185      1,504,880     1,854,047     2,736,845
                                          ------------------------------------------------------------------------- 
Total non-performing assets               $    2,343,898  $    2,425,650  $   3,221,313  $  2,644,118  $  4,278,401
                                          =========================================================================
Troubled debt restructured                $       N/A     $      445,417  $   2,337,058  $  3,466,820  $  4,391,549
                                          =========================================================================
Impaired Loans                            $    1,188,183           N/A           N/A           N/A           N/A
                                          =========================================================================
</TABLE>

/(1)/  All loans 90 days or more delinquent are placed on a non-accruing status.

/(2)/  Loans considered to be uncollectible, pending foreclosure, or in
bankruptcy proceeding, are placed on a non-earning
status.

The following table sets forth 90 day delinquent loans by category:

<TABLE> 
<CAPTION> 
                                        1996       1995         1994       1993          1992
                                  --------------------------------------------------------------
<S>                               <C>         <C>           <C>        <C>          <C>  
Real estate loans -
     Conventional                 $  723,595  $  1,132,475  $       -  $  288,663   $    152,692
     Construction                          -             -     23,825           -              -
Consumer loans                        64,335         3,983          -           -              -
Commercial and municipal loans             -         7,835          -           -              -
Other loans                                -             -          -           -              -
                                  --------------------------------------------------------------
     Total                        $  787,930  $  1,144,293  $  23,825  $  288,663   $    152,692
                                  ==============================================================
</TABLE> 

The following table sets forth the allocation of the loan loss valuation
allowance and the percentage of loans in each category to total loans as of
December 31:

<TABLE>
<CAPTION>
                                 1996                 1995                 1994                  1993                  1992
                         --------------------------------------------------------------------------------------------------------
<S>                      <C>            <C>   <C>            <C>   <C>            <C>   <C>              <C>   <C>            <C> 
Real estate loans -      
     Conventional        $ 1,603,860    84%   $   687,547    83%   $   726,959    81%   $   853,710      79%   $ 1,258,635    79%
     Construction             83,750              201,257            1,598,266     2%     1,245,382       2%       670,378     1%
Collateral and           
  consumer loans              36,873    12%         8,067    12%         5,464    12%        22,907      14%        10,684    15%
Commercial and           
  municipal loans            294,034     4%       276,526     4%       422,196     4%       252,002       5%       155,234     4%
Impaired loans               139,509              654,663     1%           N/A                  N/A                    N/A
Other                              -                    -                    -     1%             -                      -     1%
                         --------------------------------------------------------------------------------------------------------
Valuation allowance      $ 2,158,026   100%   $ 1,828,060   100%   $ 2,752,885   100%   $ 2,374,001     100%   $ 2,094,931   100%
                         ========================================================================================================
Valuation allowance      
  as a percentage of     
  total loans                    .98%                 .87%                1.38%                1.35%                  1.22%
                         =======================================================================================================
</TABLE>

                                       14
<PAGE>
 
               ================================================
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)

The following sets forth the maturities of the loan portfolio at December 31,
1996:

<TABLE> 
<CAPTION> 
                                        ONE YEAR          ONE THRU            OVER        
MATURITIES:                             OR LESS          FIVE YEARS        FIVE YEARS            TOTAL
<S>                                 <C>               <C>               <C>                <C>  
Real Estate Loans -                 $   8,412,470     $  28,282,491     $  148,287,390     $  184,982,351
                                  ----------------------------------------------------------------------- 
Real Estate Loans with:                                                                   
  Predetermined interest rates          1,714,755         7,082,348         21,786,595         30,583,698
  Adjustable interest rates             6,697,715        21,200,143        126,500,795        154,398,653
                                  -----------------------------------------------------------------------
                                        8,412,470        28,282,491        148,287,390        184,982,351
                                  -----------------------------------------------------------------------
                                                                                          
Collateral Loans -                     11,213,109         5,877,395          3,484,206         20,574,710
                                  -----------------------------------------------------------------------
Collateral Loans with:                                                                    
  Predetermined interest rates         10,147,381         3,900,095            611,832         14,659,308
  Adjustable interest rates             1,065,728         1,977,300          2,872,374          5,915,402
                                  -----------------------------------------------------------------------   
                                       11,213,109         5,877,395          3,484,206         20,574,710
                                  -----------------------------------------------------------------------
                                                                                          
Consumer Loans -                        4,832,099            28,226                  -          4,860,325
                                  -----------------------------------------------------------------------
Consumer Loans with:                                                                      
  Predetermined interest rates            114,076            28,226                  -            142,302
  Adjustable interest rates             4,718,023                 -                  -          4,718,023
                                  -----------------------------------------------------------------------
                                        4,832,099            28,226                  -          4,860,325
                                  -----------------------------------------------------------------------
                                                                                          
Commercial/Municipal Loans-             3,357,574         2,866,600          2,128,615          8,352,789
                                  -----------------------------------------------------------------------
Commercial/Municipal Loans with:                                                          
  Predetermined interest rates          1,427,783           893,134            109,837          2,430,754
  Adjustable interest rates             1,929,791         1,973,466          2,018,778          5,922,035
                                  -----------------------------------------------------------------------  
                                        3,357,574         2,866,600          2,128,615          8,352,789
                                  -----------------------------------------------------------------------
                                                                                          
Other Loans -                             116,295           311,402              9,057            436,754
                                  -----------------------------------------------------------------------
Other Loans with:                                                                         
  Predetermined interest rates             90,228           223,157              4,947            318,332
  Adjustable interest rates                26,067            88,245              4,110            118,422
                                  -----------------------------------------------------------------------
                                          116,295           311,402              9,057            436,754
                                  -----------------------------------------------------------------------
                                                                                          
TOTALS                              $  27,931,547     $  37,366,114     $  153,909,268     $  219,206,929
                                  =======================================================================
</TABLE>

The preceding schedule includes $848,942 of non-earning assets categorized
within the respective loan types.

                                       15
<PAGE>
 
               ================================================ 
               MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
 

OTHER INCOME AND EXPENSE
                                        
     Total non-interest income decreased by $487,683, or 33.97% to $1,923,239.
Net gains on the sale of securities and bank property increased $365,813 due to
the sale of a piece of property located adjacent to the Bank's New London branch
office.
                                        
     Total non-interest expense increased $1,454,322, or 23.12% to $7,745,331.
This increase was due to the one-time payment of $995,000 to the Federal Deposit
Insurance Corporation (FDIC) to recapitalize the Savings Insurance Fund (SAIF)
and the expensing of $229,970 to Other expense to cover write-downs on real
estate owned. Without these two events, the Bank's non-interest expense would
have increased 3.60%.
                                        
FAS 109-ACCOUNTING FOR INCOME TAXES     
                                        
     Effective December 31, 1993, the Bank adopted FAS No. 109, "Accounting for
Income Taxes," which requires that deferred tax assets and liabilities be
measured based on the enacted tax rates. Statement No. 109 also requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. As a result of adopting FAS 109, there is no effect on the
consolidated financial statements as of December 31, 1993, and no allowance is
required against the deferred tax debit. The provision for income taxes for the
years ended December 31, 1996, 1995 and 1994 includes net deferred income tax
expense of ($120,481), $324,909, and $75,000, respectively. These amounts were
determined by the deferred method in accordance with generally accepted
accounting principles for each year.
 
     The Bank has provided deferred income taxes on the difference between the
provision for loan losses permitted for income tax purposes and the provision
recorded for financial reporting purposes.
 
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994                      
                                       
NET INTEREST INCOME                    
                                       
     Net interest income for the year ended December 31, 1995 was $7,867,986,
compared to $7,496,030 for 1994, an increase of $371,956 or 4.96%. The increase
was the result of increased volume of the Bank's loan and investment portfolio.
                                       
     Total interest income increased $2,923,897 or 20.11%, with 56.29% of the
increase attributed to the change in volume.
                                       
     Interest expense increased $2,551,941, or 36.22%, with 52.66% attributed to
increased balances on customer deposits and FHLB advances.
                                       
PROVISION FOR LOAN LOSSES              
                                       
     The allowance for loan losses was $1,828,060 for the year ended December
31, 1995, compared to $2,752,885 at year-end 1994. Charge-offs were $2,095,220
for 1995, and $396,116 for 1994. The allowance as a percentage of total loans
was 0.87% at year-end 1995 versus 1.38% from 1994. Non-performing assets
amounted to $2,425,649, or 0.94% of total assets for 1995 compared to
$3,221,313, or 1.38% of total assets for year-end 1994.
                                       
OTHER INCOME AND EXPENSE               
                                       
Total non-interest income decreased by $121,676, or 7.81% to $1,435,556.
                                       
Total other expenses increased $304,552 to $6,291,009, or 5.08%.

                                       16
<PAGE>
 
              [LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C.]


The Board of Directors,
New Hampshire Thrift Bancshares, Inc.
Newport, New Hampshire

                         INDEPENDENT AUDITORS' REPORT
                         ----------------------------

We have audited the accompanying consolidated statement of financial condition
of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31,
1996 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of New
Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 1995 and
1994, were audited by other auditors whose reports dated January 19, 1996 and
January 24, 1995, expressed unqualified opinions of those statements.

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

In our opinion, the 1996 consolidated financial statements referred to above 
present fairly, in all material respects, the consolidated financial position of
New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 1996 
and the consolidated results of their operations and their cash flows for the 
year ended December 31, 1996, in conformity with generally accepted accounting 
principles.

As discussed in Note 1 to the consolidated financial statements, the Company 
adopted the provisions of the Financial Accounting Standards Board's Statement 
of Financial Accounting Standards No. 123 "Accounting for Stock-Based 
Compensation," effective January 1, 1996.

                                         /s/ Shatswell, MacLeod & Company, P.C.
                                             SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts
January 22, 1997

                                      17

<PAGE>
 
              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
            =======================================================
                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
<TABLE> 
<CAPTION> 
AS OF DECEMBER 31,                                                                               1996                      1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                       <C>  
ASSETS
  Cash and due from banks                                                               $   5,868,749             $   7,544,297
  Federal funds sold                                                                        5,134,000                 3,449,000
                                                                                   ----------------------------------------------- 
     Cash and cash equivalents                                                             11,002,749                10,993,297
  Securities available for sale                                                            24,950,725                25,718,260
  Securities held to maturity                                                                 340,276                   393,054
  Other investments                                                                         2,307,557                 2,303,285
  Loans held for sale                                                                         745,650                 3,095,971
  Loans receivable, net                                                                   215,153,819               205,073,080
  Nonaccrual loans                                                                            848,942                   297,172
  Accrued interest receivable                                                               1,354,042                 1,433,882
  Bank premises and equipment, net                                                          5,104,366                 5,316,837
  Investments in real estate                                                                  619,487                   638,557
  Real estate owned and property acquired in settlement of loans                              723,478                   984,185
  Other assets                                                                              1,234,253                 1,968,497
                                                                                   ----------------------------------------------- 
       Total assets                                                                     $ 264,385,344             $ 258,216,077
                                                                                   =============================================== 
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
  Demand deposits                                                                       $  10,587,757             $  10,934,512
  Savings and NOW accounts                                                                 96,630,673                95,825,177
  Time deposits                                                                           106,740,465                93,211,232
                                                                                   ----------------------------------------------- 
       Total deposits                                                                     213,958,895               199,970,921
  
  Securities sold under agreement to repurchase                                             8,662,736                 9,552,825
  Advances from Federal Home Loan Bank                                                     20,174,025                26,936,168
  Accrued expenses and other liabilities                                                    2,395,998                 2,212,158
                                                                                   ----------------------------------------------- 
       Total liabilities                                                                  245,191,654               238,672,072
                                                                                   ----------------------------------------------- 
 
SHAREHOLDERS' EQUITY
  Preferred stock, $.01 par value per share: 2,500,000 shares authorized,                           -                         -
     no shares issued or outstanding
  Common stock, $.01 par value,  per share:  5,000,000 shares authorized,
     2,147,282 shares issued and 1,704,982 shares outstanding at
     December 31, 1996, 2,147,282 shares issued and 1,689,503 shares
     outstanding at December 31, 1995                                                          21,473                    21,473
  Paid-in capital                                                                          13,241,774                13,160,382
  Retained earnings                                                                         8,437,149                 8,673,504
  Net unrealized holding gain (loss) on securities available for sale net
     of $65,000 of deferred tax benefit in 1996, and $51,000 of
     deferred taxes in 1995                                                                  (127,179)                   97,594

                                                                                           21,573,217                21,952,953
  Treasury stock, at cost, 442,300 shares as of December 31, 1996
    and 457,779 shares as of December 31, 1995                                             (2,379,527)               (2,408,948)
                                                                                   ----------------------------------------------- 
  
       Total shareholders' equity                                                          19,193,690                19,544,005
                                                                                   ----------------------------------------------- 
  
       Total liabilities and shareholders' equity                                       $ 264,385,344             $ 258,216,077
                                                                                   =============================================== 
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                              of these statements.

                                       18
<PAGE>
 
              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
           =========================================================
                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE> 
<CAPTION>  
FOR THE YEARS ENDED DECEMBER 31,                                              1996             1995              1994
----------------------------------------------------------------------------------------------------------------------   
<S>                                                                  <C>              <C>               <C>              
 INTEREST INCOME                                                                                                         
   Interest on loans                                                 $  16,775,792    $  15,846,308     $  13,250,592    
   Interest and dividends on investments                                 1,928,455        1,620,025         1,291,844    
                                                                     -------------------------------------------------   
          Total interest income                                         18,704,247       17,466,333        14,542,436    
                                                                     -------------------------------------------------   
                                                                                                                         
 INTEREST EXPENSE                                                                                                        
   Interest on deposits                                                  8,686,678        8,096,851         6,454,599    
   Interest on advances and other borrowed money                         1,637,862        1,501,496           591,807    
                                                                     -------------------------------------------------   
          Total interest expense                                        10,324,540        9,598,347         7,046,406    
                                                                     -------------------------------------------------   
                                                                                                                         
          Net interest income                                            8,379,707        7,867,986         7,496,030    
                                                                                                                         
 PROVISION FOR LOAN LOSSES                                               1,660,741        1,163,710           761,555    
                                                                     -------------------------------------------------   
                                                                                                                         
          Net interest income after provision for loan losses            6,718,966        6,704,276         6,734,475    
                                                                     -------------------------------------------------   
                                                                                                                         
 OTHER INCOME                                                                                                            
   Loan origination fees                                                    75,564           89,632           295,173    
   Customer service fees                                                 1,190,726        1,058,868           856,327    
   Net gain (loss) on sale of securities and bank property                 276,986          (88,827)           35,706    
   Rental income                                                           223,673          227,885           220,460    
   Brokerage service income                                                153,261          110,705           149,566    
   Other income                                                              3,029           37,293                 -    
                                                                     -------------------------------------------------   
          Total other income                                             1,923,239        1,435,556         1,557,232    
                                                                     -------------------------------------------------   
                                                                                                                         
 OTHER EXPENSES                                                                                                          
   Salaries and employee benefits                                        3,039,929        2,917,180         2,861,435    
   Occupancy expenses                                                    1,242,216        1,195,834         1,101,198    
   Advertising and promotion                                               188,512          162,745           154,382    
   Depositors' insurance                                                 1,448,801          440,439           406,630    
   Outside services                                                        364,101          333,361           350,812    
   Provision for other real estate owned losses                            229,970                -                 -    
   Other expenses                                                        1,231,802        1,241,450         1,112,000    
                                                                     -------------------------------------------------   
          Total other expenses                                           7,745,331        6,291,009         5,986,457    
                                                                     -------------------------------------------------   
                                                                                                                         
 INCOME BEFORE PROVISION FOR INCOME TAXES                                  896,874        1,848,823         2,305,250    
                                                                                                                         
 PROVISION FOR INCOME TAXES                                                286,163          604,000           723,000    
                                                                     -------------------------------------------------   
                                                                                                                         
 NET INCOME                                                          $     610,711    $   1,244,823     $   1,582,250    
                                                                     =================================================   
                                                                                                                         
 Earnings per common share                                           $         .35    $         .73     $         .93    
                                                                     =================================================   
                                                                                                                         
 Dividends declared per common share                                 $         .50    $         .50     $         .50    
                                                                     =================================================   
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                              of these statements.

                                       19
<PAGE>
 
              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
     ===================================================================
          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
<TABLE> 
<CAPTION> 
FOR THE YEARS ENDED DECEMBER 31,                                                1996               1995                1994
-----------------------------------------------------------------------------------------------------------------------------     
<S>                                                                    <C>                <C>                 <C>                 
 COMMON STOCK                                                                                                                     
     Balance, beginning and end of year                                $      21,473      $      21,473       $      21,473       
                                                                       ------------------------------------------------------     
                                                                                                                                  
 PAID-IN CAPITAL                                                                                                                  
     Balance, beginning of year                                        $  13,160,382      $   13,103,404      $  13,069,785       
     Gain on sale of treasury stock, at cost                                  81,392              56,978             33,619       
                                                                       ------------------------------------------------------     
                                                                                                                                  
     Balance, end of year                                              $  13,241,774      $   13,160,382      $  13,103,404       
                                                                       ------------------------------------------------------     
                                                                                                                                  
 RETAINED EARNINGS                                                                                                                
     Balance, beginning of year                                        $   8,673,504      $    8,268,094      $   7,516,147       
     Net income                                                              610,711           1,244,823          1,582,250       
     Cash dividends paid                                                    (847,066)           (839,413)          (830,303)      
                                                                       ------------------------------------------------------     
                                                                                                                                  
     Balance, end of year                                              $   8,437,149      $    8,673,504      $   8,268,094       
                                                                       ------------------------------------------------------     
                                                                                                                                  
 NET UNREALIZED HOLDING GAIN (LOSS) ON                                                                                            
  SECURITIES AVAILABLE FOR SALE                                                                                                   
     Balance, beginning of year                                        $      97,594      $     (728,667)     $      95,857       
     Adjustment to fair value                                               (340,773)          1,252,661         (1,199,924)      
     Effect of change in deferred taxes                                      116,000            (426,400)           375,400       
                                                                       ------------------------------------------------------     
                                                                                                                                  
     Balance, end of year                                              $    (127,179)     $       97,594      $    (728,667)      
                                                                       ------------------------------------------------------     
                                                                                                                                  
 TREASURY STOCK                                                                                                                   
     Balance, beginning of year                                        $  (2,408,948)     $   (2,411,430)     $  (2,316,293)      
     Shares repurchased, (3,251 shares in 1996,                                                                                   
        14,968 shares in 1995, and 20,900 shares in 1994)                    (43,482)           (144,015)          (193,938)      
     Exercise of stock options, (18,730 shares in 1996,                                                                           
        33,485 shares in 1995, and  22,583 shares in 1994)                    72,903             146,497             98,801       
                                                                       ------------------------------------------------------     
                                                                                                                                  
     Balance, end of year                                              $  (2,379,527)     $   (2,408,948)     $  (2,411,430)      
                                                                       ------------------------------------------------------     
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                              of these statements.

                                       20

<PAGE>

              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
            =======================================================
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,                                                  1996                       1995             1994
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                        <C>                   <C>        
 CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                     $          610,711         $        1,244,823    $   1,582,250
     Adjustments to reconcile net income to net cash
      provided by operating activities -
     Depreciation and amortization                                             455,910                    435,467          435,124
     Loans originated for sale                                             (14,233,140)               (18,911,177)      (7,431,617)
     Proceeds from sale of loans                                            14,166,770                 18,874,886        7,355,527
     (Gain) loss from sale of loans                                             66,370                     36,291           76,090
     (Gain) loss from sale of premises and equipment                          (251,770)                    14,603           (2,955)
     (Gain) loss from sale of debt securities available                            667                      3,957           (1,760)
       for sale and writedowns
     (Gain) loss from sale of equity securities available                       25,833                     33,975          (65,499)
      for sale
     Gain from sale of other real estate owned                                       -                          -          (41,581)
     Provision for other real estate owned losses                              229,970                          -                -
     Provision for loan losses                                               1,660,741                  1,163,710          761,555
     Deferred tax expense (benefit)                                           (120,481)                   324,909           75,000
     (Increase) decrease in accrued interest and other assets                  861,580                 (1,718,404)          96,149
     Decrease in deferred loan fees                                            (81,550)                  (138,396)        (198,762)
     Increase (decrease) in accrued expenses and other                         449,399                   (121,619)          11,183
      liabilities
                                                                    ----------------------------------------------------------------
          Net cash provided by operating activities                          3,841,010                  1,243,025        2,650,704
                                                                    ----------------------------------------------------------------

 CASH FLOWS FROM INVESTING ACTIVITIES
     Proceeds from sale of premises and equipment                              344,387                     84,400           31,119
     Capital expenditures                                                     (316,986)                  (545,515)        (952,379)
     Proceeds from sale of debt securities available for sale                2,468,275                  3,723,564          999,609
     Proceeds from sale of equity securities available for sale                450,642                    794,170          713,223
     Principal reduction on securities held to maturity                         52,778                     52,778           51,389
     Purchase of securities available for sale                              (9,063,424)               (13,211,517)      (9,006,732)
     Maturities of securities available for sale                             6,498,000                  2,665,000        3,725,000
     Purchase of other investments                                              (5,000)                  (385,289)               -
     Purchase of Federal Home Loan Bank stock                                        -                   (519,600)        (124,900)
     Net increase in loans to customers                                     (9,539,579)               (15,384,264)     (21,539,263)
     (Increase) decrease in nonaccrual loans                                  (551,770)                 1,395,436       (1,191,200)
     Decrease in real estate owned                                             260,707                    520,695          390,748
                                                                    ----------------------------------------------------------------
          Net cash used in investing activities                             (9,401,970)               (20,810,142)     (26,903,386)
                                                                    ----------------------------------------------------------------

 CASH FLOWS FROM FINANCING ACTIVITIES
     Net increase in deposits                                               13,987,974                  5,437,855       17,816,769
     Net increase (decrease) in repurchase agreements                         (890,089)                 5,954,918         (987,213)
     Increase (decrease) in advances from Federal Home                      (6,762,143)                11,725,374        9,770,015
      Loan Bank
     Net change in other borrowed money                                        (29,077)                   (31,368)         (31,034)
     Payments to acquire treasury stock                                        (43,482)                  (144,015)        (193,938)
     Dividends paid                                                           (847,066)                  (839,413)        (830,303)
     Proceeds from exercise of stock options                                   154,295                    203,475          132,420
                                                                    ----------------------------------------------------------------
          Net cash provided by financing activities                          5,570,412                 22,306,826       25,676,716
                                                                    ----------------------------------------------------------------
 NET INCREASE IN CASH AND CASH EQUIVALENTS                                       9,452                  2,739,709        1,424,034
 CASH AND CASH EQUIVALENTS, beginning of year                               10,993,297                  8,253,588        6,829,554
                                                                    ----------------------------------------------------------------
 CASH AND CASH EQUIVALENTS, end of year                             $       11,002,749         $       10,993,297    $   8,253,588
                                                                    ================================================================
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                             of these statements.

                                      21
<PAGE>
 
              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
            =======================================================
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                1996                   1995             1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                       <C>              <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for:
   Interest on deposit accounts                                           $     8,701,566         $    8,677,030   $    6,343,205
   Interest on advances and other borrowed money                                1,678,133              1,418,043          553,577
                                                                        ------------------------------------------------------------

    Total interest paid                                                   $    10,379,699         $   10,095,073   $    6,896,782
                                                                        ============================================================
   Income taxes                                                           $       331,763         $      363,879   $      701,986
                                                                        ============================================================


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Loans originated to facilitate sales of other real estate owned           $       207,500         $            -   $            -
                                                                        ============================================================
Transfers from loans to real estate acquired through foreclosure          $       462,302         $      320,000   $      305,717
                                                                        ============================================================
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                             of these statements.

                                      22
<PAGE>
 
              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
            =======================================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     NATURE OF OPERATIONS  -  New Hampshire Thrift Bancshares, Inc. (Company) is
a savings association holding company headquartered in New London, New
Hampshire.  The Company's subsidiary, Lake Sunapee Bank, fsb (Bank), a federal
stock savings bank operates ten branches primarily in Grafton, Sullivan, and
Merrimack Counties in west central New Hampshire.  Although the Company has a
diversified portfolio, a substantial portion of its debtors' abilities to honor
their contracts is dependent on the economic health of the region.  Its primary
source of revenue is providing loans to customers who are predominately small
and middle-market businesses and middle-income individuals.

     PRINCIPLES OF CONSOLIDATION  -  The consolidated financial statements
include the accounts of the Company, the Bank, Lake Sunapee Group, Inc. (LSGI),
and Lake Sunapee Financial Services Corp. (LSFSC).  LSGI and LSFSC are wholly-
owned subsidiaries of the Bank.  All significant intercompany accounts and
transactions have been eliminated in consolidation.

     CASH AND CASH EQUIVALENTS  -  For purposes of reporting cash flows, the
Company considers federal funds sold and due from banks to be cash equivalents.

     SECURITIES AVAILABLE FOR SALE  -  Available for sale securities consist of
bonds, notes, debentures, and certain equity securities. Unrealized holding
gains and losses, net of tax, on available for sale securities are reported as a
net amount in a separate component of shareholders' equity until realized. Gains
and losses on the sale of available for sale securities are determined using the
specific-identification method. Declines that are other than temporary in the
fair value of individual available for sale securities below their cost have
resulted in write-downs of the individual securities to their fair value. The
related write-downs of $728 and $76,590 have been included in earnings as
realized losses for the years ended 1996 and 1995, respectively. There was no
related write-down for the year 1994.

     SECURITIES HELD TO MATURITY  -  Bonds, notes, and debentures which the
Company has the positive intent and ability to hold to maturity are reported at
cost, adjusted for premiums and discounts recognized in interest income using
the interest method over the period to maturity.  Declines that are other than
temporary in the fair value of individual held to maturity securities below
their cost result in write-downs of the individual securities to their fair
value.  No write-downs have occurred for securities held to maturity.

     OTHER INVESTMENTS  -  Other investments are investments which do not have
readily determinable fair values. These types of investments are reported at
cost and are evaluated for other than a temporary decline in value. Other than
temporary declines in value result in write-downs of the individual security. No
write-downs have occurred for securities which are classified as other
investments.

     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 through a valuation
allowance by charges to income. No losses have been recorded.

     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 adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment to the yield of the related loan. When the interest
accrual is discontinued, all unpaid accrued interest is reversed. 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 an estimate based on the Company'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. This material estimate and the estimate of real
estate acquired in connection with foreclosures are particularly susceptible to
significant change in the near term. 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 to arrive
at its evaluation.

                                      23
<PAGE>
 
              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
            =======================================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)

     Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan".  The FAS as amended SFAS No. 118 requires
that impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. The adoption of the new
accounting standard did not have a material effect on the Company's financial
position or results of operation. Interest income on impaired loans is
recognized on an accrual basis when the impaired loan is less than 90 days past
due and has not been reclassified to non-accrual status. Interest income on
impaired loans over 90 days past due, and on loans placed on non-accrual status,
is recognized using a cash basis accounting method. Cash receipts on impaired
loans are recorded as both interest income and a reduction in the impaired loan
balance consistent with the terms of the underlying contractual agreements.

     The balance of impaired loans is determined by aggregating the fair vaLue
or present value of expected cash flows on individual loans identified as
impaired.  Homogeneous groups of loans such as consumer installment loans and
residential mortgage loans are not considered impaired.

     A loan becomes impaired when it appears probable the Company will be unable
to collect all amounts due, including principal and interest, under the
contractual terms of the loan agreement.  A loan is placed on non-accrual status
when it appears likely interest income will not be received.  Non-accrual loans
are reviewed for possible impairment.

     Impaired loans are written-down or charged-off when it has been determined
the asset has such little value that it no longer warrants remaining on the
books.  The decision to charge-off is made on a case-by-case basis.

     Factors considered by management in determining impairment include payment
status, net worth and collateral value.  An insignificant payment delay or an
insignificant shortfall in payment does not in itself result in the review of a
loan for impairment.  The Company applies SFAS No. 114 on a loan-by-loan basis.
The Company does not apply SFAS No. 114 to aggregations of loans that have risk
characteristics in common with other impaired loans.  Substantially all of the
Company's loans that have been identified as impaired have been measured by the
fair value of existing collateral.

     BANK PREMISES AND EQUIPMENT  -  Company premises and equipment are stated
at cost, less accumulated depreciation. Depreciation is computed using straight-
line and accelerated methods over the estimated useful lives of the assets.
Expenditures for replacements or major improvements are capitalized;
expenditures for normal maintenance and repairs are charged to expense as
incurred.  Upon the sale or retirement of bank premises and equipment, the cost
and accumulated depreciation are removed from the respective accounts and any
gain or loss is included in income.

     INVESTMENT IN REAL ESTATE  -  Investment in real estate is carried at the
lower of cost or estimated fair value.  The buildings are being depreciated over
their useful lives.  The properties consist of a condominium that the Company
rents to the public and three buildings that the Company rents for commercial
purposes.  Rental income is recorded in income when received and expenses for
maintaining these assets are charged to expense as incurred.

     REAL ESTATE OWNED AND PROPERTY ACQUIRED IN SETTLEMENT OF LOANS  -  The Bank
classifies loans as in-substance, repossessed or foreclosed if the Bank receives
physical possession of the debtor's assets regardless of whether formal
foreclosure proceedings take place.  At the time of foreclosure or possession,
the Company records the property at the lower of fair value minus estimated
costs to sell or the outstanding balance of the loan.  All properties are
periodically reviewed and declines in the value of the property are charged
against income.

     EARNINGS PER SHARE  -  Earnings per share are calculated using the weighted
average number of shares outstanding at the end of the year plus common stock
equivalents, as appropriate, resulting from the granting of incentive stock
options (Notes 10 and 14). Common stock equivalents are determined using the
treasury stock method. Common stock equivalents are not included in the
computation of earnings per share if they have an antidilutive effect. The
number of shares used in computing earnings per share was 1,722,983, 1,699,536,
and 1,693,259, for the years ended December 31, 1996, 1995 and 1994,
respectively.

                                      24
<PAGE>
 
              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
            ======================================================= 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)


     INCOME TAXES  -  Deferred income taxes are provided in amounts sufficient
to give effect to temporary differences between financial and tax reporting for
deferred loan origination fees, unrealized loss on securities available for
sale, provision for loan losses and depreciation.

     APPLE COMPUTER PROGRAM  -  During 1988, the Company offered depositors an
Apple computer as an inducement to open a certificate of deposit.  The cost of
acquiring these computers has been treated as a prepayment of interest and is
being amortized over the period to maturity of the deposit accounts.  In the
event of early withdrawal, the prorated value of the prepayment will be deducted
from unpaid interest and principal at the time of withdrawal.  As of December
31, 1996 and 1995, other assets include $67,019 and $115,431, respectively, of
unamortized computer costs.

     FAIR VALUE OF FINANCIAL INSTRUMENTS  -  The following methods and
assumptions were used by the Company in estimating fair values of financial
instruments as disclosed herein:


     Cash and short-term instruments  -  The carrying amounts of cash and short-
       term instruments approximate their fair value.
     Available for sale and held to maturity securities  -  Fair values for
       available for sale securities, are based on quoted market prices. The
       carrying values of held to maturity and other investments approximate
       fair values.
     Loans receivable  -  For variable-rate loans that reprice frequently and
       have no significant change in credit risk, fair values are based on
       carrying values. Fair values for all other loans are estimated using
       discounted cash flow analyses, using interest rates currently being
       offered for loans with similar terms to borrowers of similar credit
       quality. Fair values for impaired loans are estimated using discounted
       cash flow analyses or underlying collateral values, where applicable.
     Deposit liabilities  -  The fair values disclosed for demand deposits are,
       by definition, equal to the amount payable on demand at the reporting
       date (that is, their carrying amounts). The carrying amounts of variable-
       rate, fixed term money-market accounts and certificates of deposits
       (CD's) approximate their fair values at the reporting date. Fair values
       for fixed-rate CD's are estimated using a discounted cash flow
       calculation that applies interest rates currently being offered on
       certificates to a schedule of aggregated expected monthly maturities on
       time deposits.
     Borrowings  -  The carrying amounts of federal funds purchased, and other
       borrowings maturing within 90 days approximate their fair values. Fair
       values of other borrowings are estimated using discounted cash flow
       analyses based on the Bank's current incremental borrowing rates for
       similar types of borrowing arrangements.
     Accrued interest  -  The carrying amounts of accrued interest approximate
       their fair values.
     Off-balance sheet instruments  -  Fair values for loan commitments have not
       been presented as the future revenue derived from such financial
       instruments is not significant.

     USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS  -  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

     RECLASSIFICATIONS  -  Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform to the current year's
presentation.

     DEFERRED LOAN ORIGINATION FEES  - Loan origination, commitment fees and
certain direct origination costs are deferred, and the net amount is being
amortized as an adjustment of the related loan's yield.  The Company is
generally amortizing these amounts over the contractual life of the related
loans.

     STOCK BASED COMPENSATION  -  SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued in October 1995 and introduces a fair value method of
accounting for employee stock options, restricted stock grants, stock
appreciation rights or similar equity instruments.  In accordance with SFAS No.
123, entities can recognize stock-based compensation expense in the basic
financial statements using either (i) the intrinsic value approach set forth in
APB

                                      25
<PAGE>
 
              NEW HAMPSHIRE THRIFT BANCSHARES INC. AND SUBSIDIARY
            ======================================================= 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)

Opinion No. 25 or (ii) the fair value method introduced in SFAS No. 123.
Entities electing to continue to follow the provisions of APB Opinion No. 25
must make pro forma disclosure of net income and earnings per share, as if the
fair value method of accounting defined in SFAS No. 123 had been applied.
Management will continue to measure stock-based compensation costs in accordance
with APB Opinion No. 25 and has made the pro forma disclosure requirements of
SFAS No. 123 for 1996 and 1995.

     LOAN SERVICING - Effective January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65."  This statement requires that a
mortgage banking enterprise recognize as separate assets from its related loans
the rights to service mortgage loans for others, either through acquisition of
those rights or from the sale or securitization of loans with the servicing
rights retained on those loans, based on their relative fair values.  To
determine the fair value of the servicing rights created, the Company uses the
market prices under comparable servicing sale contracts, when available, or
alternatively uses a valuation model that calculated the present value of future
cash flows to determine the fair value of the servicing rights.  In using this
valuation method, the Company incorporates assumptions that market participants
would use in estimating future net servicing income, which includes estimates of
the cost of servicing loans, the discount rate, ancillary income, prepayment
speeds and default rates.

     The cost of mortgage servicing rights is amortized on a straight-line basis
which has substantially the same effect as amortizing the rights 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 interest rate risk characteristics of the underlying
loans. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair value.

     CONCENTRATION OF CREDIT RISK -  Most of the Company's business activity is
with customers located within the state.  There are no concentrations of credit
to borrowers that have similar economic characteristics.  The majority of the
Company's loan portfolio is comprised of loans collateralized by real estate
located in the state of New Hampshire.

                                      26
<PAGE>
 
                ==============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.   SECURITIES:
 
The amortized cost and approximate market value of securities are summarized as
follows:

<TABLE> 
<CAPTION> 
                                                                                            DECEMBER 31, 1996
                                                              ----------------------------------------------------------------------
                                                                                      GROSS                  GROSS
                                                                                    UNREALIZED             UNREALIZED
                                                                        FAIR         HOLDING                HOLDING        AMORTIZED
                                                                       VALUE           GAIN                   LOSS            COST
                                                              ----------------------------------------------------------------------
<S>                                                                <C>            <C>                      <C>           <C>  
Held to maturity:
    Bonds and notes -                                     
      Municipal bonds                                              $    340,276   $          -             $        -    $   340,276
                                                              ----------------------------------------------------------------------
Total held to maturity                                                  340,276              -                      -        340,276
                                                              ----------------------------------------------------------------------
 
Available for sale:
    Bonds and notes -
      U. S. Treasury Notes                                           12,884,840         31,066                 94,145     12,947,919
      U. S. Government, including agencies                            3,269,758         17,393                 18,099      3,270,464
      Other bonds and debentures                                      7,641,502         17,692                 97,336      7,721,146
                                                              ----------------------------------------------------------------------
                                                                     23,796,100         66,151                209,580     23,939,529
    Equity securities                                                 1,154,625         45,575                 94,325      1,203,375
                                                              ----------------------------------------------------------------------
Total available for sale                                             24,950,725        111,726                303,905     25,142,904
                                                              ----------------------------------------------------------------------
Other investments:
     Federal Home Loan Bank stock                                     1,861,000              -                      -      1,861,000
     Other securities                                                   446,557              -                      -        446,557
                                                              ----------------------------------------------------------------------
Total other investments                                               2,307,557                                            2,307,557
                                                              ----------------------------------------------------------------------
Total securities                                                   $ 27,598,558   $    111,726             $  303,905     27,790,737
                                                              ======================================================================

<CAPTION> 
                                                                                           DECEMBER 31, 1995
                                                              ----------------------------------------------------------------------
                                                                                      GROSS                  GROSS
                                                                                    UNREALIZED             UNREALIZED
                                                                        FAIR         HOLDING                HOLDING       AMORTIZED
                                                                       VALUE           GAIN                   LOSS           COST
                                                              ----------------------------------------------------------------------
<S>                                                                <C>            <C>                      <C>           <C>  
Held to maturity:
    Bonds and notes -
      Municipal bonds                                              $    393,054   $          -             $        -   $    393,054
                                                              ----------------------------------------------------------------------
Total held to maturity                                                  393,054              -                      -        393,054
                                                              ----------------------------------------------------------------------
Available for sale:
    Bonds and notes -
      U. S. Treasury Notes                                           12,139,529        147,900                  3,166     11,994,795
      U. S. Government, including agencies                            2,724,130         33,249                     40      2,690,921
      Other bonds and debentures                                      9,352,476        104,119                 38,416      9,286,773
                                                              ----------------------------------------------------------------------
                                                                     24,216,135        285,268                 41,622     23,972,489
    Equity securities                                                 1,502,125         11,750                106,800      1,597,175
                                                              ----------------------------------------------------------------------
Total available for sale                                             25,718,260        297,018                148,422     25,569,664
                                                              ----------------------------------------------------------------------
Other investments:
     Federal Home Loan Bank stock                                     1,861,000              -                      -      1,861,000
     Other securities                                                   442,285              -                      -        442,285
                                                              ----------------------------------------------------------------------
Total other investments                                               2,303,285              -                      -      2,303,285
                                                              ----------------------------------------------------------------------
Total securities                                                   $ 28,414,599   $    297,018             $  148,422   $ 28,266,003
                                                              ======================================================================
</TABLE>

                                      27

<PAGE>
 
                 ============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Gross gains of $810, $3,425, and $3,536,  and gross losses of $807,
$7,382, and $1,776,  were realized during 1996, 1995, and 1994, respectively, on
sales of available-for-sale debt securities.  Gross losses of $25,833 were
realized during 1996 on sales of available-for-sale equity securities.

Maturities of debt securities are as follows as of December 31, 1996:

<TABLE>
<CAPTION>
                                                                                                      WEIGHTED     
                                                                 AMORTIZED         FAIR                AVERAGE     
AVAILABLE FOR SALE: bonds and notes -                               COST          VALUE                 YIELD      
                                                            ------------------------------------------------------ 
<S>                                                         <C>                <C>                     <C>          
      U. S. Treasury Notes                                  $     2,024,190    $   2,024,374              5.78%     
      U. S. Government, including agencies                        1,739,566        1,741,076              7.83%    
      Other bonds and debentures                                  2,601,685        2,569,554              6.62%    
                                                            ---------------------------------                      
Total due in one year or less                                     6,365,441        6,335,004              6.68%    
                                                            ---------------------------------                      
                                                                                                                   
      U. S. Treasury Notes                                       10,923,729       10,860,467              5.80%    
      U. S. Government, including agencies                          502,683          497,343              6.51%    
      Other bonds and debentures                                  4,845,590        4,799,216              6.29%    
                                                            ---------------------------------                      
Total due after one year through five years                      16,272,002       16,157,026              5.97%    
                                                            ---------------------------------                      
                                                                                                                   
      U. S. Government, including agencies                        1,000,000        1,003,124              6.50%    
      Other bonds and debentures                                    202,702          201,562              5.33%    
                                                            ---------------------------------                      
Total due after five years through ten years                      1,202,702        1,204,686              6.30%    
                                                            ---------------------------------                      
                                                                                                                   
      Other bonds and debentures                                     99,384           99,384              6.04%    
                                                            ---------------------------------                      
Total due after ten years                                            99,384           99,384              6.04%    
                                                            ---------------------------------                      
                                                               $ 23,939,529    $  23,796,100              6.17%    
                                                            =================================                       
</TABLE>

A security which has a call date earlier than the maturity date is considered to
mature at the call date.

     HELD TO MATURITY:  Included in the caption bonds and notes are two
municipal bonds classified as held to maturity.  The securities are New
Hampshire Higher Educational and Health Facilities bonds purchased by the Bank
with coupon rates and maturity dates of 7.35%, 12/16/2003 at an amount of
$240,276 and 6.48%, 6/1/2000 at an amount of $100,000.  There is no established
trading market for these securities and accordingly, the carrying amount of
these securities has also been reflected as their fair value.  The Bank
anticipates no losses on these securities and expects to hold them until their
maturity.

     There were no issuers of securities whose aggregate book value exceeded 10%
of shareholders' equity as of December 31, 1996.

     A total par value of $1,000,000 was pledged to secure the treasury, tax,
and loan account as of December 31, 1996.

                                       28
<PAGE>
 
                 ============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3.        LOANS RECEIVABLE:
 
Loans receivable consisted of the following as of December 31:

<TABLE> 
<CAPTION> 
                                                             1996            1995            1994            1993            1992
                                                 -----------------------------------------------------------------------------------
<S>                                              <C>               <C>             <C>             <C>             <C> 
Real estate loans -
     Conventional                                $    183,550,150  $  175,130,966  $  161,091,563  $  139,580,597  $  135,252,277
     Construction                                       2,702,613       2,456,763       7,793,601       4,301,243       3,478,459
                                                 -----------------------------------------------------------------------------------
                                                      186,252,763     177,587,729     168,885,164     143,881,840     138,730,736
     Less - Unadvanced portion                          1,270,412       1,434,258       2,841,500       1,222,932         955,860
                                                 -----------------------------------------------------------------------------------
                                                      184,982,351     176,153,471     166,043,664     142,658,908     137,774,876
Collateral loans                                       20,574,710      19,524,706      18,776,523      19,584,411      19,768,631
Consumer loans                                          4,860,325       5,025,818       5,264,449       5,158,271       5,796,200
Commercial and municipal loans                          8,352,789       9,301,028       8,066,390       8,049,016       7,132,313
Other loans                                               436,754         671,302         625,006         977,633         673,793
                                                 -----------------------------------------------------------------------------------
     Total loans                                      219,206,929     210,676,325     198,776,032     176,428,239     171,145,813
Less    - Allowance for loan losses                     2,158,026       1,828,060       2,752,885       2,374,001       2,094,931
        - Deferred loan origination fees                  300,492         382,042         520,438         719,200         694,983
        - Nonaccrual loans                                848,942         297,172       1,692,608         501,408       1,388,864
                                                 -----------------------------------------------------------------------------------
Net loans                                        $    215,899,469  $  208,169,051  $  193,810,101  $  172,833,630  $  166,967,035
                                                 ===================================================================================
</TABLE> 

     When, in the opinion of management, a loan becomes delinquent and/or
uncollectible, it is reclassified as a non-earning loan on which interest is not
accrued.  These loans are categorized as possible foreclosures.  In addition to
non-earning assets, $787,930 and $1,144,293 of delinquent loans were classified
as non-accrual loans as of December 31, 1996 and 1995, respectively.

     The following is a summary of activity in the allowance for loan loss
account for the years ended December 31:

<TABLE> 
<CAPTION> 
                                                             1996            1995            1994            1993            1992
                                                 -----------------------------------------------------------------------------------
<S>                                              <C>               <C>             <C>             <C>             <C>             
BALANCE, beginning of year                       $      1,828,060  $    2,752,885  $    2,374,001  $    2,094,931  $    2,289,523
                                                 -----------------------------------------------------------------------------------
Loans charged-off:                                                                                                               
Real estate loans -                                                                                                              
     Conventional                                         628,107         141,541         252,258         723,131         475,096 
     Construction                                         614,355       1,014,670           2,871         333,581       1,666,932 
Collateral and consumer loans                              36,721          25,568             612           5,289           5,869 
Commercial and municipal loans                            101,431         913,441         140,375          57,719         291,695 
                                                 ----------------------------------------------------------------------------------
     Total charged-off loans                            1,380,614       2,095,220         396,116       1,119,720       2,439,592
                                                 ----------------------------------------------------------------------------------
Recoveries on loans:
Real estate loans -                                                                                                              
     Conventional                                           9,063           3,300          11,666          24,532          63,045
Collateral and consumer loans                              22,105           2,099           1,779           1,584             969
Commercial and municipal loans                              8,671           1,286               -               -          15,551
                                                 ---------------------------------------------------------------------------------  
     Total recoveries                                      49,839           6,685          13,445          26,116          79,565
                                                 ---------------------------------------------------------------------------------  
     Net charged-off loans:                             1,330,775       2,088,535         382,671       1,093,604       2,360,027
                                                 ---------------------------------------------------------------------------------  
Provision for loan losses charged       
   to income:                                           1,660,741       1,163,710         761,555       1,372,674       2,165,435
                                                 -----------------------------------------------------------------------------------
BALANCE, end of year                                 $  2,158,026  $    1,828,060  $    2,752,885  $    2,374,001  $    2,094,931
                                                 ==================================================================================
Ratios of net charged-off loans during 
  the period to average loans           
  outstanding during the period                              .63%           1.02%            .20%            .64%           1.41% 
                                                 ==================================================================================
</TABLE> 
                                                             
                                       29
<PAGE>
 
                 =============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.   LOANS RECEIVABLE: (continued)


     The Company had no extensions of credit to related parties in excess of 5%
of shareholders' equity at any time during the year ended December 31, 1996 and
1995.  Certain directors and executive officers of the Bank and companies in
which they have significant ownership interest were customers of the Bank during
1996.  Total loans to such persons and their companies amounted to $1,066,552 as
of December 31, 1996.  During 1996 advances of $319,847 were made and repayments
totaled $255,150.

     As of December 31, 1996, all loans restructured in a troubled debt
restructuring were considered to be "Impaired loans" and are included in the
amount shown as the recorded investment in impaired loans.  The Company had no
loans restructured in a troubled debt restructuring that are not impaired based
on the terms specified by the restructuring agreement.

     During 1996 and 1995, LSB sold properties out of real estate owned.
According to FAS No. 66, "Accounting for Sales of Real Estate," a minimum down
payment must be made by the buyer in order for a sale and a new loan to be
recorded.  Until the down payment requirement is met, the loan remains
classified as real estate owned and interest income is not recorded.  The effect
of FAS No. 66 would be to reclassify $362,436 and $370,672 from loans to real
estate owned and reduce interest income by $22,602 and $23,063 for the years
ended December 31, 1996 and 1995, respectively.

<TABLE>
<CAPTION>
IMPAIRED LOANS AS OF DECEMBER 31,                                                             1996            1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>             <C>
Average recorded investment in impaired loans                                         $     837,357   $     934,829
Recorded investment in impaired loans at December 31                                  $   1,188,183   $   1,452,049
Portion of valuation allowance allocated to impaired loans                            $     139,509   $     654,663
Net balance of impaired loans                                                         $   1,048,674   $     797,386
Interest income recognized on impaired loans                                          $      40,006   $     102,449
Interest income on impaired loans on cash basis                                       $      37,592   $      97,401
Recorded investment in impaired loans with related allowance for credit losses        $     814,182   $   1,452,049
Recorded investment in impaired loans with no related allowance for credit losses     $     374,001   $           0
</TABLE>

     In addition to total loans previously shown, the Company services loans for
other financial institutions.  Participation loans are loans originated by the
Company for a group of banks. Sold loans are loans originated by the Company and
sold to the secondary market. The Company services these loans and remits the
payments received to the buyer.  The Company specifically originates long-term,
fixed-rate loans to sell.  The amount of loans sold and participated out which
are serviced by the Company are as follows as of December 31:
 
                                  1996           1995    
                            ----------------------------- 
     Sold loans              $ 52,165,252   $ 43,433,158 
                            ============================= 
     Participation loans     $  2,664,278   $  2,763,715 
                            =============================

     Mortgage servicing rights of $118,086 were capitalized in 1996.
Amortization of mortgage servicing rights was $15,056 in 1996.  No valuation
allowance for capitalized servicing rights was required in 1996.

     The Company has issued letters of credit and has approved lines of credit
loans to specific individuals and companies.  The unused portions as of December
31, are as follows:
 
                                  1996           1995   
                            ----------------------------
     Letters of credit       $    468,750   $    448,150
                            ============================
     Lines of credit         $ 10,420,574   $ 11,139,725
                            ============================ 

                                       30
<PAGE>
 
                 ============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.   BANK PREMISES AND EQUIPMENT:

     Bank premises and equipment are shown on the consolidated statements of
financial condition at cost, net of accumulated depreciation, as follows as of
December 31:
 

                                                 1996         1995      
                                        -------------------------------
     Land                                $     823,218  $    679,980   
     Buildings and premises                  4,891,724     4,982,713   
     Furniture, fixtures and equipment       3,610,607     3,464,598   
                                        -------------------------------
                                             9,325,549     9,127,291   
     Less - Accumulated depreciation         4,221,183     3,810,454   
                                        -------------------------------
                                         $   5,104,366  $  5,316,837   
                                        =============================== 
 

NOTE 5.   REAL ESTATE OWNED AND PROPERTY ACQUIRED:

     As of December 31, 1996 and 1995, the Company owned property acquired by
foreclosure and chattel property.  The balances consisted of the following:
 

                                                 1996         1995      
                                        -------------------------------
     Residential real estate             $      75,000  $     34,970   
     Commercial real estate                    632,026       949,215   
     Chattel property                           16,452             -   
                                        -------------------------------
                                             $ 723,478  $    984,185   
                                        =============================== 


     As of December 31, 1996 and 1995, real estate owned includes  $539,026 and
$831,215, respectively, for two real estate development projects.  The
properties have been developed and are ready for individual lots to be sold.
One lot was sold during 1996.

     It is the policy of the Company, upon the acquisition of real estate by
foreclosure, to evaluate the condition of the property, make any appropriate or
necessary structural and/or cosmetic improvements and place the property as an
open listing with all area real estate agents. Company employees are also
encouraged to participate in the selling of these properties.

     For 1996, 1995 and 1994, $179,443, $112,544 and $17,629, respectively, of
net operating cost of other real estate is included in net income.

                                       31
<PAGE>
 
                 ============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 6.        DEPOSITS:
 
      Deposits consisted of the following as of December 31:
 
<TABLE> 
<CAPTION> 
                                                                          1996                          1995
                                                              -----------------------------------------------------------
<S>                                                           <C>                    <C>    <C>                   <C>  
Checking accounts (non-interest-bearing)                      $     10,587,756        4.9%  $     10,934,512       5.5% 
NOW accounts                                                        26,030,170       12.2%        26,014,007      13.0% 
Ever-Ready Money Market                                             11,207,455        5.2%        13,971,617       7.0% 
Regular savings accounts                                             9,167,458        4.3%        11,363,366       5.7% 
Treasury savings accounts                                           50,154,503       23.5%        44,388,408      22.2% 
Club deposits                                                           71,088         .0%            87,779        .0% 
                                                              -----------------------------------------------------------
                                                                   107,218,430       50.1%       106,759,689      53.4%  
                                                              -----------------------------------------------------------
 
Time deposits -
 2.00% - 2.99%                                                         448,874         .2%           251,318        .1%
 3.00% - 3.99%                                                               -           -                 -          -
 4.00% - 4.99%                                                       2,738,534        1.3%         6,140,501       3.1%
 5.00% - 5.99%                                                      77,115,922       36.0%        41,959,447      21.0%
 6.00% - 6.99%                                                      11,667,942        5.5%        31,152,885      15.6%
 7.00% - 7.99%                                                      12,503,732        5.8%        10,889,340       5.4%
 8.00% - 8.99%                                                       2,265,461        1.1%         2,817,741       1.4%
                                                              -----------------------------------------------------------
                                                                   106,740,465       49.9%        93,211,232      46.6%
                                                              ===========================================================
                                                              $    213,958,895      100.0%  $    199,970,921     100.0%
                                                              ===========================================================
</TABLE> 

     The following is a summary of maturities of time deposits as of December
31, 1996:

<TABLE> 
<S>                                                                                         <C> 
 1997                                                                                       $     71,668,007
 1998                                                                                             21,762,683
 1999                                                                                             10,970,261
 2000                                                                                              2,100,953
 2001                                                                                                236,179
 Thereafter                                                                                            2,382
                                                                                            -----------------------
                                                                                            $    106,740,465
                                                                                            =======================               
</TABLE> 

     As of December 31, 1996, time deposits include $12,884,426 of certificates
of deposit with a minimum balance of $100,000. Maturities of these certificates
are as follows:

<TABLE> 
<S>                                                                                         <C> 
Less than 3 months                                                                          $      3,730,043 
Over 3 months and less than 6 months                                                               4,150,174 
Over 6 months and less than 12 months                                                              2,872,478 
Over 12 months                                                                                     2,131,731 
                                                                                            -----------------------
                                                                                                $ 12,884,426 
                                                                                            =======================
</TABLE>

                                       32
<PAGE>
 
                 ============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7.   SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:

     The purchasers of the agreements have agreed to resell to the Company
substantially identical securities at the maturities of the agreements.
Information concerning securities sold under agreements to repurchase is
summarized as follows:

<TABLE>
<CAPTION>                                 
                                                                                1996            1995      
                                                                         ----------------------------------                
<S>                                                                       <C>                <C>                       
Average balance during the year                                           $     5,060,481    $   4,272,752                
Average interest rate during the year                                                  4%               4%               
Maximum month-end balance during the year                                       8,662,736        9,552,825                
Securities underlying the agreements at year-end:                                                                       
    Carrying amount                                                            12,947,919       11,994,795                
    Estimated fair value                                                       12,884,841       12,139,529                
</TABLE>                                                                    

     As of December 31, 1996, sixteen repurchase agreements were outstanding.
The maturity dates of the repurchase agreements are from January 27, 1997 to
October 25, 1997 on the anniversary date of the repurchase agreement.
Securities are under control of the Bank.


NOTE 8.   ADVANCES FROM FEDERAL HOME LOAN BANK:


     Advances from the Federal Home Loan Bank consisted of loans, at various
interest rates ranging from 4.87% to 7.32%, maturing as follows at December 31,
1996.

<TABLE> 
<S>                                                                       <C> 
1997 (4.87% - 7.32%)                                                      $     7,927,707 
1998 (4.87% - 5.82%)                                                            7,166,033 
1999 (5.78%)                                                                       56,085 
2000 and thereafter (5.41% - 5.82%)                                             5,024,200 
                                                                          ----------------
                                                                          $    20,174,025 
                                                                          ================
</TABLE>

     These advances are secured by Federal Home Loan Bank stock (Note 2) and
unspecified first mortgage loans. The Company is able to borrow up to an
additional $50,000,000 of Federal Home Loan Bank advances.

     In addition to the above advances, the Company has credit available up to
$5,167,000 under a revolving loan agreement with the Federal Home Loan Bank.  No
amounts were borrowed against the line of credit as of December 31, 1996 and
1995.  Interest is payable monthly as funds are borrowed.

                                       33
<PAGE>
 
                 ============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9.   INCOME TAXES:

     The Company, the Bank and its wholly-owned subsidiaries file a consolidated
federal income tax return.  Applicable income taxes amounted to $286,163 in 1996
$604,000 in 1995 and $723,000 in 1994.  These amounts differ from the amounts
computed by applying the statutory tax rates to income before provision for
income taxes.

      The reasons for these differences are as follows:

<TABLE>
<CAPTION>
                                                                                 1996              1995                1994
                                                                   --------------------------------------------------------------
<S>                                                                <C>                  <C>                  <C>
Tax on income at statutory tax rates                                $         304,907   $       628,600      $      783,785
Tax effect of dividends received deduction                                    (27,023)          (35,714)            (39,270)
Tax effect of tax exempt interest, net                                        (14,630)          (19,289)            (22,246)
Tax effect of unallowable amortization                                              -                 -               3,292
Other, net                                                                     22,909            30,403              (2,561)
                                                                   --------------------------------------------------------------
     Tax at effective rate                                          $         286,163   $       604,000      $      723,000
                                                                   ============================================================== 
</TABLE> 

       Income tax expense is made up of the following components:
 
<TABLE> 
<CAPTION> 
                                                                                 1996              1995                1994
                                                                   --------------------------------------------------------------
<S>                                                                <C>                  <C>                  <C>     
Current tax expense                                                 $         406,644   $       279,091      $      648,000
Deferred tax  expense (benefit)                                              (120,481)          324,909              75,000
                                                                   --------------------------------------------------------------
                                                                    $         286,163   $       604,000      $      723,000
                                                                   ==============================================================
</TABLE> 

     Deferred taxes result from temporary differences in the recognition of
revenue and expense for tax and financial statement purposes.  The source of
these differences were as follows:
 
<TABLE> 
<CAPTION> 
                                                                                                   1996                1995
                                                                                       ------------------------------------------
<S>                                                                                    <C>                   <C>
Difference between book and tax depreciation                                            $         8,587      $       11,533
Deferred loan origination fees included in taxable income                                        31,495              47,055
Bad debts deducted for taxable income not for book income                                      (232,334)            174,852
Unrealized gain (loss) on securities available for sale                                        (116,000)            426,400
Other, net                                                                                       71,771              91,469
                                                                                       ------------------------------------------ 
                                                                                        $      (236,481)     $      751,309
                                                                                       ==========================================
</TABLE> 


     The components of the net deferred tax asset or liability on the
consolidated statements of financial condition are as follows as of December 31:

<TABLE> 
<CAPTION> 
                                                                                                    1996                1995    
                                                                                       ------------------------------------------  
<S>                                                                                    <C>                   <C>       
Deferred tax liability                                                                  $    478,541         $      728,422  
Deferred tax asset                                                                          (118,022)              (131,422) 
                                                                                       ------------------------------------------
                                                                                        $    360,519         $      597,000  
                                                                                       ==========================================
</TABLE>

     Deferred tax assets as of December 31, 1996 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.

     As of December 31, 1996, the Company had no operating loss and tax credit
carryovers for tax purposes.

                                       34
<PAGE>
 
                 ============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10.  STOCK COMPENSATION PLANS:

     As of December 31, 1996, the Company had three fixed option, stock-based
compensation plans, which are described below.  The Company has adopted the
disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" but applies APB Opinion 25 and related Interpretations in
accounting for its plans.  Accordingly, no compensation cost has been recognized
for its fixed stock option plans.  Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:

<TABLE> 
<CAPTION> 
                                                   1996          1995  
                                               ----------------------- 
<S>                   <C>                    <C>         <C> 
Net income            As reported            $  610,711  $  1,244,823 
                      Pro forma              $  500,828  $  1,216,275 
                                                                      
Earnings per share    As reported            $      .35  $        .73 
                      Pro forma              $      .29  $        .72  
</TABLE> 

     Under the 1986 plan, the Company may grant options to its employees for up
to 57,880 additional shares of common stock.  Under the 1987 plan, the Company
may grant options to its employees for up to 27,666 additional shares of common
stock.  Under both plans, the exercise price of each option equals the market
price of the Company's stock on the date of grant and an option's maximum term
is 10 years.  Options are exercisable immediately.

     On April 10, 1996, the shareholders approved the adoption of the "1996
Stock Option Plan." Under this plan, an amount equal to 10% of the issued and
outstanding common stock of the Company has been reserved for future issuance.
On December 2, 1996 48,000 options were granted from the 1996 stock option plan
at an exercise price of $12.50 per share, the fair market value on that date.
 
     The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:

<TABLE> 
<CAPTION> 
                                                   1996            1995     
                                        ------------------------------- 
<S>                                     <C>              <C> 
Weighted risk-free interest rate                 6.37%           6.67%
Weighted expected life                      9.25 years      9.25 years 
Weighted expected volatility                    17.33%          17.33%
Weighted expected dividend yield         5.0% per year   5.0% per year 
</TABLE> 

     No modifications have been made to the terms of the option agreements.

     A summary of the status of the Company's  fixed stock option plans as of
December 31, 1996 and 1995 and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>
                                                                                    1996                          1995
                                                   ---------------------------------------------------------------------------------
                                                                             Weighted Average                      Weighted Average
Fixed Options                                                 Shares           Exercise Price         Shares         Exercise Price
-------------                                                 ------           --------------         ------         --------------
<S>                                                <C>                       <C>                    <C>            <C>
Outstanding at beginning of year                              62,590             $       8.22         66,075           $       6.78
Granted                                                       97,900                    11.29         30,000                   9.00
Exercised                                                    (18,730)                    8.24        (33,485)                  6.08
Forfeited 
                                                  -------------------                          --------------
Outstanding at end of year                                   141,760             $      10.34         62,590           $       8.22
                                                  ===================                          ==============

Options exercisable at year-end                              141,760                                  62,590
Weighted-average fair value of                            $     1.84                                $   1.56
   options granted during the year
</TABLE> 

                                       35
<PAGE>
 
                  ==========================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 10.  STOCK COMPENSATION PLANS: (continued):
 
     The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:

                      Options Outstanding and Exercisable
         ------------------------------------------------------------
                                        Number                             
                                     Outstanding        Remaining          
             Exercise Prices       as of 12/31/96    Contractual Life      
             ---------------       --------------    ----------------      
            $     7.500               21,190            1.2 year           
                  9.000               25,170            8.0 years          
                 10.125               47,400            9.0 years          
                 12.500               48,000            9.9 years          
                                ----------------                           
            $    10.340              141,760            8.0 years          
            ========================================================= 

NOTE 11.  EMPLOYEE BENEFIT PLANS:

     DEFINED BENEFIT PENSION PLAN - The Company has a defined benefit pension
plan covering substantially all full-time employees who have attained age 21 and
have completed one year of service. Annual contributions to the plan are based
on actuarial estimates.

     Net pension cost for the Company's defined benefit pension plan consisted
of the following components as of December 31:

<TABLE> 
<CAPTION> 
                                                            1996              1995               1994
                                                     ----------------------------------------------------
    <S>                                              <C>               <C>               <C>      
    Service cost                                     $     84,057      $     88,168      $      77,370    
    Interest cost on projected benefit obligation         109,326           104,325            100,515
    Actual return on plan assets                         (143,470)         (143,671)            55,611   
    Net amortization and deferral                          72,337            85,790           (125,230)  
                                                     ----------------------------------------------------
                                                     $    122,250      $    134,612      $     108,266   
                                                     ====================================================
</TABLE>

     The following table sets forth the plan's funded status and amounts
recognized in the accompanying consolidated statements of financial position as
of December 31:

<TABLE> 
<CAPTION>  
                                                                                                1996                  1995   
                                                                                      ---------------------------------------
<S>                                                                                   <C>                     <C>            
Actuarial present value of benefit obligations:                                                                              
         Vested benefit obligation                                                    $     1,297,443         $    1,250,767 
                                                                                      =======================================
         Accumulated benefit obligation                                               $     1,350,262         $    1,273,735 
                                                                                      =======================================
         Projected benefit obligation                                                 $     1,516,431         $    1,477,750 
         Plan assets at fair value, primarily invested in debt and equity securities        1,636,405              1,395,207 
                                                                                      ---------------------------------------
         Projected benefit obligation (in excess of) less than plan assets                    119,974                (82,543)
         Unrecognized net loss                                                                286,143                374,051 
         Unrecognized prior service cost                                                      (32,658)               (35,351)
                                                                                      ---------------------------------------
         Prepaid expense, included in other assets                                    $       373,459        $       256,157 
                                                                                      =======================================
</TABLE>

                                       36
<PAGE>
 
                  ========================================== 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 11.  EMPLOYEE BENEFIT PLANS: (continued)

     Assumptions used by the Company in the determination of pension plan
information consisted of the following as of December 31:

                                                                1996      1995
                                                         ----------------------

    Discount rate                                              7.00%     7.00%
    Rate of increase in compensation levels                    3.00%     3.00%
    Expected long-term rate of return on plan assets           7.00%     7.00%

     PROFIT SHARING - STOCK OWNERSHIP PLAN  -  Lake Sunapee Bank, fsb, adopted a
Profit Sharing - Stock Ownership Plan which became effective January 1, 1987.
The purpose of the Plan is to reward eligible employees for long and loyal
service by providing them with retirement benefits.  The Plan is a qualified
defined contribution plan designed to meet the requirements of ERISA and to
conform to Section 401(k) of the Internal Revenue Code.  All employees of Lake
Sunapee Bank, fsb, and its subsidiaries who have attained age 21 and have
completed one year of service are eligible to participate in the Plan.
Participation is not required.  Eligible employees electing to participate may
contribute between 2% and 15% of their salary to the Plan up to $9,500 for 1996.
Participants will not be subject to federal income taxation on such
contributions  which constitute salary reductions at the time such contributions
are made.  Lake Sunapee Bank, fsb may elect, but is not required, to make
discretionary and/or matching contributions to the Plan.

     Discretionary and matching contributions to the Plan will be invested
primarily in company stock.  Benefits under the Profit Sharing - Stock Ownership
Plan will be payable upon retirement, death or other separation from service.

     The assets of the Profit Sharing - Stock Ownership Plan are held pursuant
to an Investment Management Agreement with Charter Trust Company as Agent.  The
assets are invested as directed by participating employees and the Bank.

     For 1996, 1995 and 1994, participating employees' contributions totaled
$118,346, $96,452, and $88,682 respectively.  The Bank made a matching
contribution of  $10,000 for 1996 and $9,500 for 1995.  No matching contribution
was made for 1994.  A participant's retirement benefit will depend on the amount
of the contributions to the Plan together with the gains or losses on the
investments.


NOTE 12.  COMMITMENTS AND CONTINGENCIES:


     In the normal course of business, the Company has outstanding various
commitments and contingent liabilities, such as legal claims, which are not
reflected in the consolidated financial statements.  Management does not
anticipate any material loss as a result of these transactions.  As of December
31, 1996, the Company had entered into commitments to fund loans totaling
$4,195,156.  The majority of these loans will have adjustable rates.

     The following is a schedule, by interest rate, of loan commitments
outstanding as of December 31:

                                               1996               1995      
                                     ----------------------------------   

 6.00%  -  6.99%                      $   2,439,825      $     594,250   
 7.00%  -  7.99%                          1,500,194          3,070,875   
 8.00%  -  8.99%                            210,137            445,118   
 9.00%  -  9.99%                             20,000            264,750   
 10.00% - 10.99%                             25,000             35,000   
                                     ---------------------------------- 
                                      $   4,195,156      $   4,409,993   
                                     ==================================

                                       37
<PAGE>
 
                 ============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.  SHAREHOLDERS' EQUITY:

     LIQUIDATION ACCOUNT - On May 22, 1986, Lake Sunapee Bank, fsb received
approval from the Federal Home Loan Bank Board and converted from a federally-
chartered mutual savings bank to a federally-chartered stock savings bank.  At
the time of conversion, the Bank established a liquidation account in an amount
of $4,292,510 (equal to the Bank's net worth as of the date of the latest
financial statement included in the final offering circular used in connection
with the conversion).  The liquidation account will be maintained for the
benefit of eligible account holders who maintain their deposit accounts in the
Bank after conversion.  In the event of a complete liquidation of the Bank
subsequent to conversion (and only in such event), each eligible account holder
will be entitled to receive a liquidation distribution from the liquidation
account before any liquidation distribution may be made with respect to capital
stock.  The amount of the liquidation account is reduced to the extent that the
balances of eligible deposit accounts are reduced on any year-end closing date
subsequent to the conversion.  Company management believes the balance in the
liquidation account would be immaterial to the consolidated financial statements
as of December 31, 1996.

     DIVIDENDS - The Bank may not declare or pay a cash dividend on or purchase
any of its stock if the effect would be to reduce the net worth of the Bank
below either the amount of the liquidation account or the net worth requirements
of the banking regulators.

     TREASURY STOCK - On July 15, 1993, the Company announced a buy back program
whereby the Company intends to repurchase, on the open market, 10% of its
currently outstanding common stock. As of December 31, 1996, 117,782 shares
remained to be purchased from the 1993 buy back program.

     Treasury stock is recorded at cost, as purchased. Treasury stock sold is
accounted for on a first-in, first-out basis.

     SPECIAL BAD DEBTS DEDUCTION - In prior years, Lake Sunapee Savings Bank,
fsb, a wholly-owned subsidiary of the Company, was allowed a special tax-basis
under certain provisions of the Internal Revenue Code.  As a result, retained
income of Lake Sunapee Bank, fsb, as of December 31, 1996 includes approximately
$1,896,000 for which federal and state income taxes have not been provided.  If
the Bank no longer qualifies as a bank as defined in certain provisions of the
Internal Revenue Code, this amount will be subject to recapture in taxable
income ratably over six (6) years, subject to a combined federal and state tax
rate of approximately 39%.

     The following is a reconciliation of shareholders' equity and net income as
reported in the accompanying consolidated financial statements and as reflected
in reports filed with the Office of Thrift Supervision (OTS):

<TABLE>
<CAPTION>
                                            SHAREHOLDERS' EQUITY                      NET INCOME
                                            1996            1995           1996          1995           1994
                                      --------------------------------------------------------------------------
<S>                                   <C>            <C>             <C>          <C>            <C>
Balance reported to OTS               $ 17,856,000   $ 18,456,000    $ 625,000    $ 1,258,000    $ 1,605,000
 
Parent company -
     Loss before equity in earnings
         of subsidiary                     (13,874)       (12,830)     (13,874)       (12,830)       (20,960)
 
     Dividends from LSB to NHTB          1,000,000      1,000,000            -              -              -
     Stock options exercised               725,120        570,825            -              -              -
     Cash dividends paid to                                                  -              -              -
         shareholders of NHTB             (847,066)      (839,413)
     Retained earnings                   3,347,321      3,199,564            -              -              -
     Treasury stock purchased           (2,873,530)    (2,830,048)           -              -              -
     Other, net                               (281)           (93)        (415)          (347)        (1,790)
                                     ---------------------------------------------------------------------------
Balance per consolidated
      financial statements            $ 19,193,690   $ 19,544,005    $ 610,711    $ 1,244,823    $ 1,582,250
                                     ===========================================================================
</TABLE>

                                       38
<PAGE>
 
                 =============================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14.  REGULATORY MATTERS:

     The Company and the Bank are subject to various capital requirements
administered by their primary federal regulators, the Office of Thrift
Supervision (OTS) .  Failure to meet minimum regulatory requirements can
initiate mandatory, and possible additional discretionary actions by regulators,
that if undertaken, could have a direct material effect on the Company's and the
consolidated financial statements.  Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving 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
classifications under the prompt corrective action guidelines 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 risk-based capital and Tier I capital to risk-weighted assets
(as defined in the regulations), Tier I capital to adjusted total assets (as
defined) and tangible capital to adjusted total assets (as defined).

     Management believes, as of December 31, 1996, that the Bank meets all
capital requirements to which it is subject.

     As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
frame work for prompt corrective action.  To be categorized as well capitalized
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 Bank's
category.

     The table below presents the Bank's regulatory capital as compared to OTS
and FDIC requirements as of December 31, 1996.  There was no deduction from
capital for interest-rate risk.

<TABLE>
<CAPTION>
                                   Bank                 OTS                FDIC
                           -------------------  ------------------  ------------------
                             Amount   Percent    Amount   Percent    Amount   Percent
                             ------   -------    ------   -------    ------   -------
<S>                          <C>      <C>        <C>      <C>        <C>      <C>
Tangible capital             $17,862     6.76%   $ 3,966     1.50%     N/A       N/A
Core leverage capital        $17,862     6.76%   $ 7,932     3.00%   $13,220     5.00%
Tier I risk-based capital    $17,862    11.81%      N/A       N/A    $ 9,072     6.00%
Total risk-based capital     $18,146    12.00%   $12,097     8.00%   $15,121    10.00%
</TABLE>

NOTE 15.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

     The estimated fair values of the Company's financial instruments , all of
which are held or issued for purposes other than trading, were as follows as of
December 31:

<TABLE>
<CAPTION>
                                                        1996                                 1995
                                           -----------------------------        -----------------------------
                                                 CARRYING       FAIR               CARRYING          FAIR
                                                  AMOUNT        VALUE               AMOUNT           VALUE
                                           -----------------------------        -----------------------------
<S>                                          <C>              <C>              <C>             <C>
Financial assets:
     Cash and cash equivalents               $   11,002,749   11,002,749       $   10,993,297  $   10,993,297
     Securities available for sale               24,950,725   24,950,725           25,569,664      25,718,260
     Securities held to maturity                    340,276      340,276              393,054         393,054
     Other investments                            2,307,557    2,307,557            2,303,285       2,303,285
     Loans                                      216,002,761  216,136,350          209,032,402     209,043,415
     Loans held for sale                            745,650      745,650            3,095,971       3,095,971
     Accrued interest receivable                  1,354,042    1,354,032            1,433,882       1,433,882
 
Financial liabilities:
     Regular savings, NOW, demand and
       money market deposits                    107,218,430  107,218,430          106,759,689     106,759,689
     Time deposits                              106,740,465  107,416,000           93,211,231      93,677,261
     Repurchase agreements                        8,662,736    8,662,736            9,552,825       9,552,825
     Advances from Federal Home Loan Bank        20,174,025   20,162,000           26,936,168      27,016,696
</TABLE> 

                                       39
<PAGE>
 
                  ==========================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15.  FAIR VALUE OF FINANCIAL INSTRUMENTS: (continued):

     The carrying amounts of financial instruments shown in the above table are
included in the consolidated statements of financial condition under the
indicated captions.

     The Company has no derivative financial instruments subject to the
provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments".  Accounting policies related to
financial instruments are described in Note 1.


NOTE 16.  HOLDING COMPANY OPERATIONS:

     The following are condensed statements of financial condition, income,
retained earnings and cash flows for NHTB for the years ended December 31:

                  CONDENSED STATEMENTS OF FINANCIAL CONDITION

<TABLE> 
<CAPTION> 
                                                       1996           1995
                                             ------------------------------
<S>                                             <C>            <C>  
ASSETS
     Investment in subsidiary                   $ 17,855,719   $ 18,455,908
     Advances to affiliates (LSB)                  1,337,971      1,088,097
                                             ------------------------------
       Total assets                             $ 19,193,690   $ 19,544,005
                                             ==============================     
 

                                             ------------------------------
SHAREHOLDERS' EQUITY                            $ 19,193,690   $ 19,544,005
                                             ==============================
</TABLE> 


                        CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                     1996          1995           1994
                                              ------------------------------------------
<S>                                           <C>             <C>            <C> 
Operating expenses                               $  13,874    $    12,830    $    20,960
                                              ------------------------------------------
Loss before equity in earnings of subsidiary       (13,874)       (12,830)       (20,960)
Equity in earnings of subsidiary                   624,585      1,257,653      1,603,210
                                              ------------------------------------------
 
Net income                                       $ 610,711    $ 1,244,823    $ 1,582,250
                                              ==========================================
</TABLE>

                                       40
<PAGE>
 
                  ==========================================
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 16.  HOLDING COMPANY OPERATIONS: (continued)
 
                      CONDENSED STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 
                                                                                       1996                   1995            1994
                                                                           -------------------------------------------------------
<S>                                                                        <C>                     <C>                <C> 
Cash flows from operating activities:
     Net income                                                                $    610,711        $     1,244,823    $  1,582,250
     Adjustments to reconcile net income to net
      cash
      used in operating activities -
     Equity in earnings of subsidiary (LSB)                                        (624,585)            (1,257,653)     (1,603,210)
     Amortization                                                                         -                      -          13,752
                                                                           -------------------------------------------------------
         Net cash used in operating activities                                      (13,874)               (12,830)         (7,208)
                                                                           -------------------------------------------------------
 
Cash flows from investing activities:
     Dividends received from subsidiary (LSB)                                     1,000,000              1,000,000         500,000
     Advances from subsidiary, net                                                 (249,873)              (207,217)        399,029
                                                                           -------------------------------------------------------
         Net cash provided by investing activities                                  750,127                792,783         899,029
                                                                           -------------------------------------------------------
 
Cash flows from financing activities:
     Proceeds from stock options exercised                                          154,295                203,475         132,420
     Dividends paid                                                                (847,066)              (839,413)       (830,303)
     Acquisition of treasury stock                                                  (43,482)              (144,015)       (193,938)
                                                                           -------------------------------------------------------
         Net cash used in financing activities                                     (736,253)              (779,953)       (891,821)
                                                                           -------------------------------------------------------
Net increase in cash                                                                      -                      -               -
 
Cash, beginning of year                                                                   -                      -               -
                                                                           -------------------------------------------------------
 
Cash, end of year                                                              $          -        $             -    $          -
                                                                           -------------------------------------------------------
</TABLE>


     The Parent Only Statements of Changes in Shareholders' Equity are identical
to the Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1996, 1995, and 1994, and therefore are not reprinted here.

NOTE 17.  MERGER WITH LANDMARK BANK:

     On July 26, 1996, the Company entered into an agreement and plan of
reorganization (the "Merger Agreement") with Landmark Bank.  Pursuant to the
Merger Agreement, the Company will acquire all of the outstanding shares of
Landmark Bank for total consideration of approximately $6 million.  The Merger
Agreement was subject to the approval of the shareholders of the Company,
shareholders of Landmark Bank, and various regulatory agencies.  On January 22,
1997, the Company completed the acquisition of Landmark Bank.

     Under the terms of the merger agreement, holders of Landmark Bank's stock
may elect to receive $12.00 in cash per share, or exchange their stock for stock
in the Company at a ratio of 1.1707 shares of the common stock of the Company
per Landmark share, subject to 60% of Landmark's stock being converted to stock
and 40% to cash.  Allocation of the merger consideration is expected to take
place in February, 1997.

                                       41
<PAGE>
 
                    SECURITIES AND EXCHANGE COMMISSION                        

                            WASHINGTON, D.C. 20549

                                  FORM 10-KSB


                 Annual Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934
                          SEC Commission Number 17859
                          For the fiscal year ended:
                               DECEMBER 31, 1996


                     NEW HAMPSHIRE THRIFT BANCSHARES, INC.
            (Exact name of registrant as specified in its charter)


     DELAWARE                                02-0430695
     (State or other jurisdiction of         (IRS Employer Identification No.)
     incorporation or organization)

                                  THE CARRIAGE HOUSE
                            NEW LONDON, NEW HAMPSHIRE  03257
                                      (ADDRESS)

      Registrant's telephone number, including area code:  (603) 526-2116

           Securities registered pursuant to Section 12(b) of the Act:

                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                        COMMON STOCK, $.01 PAR VALUE
                               Title of Class



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                                      Yes  X   No _____
                                          ---          

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant is between $19,666,303 and $19,082,156 based on a $12.625 average bid
and a $12.25 average asked price, respectively, as of December 31, 1996.

Number of shares of Common Stock Outstanding as of January 21, 1997:  1,704,982

                                       42
<PAGE>
 
                   ======================================== 
                     NEW HAMPSHIRE THRIFT BANCSHARES, INC.



                                     INDEX

<TABLE>
<S>                                                                                                <C>
PART I
Item 1.    Business.............................................................................  44  
Item 2.    Properties...........................................................................  50  
Item 3.    Legal Proceedings....................................................................  50  
Item 4.    Submission of Matters to a Vote of Security Holders..................................  50  
                                                                                                      
PART II                                                                                               
Item 5.    Market for the Registrant's Common Stock and Related Stockholder Matters.............  51  
Item 6.    Management's Discussion and Analysis of Financial Condition and Results                    
           of Operations........................................................................  51  
Item 7.    Financial Statements and Supplementary Information                                         
           Report of Independent Auditors.......................................................  51  
           Consolidated Statements of Financial Condition.......................................  51  
           Consolidated Statements of Income....................................................  51  
           Consolidated Statements of Changes in Shareholders' Equity...........................  51  
           Consolidated Statements of Cash Flows................................................  51  
           Notes to Consolidated Financial Statements...........................................  51  
Item 8.    Disagreements on Accounting and Financial Disclosure.................................  51  
                                                                                                      
PART III                                                                                              
Item  9.   Directors and Executive Officers of the Registrant...................................  52  
Item 10.   Executive Compensation...............................................................  52  
Item 11.   Security Ownership of Certain Beneficial Owners and Management.......................  52  
Item 12.   Certain Relationships and Related Transactions.......................................  52  
Item 13.   Exhibits and Reports on Form 8-K                                                           
           Exhibits.............................................................................  52  
           Reports on Form 8-K..................................................................  53  
                                                                                                      
           Signatures...........................................................................  54  
</TABLE>

                                       43
<PAGE>
 
PART I.

ITEM 1. BUSINESS

                                    GENERAL

ORGANIZATION

          New Hampshire Thrift Bancshares, Inc. (NHTB), a Delaware holding
company organized on July 5, 1989, is the parent company of Lake Sunapee Bank,
fsb (LSB), a federally chartered savings bank.  The Bank was originally
chartered by the State of New Hampshire in 1868 as the Newport Savings Bank.
The Bank became a member of the Federal Deposit Insurance Corporation (FDIC) in
1959 and a member of the Federal Home Loan Bank of Boston in 1978.  On December
1, 1980, the Bank was the first bank in the United States to convert from a
state-chartered mutual savings bank to a federally-chartered mutual savings bank
and its deposits became insured by the Federal Savings and Loan Insurance
Corporation (FSLIC).  In 1981, the Bank changed its name to "Lake Sunapee
Savings Bank, fsb" and in 1994, refined its name to "Lake Sunapee Bank, fsb."
In 1989, as a result of the Financial Institution Reform, Recovery, and
Enforcement Act (FIRREA), the Bank's deposits were insured by the Savings
Association Insurance Fund (SAIF).

          Lake Sunapee Bank, fsb is a thrift institution established for the
purposes of providing the public with a convenient and safe place to invest
funds, for the financing of housing, consumer-oriented products and commercial
loans, and for providing a variety of other consumer-oriented financial
services.  The Bank is a full-service community institution promoting the ideals
of thrift, security, home ownership and financial independence for its
customers.  The Bank's operations are conducted from its home office located in
Newport, New Hampshire and its branch offices located in Sunapee, New London,
Bradford, Grantham, Guild, Lebanon, West Lebanon, Hillsboro, and Andover, New
Hampshire.  The Bank had assets of approximately $264 million as of December 31,
1996.

          On January 22, 1997 the Company acquired all of the outstanding common
stock of Landmark Bank.  The cost of the acquisition was approximately $6.7
million and will be accounted for as a purchase.  Landmark Bank has total assets
of approximately $53 million.

          Through its subsidiary, Lake Sunapee Financial Services Corporation
(LSFSC), the Bank offers brokerage services to its customers.

          The Bank offers trust and investment management services to its
customers through its affiliate, Charter Trust Company, of which the Bank is a
one-sixth owner.  Charter Trust Company was formed in 1984 and services thirteen
community banks.  As of December 31, 1996, Charter Trust Company had
approximately $700 million under investment and custodial management.  The Bank
accounts for its investment in Charter Trust Company at cost which is
approximately $400,000.

MARKET AREA

          The Bank's market area consists of west-central New Hampshire in the
counties of Merrimack, Sullivan, Hillsboro, and Grafton.  This area is best
known for its recreational facilities and its resort/retirement environment.
Within the market area are two major ski areas, several lakes, retirement
communities, a four-season recreational development center designed to support
3,500 families, Colby Sawyer, New England, and Dartmouth Colleges and several
industrial manufacturing employers.

          In addition to the year-round regional population, the Upper Valley-
Kearsarge-Lake Sunapee area has a sizable number of seasonal residents.  In
1990, a total of over 3,600 seasonal dwellings were listed by the Census Bureau.
Based on an occupancy rate of five persons per seasonal unit, the regional
seasonal population can be estimated to be over 18,000 persons.

                                       44
<PAGE>
 
                              LENDING ACTIVITIES

          The Bank's loan portfolio totaled $219,206,929, including $745,650 of
loans held for sale at December 31, 1996, representing approximately 83% of
total assets. As of December 31, 1996, approximately 83% of the mortgage loan
portfolio had adjustable rates.  As of December 31, 1996, the Bank had sold
$52,165,252 in fixed rate mortgage loans in an effort to meet customer demands
for fixed rate loans, minimize interest rate risk, and build a servicing
portfolio.

          RESIDENTIAL LOANS.  The Bank's loan origination team solicits
residential mortgage loans in the local real estate marketplace.  Residential
borrowers are frequently referred to the Bank by its existing customers or real
estate agents.  Generally, the Bank makes conventional mortgage loans (loans of
80% of value or less that are neither insured nor partially guaranteed by
government agencies) on one- to four-family owner occupied dwellings.  The Bank
also makes residential loans up to 95% of the appraised value if the top 20% of
the loan is covered by private mortgage insurance.  Residential mortgage loans
typically have terms up to 30 years and are amortized on a monthly basis with
principal and interest due each month.  Currently, the Bank offers one-year,
three-year and five-year adjustable-rate mortgage loans and long-term fixed rate
loans.  Borrowers may prepay loans at their option or refinance their loans on
terms agreeable to the Bank.  The Bank's management believes that due to
prepayments in connection with refinancing and sales of property, the average
length of the Bank's long-term residential loans is approximately nine years.

          Since the middle of the 1960's, the terms of conventional residential
mortgage loans granted by the Bank have contained a "due-on-sale" clause which
permits the Bank to accelerate the indebtedness of a loan upon the sale or other
disposition of the mortgaged property.  Due-on-sale clauses are an important
means of increasing the turnover of mortgage loans in the Bank's portfolio.

          CONSUMER LOANS.  The Bank makes various types of secured and unsecured
consumer loans, including home improvement loans. The Bank offers loans secured
by automobiles, boats and other recreational vehicles. The Bank believes that
the shorter terms and the normally higher interest rates available on various
types of consumer loans is helpful in maintaining a more profitable spread
between the Bank's average loan yield and its cost of funds.

          COMMERCIAL LOANS.  The Bank offers commercial loans in accordance with
regulatory requirements.   Under current regulation the bank is limited to 20%
of total assets.  The Bank currently has approximately 10% commercial loans.

          MUNICIPAL LOANS.  The Bank's activity in the municipal lending market
is limited to those towns and school districts located within our primary
lending area and such loans are extended for the purposes of either tax
anticipation, building improvements or other capital spending requirements.
Municipal lending is considered to be an area of accommodation and part of the
Bank's continuing involvement with the communities it serves.

          HOME EQUITY LOANS.  The Bank provides Home Equity Loans secured by
liens on residential real estate located within the Bank's market area.  These
include loans with regularly scheduled principal and interest payments as well
as revolving credit agreements.  The interest rate on these loans is adjusted
quarterly and tied to the movement of the Prime Rate.

ORIGINATION, PURCHASE AND SALE OF LOANS

          The primary lending activity of the Bank is the origination of
conventional loans (i.e., loans that are neither insured nor guaranteed in whole
or in part by governmental agencies) secured by first mortgage liens on
residential properties, principally single-family residences, substantially all
of which are located in the west-central area of New Hampshire.

          The Bank appraises the security for each new loan made.  Appraisals
are made for the Bank by qualified sub-contracted appraisers.  The appraisal of
the real property upon which the Bank makes a mortgage loan is of particular
significance to the Bank in the event that the loan is foreclosed, since an
improper appraisal may contribute to a loss by or other financial detriment to
the Bank in the disposition of the loan.

                                       45
<PAGE>
 
          Detailed applications for mortgage loans are verified through the use
of credit reports, financial statements and confirmations.  Depending upon the
size of the loan involved, a varying number of senior officers of the Bank must
approve the application before the loan can be granted.  At times, the Executive
Committee of the Bank is called together to review particularly large loans.

          The Bank requires title certification on all first mortgage loans and
the borrower is required to maintain hazard insurance on the security property.

                             SERVICE CORPORATIONS

          The Bank has an expanded service corporation authority because of its
conversion from a state-chartered mutual savings bank to a federal institution
in 1980.  This authority, grandfathered in that conversion, permits the Bank to
invest 15% of its deposits, plus an amount of approximately $825,000, in service
corporation activities permitted by New Hampshire law.  However, the first 3% of
these activities is subject to federal regulation and the remainder is subject
to state law.  This permits a 3% investment in activities not permitted by state
law.

          As of December 31, 1996, the Bank had two service corporations, the
Lake Sunapee Group, Inc., and the Lake Sunapee Financial Services Corporation.
The Lake Sunapee Group owns and maintains the Bank's buildings and investment
properties.

                                  COMPETITION

          The Bank faces strong competition in the attraction of deposits.  Its
most direct competition for deposits comes from the other thrifts and commercial
banks located in its primary market area.  The Bank faces additional significant
competition for investors' funds from mutual funds and other corporate and
government securities.

          The Bank competes for deposits principally by offering depositors a
wide variety of savings programs, a market rate of return, tax-deferred
retirement programs and other related services.  The Bank does not rely upon any
individual, group or entity for a material portion of its deposits.

          The Bank's competition for real estate loans comes from mortgage
banking companies, other thrift institutions and commercial banks.  The Bank
competes for loan originations primarily through the interest rates and loan
fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders.  The Bank's competition for loans
varies from time to time depending upon the general availability of lendable
funds and credit, general and local economic conditions, current interest rate
levels, volatility in the mortgage markets and other factors which are not
readily predictable.  During 1994, the Bank increased its outside origination
staff to four loan officers.  These officers call on real estate agents, follow
leads, and are available seven days a week to service the mortgage loan market.

                                  REGULATION

INSURANCE OF DEPOSIT ACCOUNTS

          The Bank is a member of the SAIF, and the Bank pays its deposit
insurance assessments to the SAIF.  The FDIC also maintains another insurance
fund, the BIF, which primarily insures the deposits of banks and state chartered
savings banks.

          Pursuant to FDICIA, the FDIC established a new risk-based assessment
system for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the new assessment system, which began in 1993,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information of the reporting period ending seven months
before the assessment period. The three capital categories consist of (a) well
capitalized, (b) adequately capitalized or (c) undercapitalized. The FDIC also
assigns an institution to one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Under the 

                                       46
<PAGE>
 
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Beginning in 1993, the assessment rates for both the BIF and the
SAIF had ranged from 0.23% of deposits for an institution in the highest
category (i.e., well-capitalized and financially sound, with no more than a few
minor weaknesses) to 0.31% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern).

          The FDI Act requires that the BIF and the SAIF funds each be
recapitalized until reserves are at least 1.25% of the deposits insured by that
fund.  After a fund reached the 1.25% reserve ratio, the assessment rates for
that fund could be reduced.  During 1995, the BIF reached the required reserve
ratio, and the FDIC reduced the BIF assessment rates.  Effective January 1,
1996, the BIF assessment rate for "well capitalized" institutions without any
significant supervisory concerns was set at the statutory minimum of $2,000
annually, and the rates for other BIF-insured institutions ranged from 0.03% to
0.27% of deposits.  The SAIF remained undercapitalized, and it was not expected
to be recapitalized until 2001.  SAIF reserves had not grown as quickly as the
BIF reserves due to a number of factors, including the fact that a significant
portion of SAIF assessments had been used to make payments of bonds (the "FICO
bonds") issued in the late 1980s by the Financing Corporation to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation.  Accordingly,
SAIF-insured institutions continued to pay assessments at rates that ranged from
0.23% of deposits to 0.31% of deposits.  The Bank's assessment rate for the
first three quarters of 1996 was 0.23% of deposits.

          On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
"1996 Act") was enacted into law, and it amended the FDI Act in several ways to
recapitalize the SAIF and reduce the disparity in the assessment rates for the
BIF and the SAIF.  The 1996 Act authorized the FDIC to impose a special
assessment on all institutions with SAIF-assessable deposits in the amount
necessary to recapitalize the SAIF.  As implemented by the FDIC, the special
assessment has been fixed, subject to adjustment, at 65.7 basis points of an
institution's  SAIF-assessable deposits, and the special assessment will be paid
on November 27, 1996.  The special assessment is based on the amount of SAIF-
assessable deposits held on March 31, 1995.  The special SAIF assessment was
paid by the Bank on November 27, 1996 in the amount of  $994,025.

          In view of the recapitalization of the SAIF by the special assessment,
on October 8, 1996, the FDIC proposed a reduction in the assessment  rate for
SAIF-assessable deposits for periods beginning of October 1, 1996.  As would be
effective for the SAIF-assessable deposits of savings associations, such as the
Bank, the proposed assessment rates would range from 18 to 27 basis points for
the last quarter of 1996 and would range from 0 to 27 basis points for the
following assessment periods.

          In addition, the 1996 Act expanded the assessment base for the
payments on the FICO bonds to include, beginning January 1, 1997, the deposits
of both BIF- and SAIF-insured institutions. Until December 31, 1999, or such
earlier date on which the last savings association ceases to exist, the rate of
assessment for BIF-assessable deposits shall be one-fifth of the rate imposed on
SAIF-assessable deposits. It has been estimated that the rate of assessments for
the payment of interest on the FICO bonds will be approximately 1.3 basis points
for BIF assessable deposits and approximately 6.4 basis points for SAIF-
assessable deposits beginning on January 1, 1997.

          The 1996 Act also provides, that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weakness.  The Bank has not been so classified by the FDIC or the
OTS.  Accordingly, assuming that the designated reserve ratio is maintained by
the BIF and by the SAIF after the collection of the special SAIF assessment and
the Bank maintains its regulatory status, the Bank will have to pay
substantially lower regular assessments on its deposits compared to those paid
in recent years.

          The 1996 Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter.  The Secretary of the Treasury is required to conduct a
study of relevant factors with respect to the development of a common charter
for all insured depository institutions and abolition of separate chargers for
banks and thrift and to report the Secretary's conclusions and findings to the
Congress on or before March 31, 1997.

          Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any

                                       47
<PAGE>
 
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS.  The management of the Bank does not know of any practice, condition, or
violation that might lead to termination of deposit insurance.

REGULATIONS OF SAVINGS ASSOCIATION HOLDING COMPANIES

          NHTB is a non-diversified unitary savings association holding company
within the meaning of the HOLA.  As such, NHTB is required to register with the
OTS and is subject to OTS regulations, examinations, supervision and reporting
requirements.  In addition, the OTS has enforcement authority of NHTB and its
non-savings association subsidiaries, if any.  Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the financial safety, soundness, or stability of a
subsidiary savings association.

          The HOLA prohibits a savings association holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-
subsidiary savings association, a non-subsidiary holding company, or a non-
subsidiary company engaged in activities other than those permitted by the HOLA;
or acquiring or retaining control of a depository institution that is not
insured by the FDIC.  In evaluating an application by a holding company to
acquire a savings association, the OTS must consider the financial and
managerial resources and future prospects of the company and savings association
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.

          As a unitary savings association holding company, NHTB is not
restricted under existing laws as to the types of business activities  in which
it may engage, provided that the Bank continues to satisfy the QTL test.  See 
"--Regulation of Federal Savings Associations--QTL Test" for a discussion of the
QTL requirements.  Upon any non-supervisory acquisition by NHTB of another
savings association or savings bank that meets the QTL test and is deemed to be
a savings association by the OTS and that will be held as a separate subsidiary,
NHTB would become a multiple savings association holding company and would be
subject to limitations on the types of business activities in which it could
engage.  The HOLA limits the activities of a multiple savings association
holding company and its non-insured association subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
BHC Act, subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation.

          The OTS is prohibited from approving any acquisition that would result
in a multiple savings association holding company controlling savings
associations in more than one state, subject to two exceptions:  an acquisition
of a savings association in another state (a) in a supervisory transaction or
(b) pursuant to authority under the laws of the state of the association to be
acquired that specifically permit such acquisitions.  The conditions imposed
upon interstate acquisitions by those states  that have enacted authorizing
legislation vary.  Some states impose conditions of reciprocity, which have the
effect of requiring that the laws of both the state in which the acquiring
holding company is located (as determined by the location of its subsidiary
savings  association) and the state in which the association to be acquired is
located, have each enacted legislation allowing its savings associations to be
acquired to out-of-state holding companies on the condition that the laws of the
other state authorize such transactions on terms no more restrictive than those
imposed on the acquiror by the state of the target association.  Some of these
states also impose regional limitations, which restrict such acquisitions to
states within a defined geographic region.  Other states allow full nationwide
banking without any condition of reciprocity.  Some states do not authorize
interstate acquisitions of savings associations.

FEDERAL HOME LOAN BANK SYSTEM

          The Bank is a member of the FHLB of Boston, which is one of the
regional Federal Home Loan Banks composing the Federal Home Loan Bank System.
Each Federal Home Loan Bank provides a central credit facility primarily for its
member institutions.  The Bank, as a member of the FHLB of Boston, is required
to acquire and hold shares of capital stock in the FHLB of Boston in an amount
at least equal to the greater of 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year or 1/20 of its advances (borrowings) from the FHLB of Boston.  The
Bank was in compliance with this requirement with an investment in the capital
stock of the FHLB of Boston at June 30, 1996, of $1.9 million.  Any advance from
a Federal Home Loan Bank must be secured by specified types of collateral, and
all long-term advances may be obtained only for the purpose of providing funds
for residential housing finance.

                                       48
<PAGE>
 
          The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs.  These requirements could reduce the amount of earnings that the
Federal Home  Loan Banks can pay as dividends to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members.  The Bank earned dividends on the FHLB of Boston
capital stock in amounts equal to $119,109, $150,058 and $101,600 during the
years ended December 31, 1996, 1995, and 1994, respectively.  If dividends were
reduced, or interest on future Federal Home Loan Bank advances increased, the
Bank's net interest income would likely also be reduced.

LIQUIDITY

          The Bank is required to maintain an average daily balance of liquid
assets (cash, certain time deposits, bankers' acceptances, specified United
States Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of not less than a specified percentage of its net withdrawable
deposit accounts plus short-term borrowings.  This liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5%.  OTS regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of its net withdrawable deposit accounts
and borrowings payable in one year or less.  Monetary penalties may be imposed
for failure to meet these liquidity  requirements.  The Bank's average long-term
liquidity ratio for the month ended December 31, 1996 was 12.16% which exceeded
the applicable requirements.  The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.

TAXATION

          A thrift institution organized in stock form which utilizes the bad
debt reserve method for bad debt will be subject to certain recapture taxes on
such reserves in the event it makes certain types of distributions to its
stockholders.  Dividends may be paid out of appropriated retained income without
the imposition of any tax on an institution to the extent that the amounts paid
as dividends do not exceed such current and accumulated earnings and profits as
calculated for federal income tax purposes.  Stock redemptions, dividends paid
in excess of an institution's current and accumulated earnings and profits as
calculated for tax purposes, and partial or complete liquidation distributions
made with respect to an institution's stock, however, are deemed under
applicable provisions of the Code to be made from the institution's bad debt
reserve, to the extent that such reserve exceeds the amount that could have been
accumulated under the actual experience method.  In the event a thrift
institution makes a distribution that is treated as having been made from the
tax bad debt reserve, the distribution is treated as an after tax distribution
and the institution will be liable for tax on the gross amount before tax at the
then current tax rate.  Amounts added to the bad debt reserves for federal
income tax purposes are also used by the Bank to meet the OTS reserve
requirements described under "Regulation-Insurance of Accounts."

          The Bank's tax returns have been audited and accepted through December
31, 1995 by the Internal Revenue Service.

STATE INCOME TAX

          The Bank is subject to an annual Business Profits Tax (BPT) imposed by
the State of New Hampshire at the rate of 7.00% of the total amount of federal
taxable income, less deductions for interest earned on United States government
securities.  During 1993, the State of New Hampshire instituted a Business
Enterprise Tax (BET), which places a tax on certain expense items.  Interest,
dividends, wages, benefits and pensions are taxed at a rate of 0.25%.  Business
Enterprise Taxes are allowed as a credit against the Business Profits Tax.

          Upon conversion to a holding company, NHTB became subject to a state
franchise tax imposed by Delaware.  For the year ended 1996, the tax amounted to
$13,874.

          At December 31, 1996, LSB had a total of 79 full-time employees and 19
part-time employees.  These employees are not represented by collective
bargaining agents.  LSB believes that its relationship with its employees is
good.

                                       49
<PAGE>
 
ITEM 2. PROPERTIES

The following table sets forth the location of the LSB offices and certain
additional information relating to these offices at December 31, 1996:

<TABLE>
<CAPTION>
                            YEAR         NET BOOK VALUE       EXPIRATION    LEASE RENEWAL
LOCATION                   OPENED     LEASED        OWNED    DATE OF LEASE     OPTION
-----------------------------------------------------------------------------------------
<S>                        <C>        <C>                    <C>            <C> 
Corporate Office
9 Main Street
  Newport, NH                1868            $  1,490,221

Guild Office
 300 Sunapee Street
 Newport, NH                 1978            $    105,750

Bradford Office
 115 East Main Street
 Bradford, NH                1975            $     81,034

Grantham Office
 165 Route 10 South
 Grantham, NH                1980            $    308,686

Lebanon Office
 200 Heater Road
 Lebanon, NH                 1986            $    585,159

New London Office
 24 Newport Road
 New London, NH              1981            $    343,558

Sunapee Office
 565 Route 11
 Sunapee, NH                 1965            $     90,354

Andover Office/(1)/
 720 Main Street
 Andover, NH                 1987            $     34,818        1997            -

Hillsboro Office/(1)/
 15 Antrim Road
 Hillsboro, NH               1994            $     18,083        1997         7 Years

West Lebanon Office/(1)/
 83 Main Street
 West Lebanon, NH            1994              $  158,175        1999        15 Years
</TABLE>

/(1)/ Operating lease, value of improvements.

ITEM 3. LEGAL PROCEEDINGS

There is no material litigation pending in which the Company is a party or which
the property of the Company is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At a special meeting of shareholders of the Company held on December 19, 1996,
the Company presented the following matters to shareholders of the Company for
their votes of approval.

1.   Adopt and approve the Agreement and Plan of Reoganization dated July 26,
     1996 by and among the Company, the Bank and Landmark Bank, and the
     Agreement and Plan of a Merger, dated July 26, 1996 by and between the Bank
     and Landmark Bank, and joined in by the Company, and the transactions
     comtemplated thereby.
     FOR:    1,083,344        AGAINST:    8,319            ABSTAIN:   10,096

                                       50
<PAGE>
 
2.   Adopt a proposal to adjourn the special meeting for any reason.
     FOR:    1,055,07 1       AGAINST:   46,368           ABSTAIN:    42,228

PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The following table shows the market range for the Company's Common Stock based
on reported sales prices on the NASDAQ Market System.  New Hampshire Thrift
Bancshares, Inc. is traded under the symbol NHTB.

<TABLE>
<CAPTION>
        PERIOD                                           HIGH        LOW
       --------------------------------------------------------------------
<S>                                                <C>          <C>
1996    First Quarter                              $   10 1/2   $   9 1/4
        Second Quarter                                 10 7/16      9 1/2
        Third Quarter                                  12 1/2       9 3/4
        Fourth Quarter                                 13 1/2      11 3/8
 
1995    First Quarter                              $   10       $   8 7/8
        Second Quarter                                 10 1/4       8 3/4
        Third Quarter                                  11           9 1/2
        Fourth Quarter                                 11           9 3/4
</TABLE>

The bid quotations set forth above represent prices between dealers and do not
include retail mark-ups, mark-downs or commissions and may not represent actual
transactions.  As of December 31, 1996, New Hampshire Thrift Bancshares, Inc.
had approximately 756 stockholders of record.  The number of stockholders does
not reflect the number of persons or entities who held their stock in nominee or
"street" name through various brokerage firms.

The following table sets forth certain information regarding per share dividends
declared on the Company's Common Stock:

<TABLE>
<CAPTION>
                                                              1996        1995
                                                           --------------------
<S>                                                        <C>         <C> 
First Quarter                                              $  .125     $  .125
Second Quarter                                                .125        .125
Third Quarter                                                 .125        .125
Fourth Quarter                                                .125        .125 
</TABLE>

For information regarding limitations of the declaration and payment of
dividends by New Hampshire Thrift Bancshares, Inc., see Note 13 of the Notes to
Consolidated Financial Statements.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS

The information called for by this item is contained on pages 7 through 16 of
this document.

ITEM 7. FINANCIAL STATEMENTS

The report of independent accountants and the financial information called for
by this item are contained on pages 17 through 41 of this document.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

                                       51
<PAGE>
 
PART III.

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information relating to directors and executive officers of the Company,
executive compensation, security ownership of certain beneficial owners and
management, and certain relationships and related transactions is incorporated
by reference herein from the Company's definitive proxy statement in connection
with its Annual Meeting of Shareholders to be held on April 9, 1997, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.

ITEM 10.  EXECUTIVE COMPENSATION

Certain information relating to directors and executive officers of the Company,
executive compensation, security ownership of certain beneficial owners and
management, and certain relationships and related transactions is incorporated
by reference herein from the Company's definitive proxy statement in connection
with its Annual Meeting of Shareholders to be held on April 9, 1997, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Certain information relating to directors and executive officers of the Company,
executive compensation, security ownership of certain beneficial owners and
management, and certain relationships and related transactions is incorporated
by reference herein from the Company's definitive proxy statement in connection
with its Annual Meeting of Shareholders to be held on April 9, 1997, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain information relating to directors and executive officers of the Company,
executive compensation, security ownership of certain beneficial owners and
management, and certain relationships and related transactions is incorporated
by reference herein from the Company's definitive proxy statement in connection
with its Annual Meeting of Shareholders to be held on April 9, 1997, which proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year.

ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K

         The exhibits filed as a part of this Registration Statement are as
follows:

         (A). LIST OF EXHIBITS.  (Filed herewith unless otherwise noted.)

EXHIBIT NO.                         DESCRIPTION
-----------                         -----------

     2.1            Agreement as Plan of Reorganization, dated as of July 26,
                    1996, by and among New Hampshire Thrift Bancshares, Inc.
                    ("NHTB"), Lake Sunapee Bank, fsb (the "Bank") and Landmark
                    Bank ("Landmark"), including Annex A, Agreement and Plan of
                    Merger, dated as of July 26, 1996, by and between Landmark
                    and the Bank, and joined in by NHTB (previously filed as an
                    Exhibit to the Company's Form S-4 (No. 333-12645) filed with
                    the Securities and Exchange Commission (the "Commission") on
                    November 5, 1996 (the "November 5, 1996 S-4"))

                                       52
<PAGE>
 
EXHIBIT NO.                         DESCRIPTION
-----------                         -----------

     3.1            Amended and Restated Certificate of Incorporation of NHTB
                    (previously filed as an exhibit to the November 5, 1996 
                    S-4).

     3.2            Amended and Restated Bylaws of NHTB.

     4.1            Stock Certificate of New Hampshire Thrift Bancshares, Inc.
                    (previously filed as an exhibit to the Company's Form S-4
                    (file No. 33-27192) filed with the Commission on March 1,
                    1989).

    10.1            Profit Sharing-Stock Ownership Plan of Lake Sunapee Bank,
                    fsb (previously filed as an exhibit to the November 5, 1996
                    S-4).

    10.2            New Hampshire Thrift Bancshares, Inc. 1996 Stock Option Plan
                    (previously filed as an exhibit in the November 5, 1996 S-4.

    10.3            Lake Sunapee Bank, fsb 1987 Incentive Stock filed as an
                    exhibit to the Option Plan (previously Commission on March
                    1, 1989). Company's Form S-4 (file No. 33-27192), filed with
                    the filed with the Commission on March 1, 1989).
                     
    10.4            New Hampshire Thrift Bancshares, Inc. 1996 Incentive Stock
                    Option Plan (previously filed as an exhibit to the Company's
                    Form S-4 (file No. 33-27192), filed with the Commission on
                    March 1, 1989).

    10.5            Employment Agreement between NHTB and Stephen W. Ensign
                    (previously filed as an exhibit to the November 5, 1996 S-
                    4).
 
    10.6            Employment Agreement between the Bank and Stephen
                    (previously filed as an R. Theroux exhibit to the November
                    5, 1996 S-4).
                    
    10.7            Stock Option Agreement, dated as of July 26, 1996, Landmark,
                    (previously between NHTB and filed as an exhibit to the
                    November 5, 1996 S-4).
 
    11.1            Computation of Per Share Earnings (see Note 1 to
                    Consolidated Financial Statements). 
 
    16.1            Letter on Change in Certifying Accountant to the Company's
                    (previously filed as an exhibit Current Report on Form 8-K
                    dated July 10, 1996).
                    
    21.1            Subsidiaries of the Company (previously filed as an exhibit
                    to the November 5, 1996 S-4). 
 
    27.1            Financial Data Schedule (submitted only with filing in
                    electronic format).
 
    99.1            Proxy Statement for the 1997 Annual Meeting of Company (to
                    be filed Rule pursuant to 14a-6 under the Securities and
                    Exchange Act of Shareholders of the 1934, as amended).

     (B)  REPORTS OF FORM 8-K.

     None

                                       53
<PAGE>

------------ 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

New Hampshire Thrift Bancshares, Inc.

By:  /s/ John J. Kiernan      Chairman of the Board            March 7, 1997
     -------------------                                                  
     (John J. Kiernan)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
     Name                        Title                                    Date           
     <S>                         <C>                                      <C>            
     /s/ John J. Kiernan         Chairman of the Board                    March 7, 1997  
     -------------------                                                                 
     (John J. Kiernan)                                                                   
                                                                                         
     /s/ Stephen W. Ensign       Vice Chairman of the Board,              March 7, 1997  
     ---------------------                                                              
     (Stephen W. Ensign)         President and Chief Executive Officer                  
                                                                                        
     /s/ Stephen R. Theroux      Director, Executive Vice President and   March 7, 1997 
     ----------------------                                                             
     (Stephen R. Theroux)        Chief Financial Officer                                
                                                                                        
     /s/ Leonard R. Cashman      Director                                 March 7, 1997 
     ----------------------
     (Leonard R. Cashman)
 
     /s/ Ralph B. Fifield, Jr.   Director                                 March 7, 1997
     -------------------------
     (Ralph B. Fifield, Jr.)
 
     /s/ John A. Kelley, Jr.     Director                                 March 7, 1997
     -----------------------
     (John A. Kelley, Jr.)
 
     /s/ Dennis A. Morrow        Director                                 March 7, 1997
     --------------------
     (Dennis A. Morrow)
 
     /s/ Jack H. Nelson          Director                                 March 7, 1997
     ------------------
     (Jack H. Nelson)
 
     /s/ Priscilla W. Ohler      Director                                 March 7, 1997
     ----------------------
     (Priscilla W. Ohler)
 
     /s/ Perry R. Smith, Jr.     Director                                 March 7, 1997
     -----------------------
     (Perry R. Smith, Jr.)
 
     /s/ Kenneth D. Weed         Director                                 March 7, 1997
     -------------------
     (Kenneth D. Weed)
</TABLE>

                                       54
<PAGE>
 
=========================================================================  
 DIRECTORS AND OFFICERS OF NEW HAMPSHIRE THRIFT BANCSHARES, INC.

DIRECTORS
---------

John J. Kiernan                               
Chairman of the Board                         
                                              
Stephen W. Ensign                             
Vice Chairman of the                          
Board, President and                          
Chief Executive Officer                       
                                              
Stephen R. Theroux                            
Executive Vice President and                  
Chief Financial Officer                       
                                              
Leonard R. Cashman                            
Owner and Partner C.O.H.                      
Properties, Owner,                            
President, and Director                       
C.O.H. Enterprises, Inc.,                     
Partner Etna Real Estate                    
Associates                                  

Ralph B. Fifield, Jr. Retired   
Executive Vice President        
Lending and Commercial          
Finance                         
                                
John A. Kelley, Jr.             
Real Estate Developer           
                                
Dennis A. Morrow                
Sales Manager                   
Cote & Reney Lumber Company     
                                
Jack H. Nelson                  
Chairman North East             
Environmental Products,         
Inc., President Hanover         
Water Company                    

Priscilla W. Ohler                            
Community Representative                      
                                              
Perry R. Smith, Jr., Retired                  
Co-owner Lake Sunapee                         
Realty Company, Inc.                          
                                              
Kenneth D. Weed, Partner                      
L.E. Weed and Son                             
                                              
John E. Johannessen                           
(Emeritus)                                    
Retired Executive                             
Mobil Corporation                             

OFFICERS                         
--------                         
John J. Kiernan                  
Chairman of the Board            
                                 
Stephen W. Ensign                
Vice Chairman of the             
Board, President and             
Chief Executive Officer          
                                 
Stephen R. Theroux               
Executive Vice President and     
Chief Financial Officer          
                                 
Linda L. Oldham                  
Senior Vice President            
and Secretary                    
                                 
Sandra M. Blackington                                                          
Assistant Secretary               

=========================================================================  
 DIRECTORS AND OFFICERS OF LAKE SUNAPEE BANK, FSB

DIRECTORS
---------
John J. Kiernan                               
Chairman of the Board                         
                                              
Stephen W. Ensign                             
Vice Chairman of the Board,                   
President and Chief                           
Executive Officer                             
                                              
Stephen R. Theroux                            
Executive Vice President                      
and Chief Financial Officer                   
                                              
Peter R. Lovely                               
Senior Vice President                         
Investment Services                           
                                              
Leonard R. Cashman                            
Owner and Partner C.O.H.                      
Properties, Owner, President                  
and Director C.O.H.                           
Enterprises, Inc.                             
Partner Etna Real Estate                      
Associates                                    
                                              
Ralph B. Fifield, Jr. Retired                 
Executive Vice President                      
Lending and Commercial                        
Finance                                       
                                              
John E. Johannessen                           
Retired Executive                             
Mobil Corporation                             
                                              
John A. Kelley, Jr.                           
Real Estate Developer                         
                                              
Dennis A. Morrow                              
Sales Manager                                 
Cote & Reney Lumber                           
Company                                       
                                              
Jack H. Nelson                                
Chairman North East                           
Environmental Products,                       
Inc., President Hanover                       
Water Company                                 
                                              
Priscilla W. Ohler                            
Community Representative                      
                                              
Perry R. Smith, Jr., Retired                  
Co-owner Lake Sunapee                         
Realty Company, Inc.                          
                                              
Kenneth D. Weed, Partner                
L.E. Weed and Son                       

Joseph B. Willey               
Principal Owner, President     
and Director Pro-Cut           
International                  
                               
OFFICERS                       
--------                       
John J. Kiernan                
Chairman of the Board          
                               
Stephen W. Ensign              
Vice Chairman of the Board,    
President and Chief            
Executive Officer              
                               
Stephen R. Theroux             
Executive Vice President and   
Chief Financial Officer        
                               
ACCOUNTING                     
Daryl J. Cady                  
Vice President and             
Controller                     
                               
BUSINESS DEVELOPMENT           
Peter R. Lovely                
Senior Vice President          
                               
COMPLIANCE AND INTERNAL        
AUDIT                          
H. Bliss Dayton                
Vice President                 
                               
Linda M. Basher                
Assistant Vice President       
                               
Arthur W. Phillips             
Assistant Vice President       
and Certified Real Estate      
Appraiser                      
                               
EDUCATION AND HUMAN            
RESOURCES                      
Betty H. Ramspott              
Vice President                 
                               
Sandra M. Blackington          
Assistant Secretary            
                               
LENDING                        
W. Grant MacEwan               
Senior Vice President          
Commercial Lending              

Sharon L. Whitaker                            
Vice President                                
Retail Lending                                
                                              
LOAN ORIGINATION                              
Robert C. O'Brien                             
Senior Vice President                         
                                              
Colin S. Campbell                             
Vice President                                
                                              
Stephen B. Ellis                              
Assistant Vice President                      
                                              
Peter N. Jennings                             
Loan Officer                                  
                                              
MARKETING                                     
Douglas S. Baxter                             
Vice President                                
                                              
OPERATIONS                                    
Sandra J. Luckury                             
Assistant Vice President                      
                                              
Gail A. Fraser                                
Assistant Vice President                      
                                              
Francetta Raymond                             
Assistant Vice President                      
                                              
SHAREHOLDER RELATIONS                         
AND SECRETARY                                 
Linda L. Oldham                               
Senior Vice President                         
                                              
RETAIL OFFICES                                
9 Main Street                                 
Newport, NH 03773                             
(603) 863-5772                                
(800) 281-5772                                
Terri G. Spanos                               
Assistant Vice President                      
                                              
720 Main Street                               
Andover, NH 03216                             
(603) 735-5772                                
Sue-Anne C. Bourbeau                          
Supervisor                                    
                                              
115 East  Main Street                         
Bradford, NH 03221                    
(603) 938-2277                        
Nancy E. Desmarais                    
Supervisor                            

165 Route 10 South              
Grantham, NH 03753              
(603) 863-5600                  
Anita G. Sanborn                
Manager                         
                                
15 Antrim Road                  
Hillsboro, NH 03244             
(603) 464-4820                  
Virginia S. Landers             
Supervisor                      
                                
200 Heater Road                 
Lebanon, NH 03766               
(603) 448-2566                  
Erik C. Cinquemani              
Assistant Vice President        
                                
24 Newport Road                 
New London, NH 03257            
(603) 526-6933                  
Heather K. Melson               
Assistant Vice President        
                                
Maxine B. Wiggins               
Customer Service Officer        
                                
300 Sunapee Street              
Newport, NH 03773               
(603) 863-1428                  
Sherri A. Cummings              
Supervisor                      
                                
565 Route 11                    
Sunapee, NH 03782               
(603) 763-2511                  
Heide Hubert Menard             
Supervisor                      
                                
83 Main Street                  
West Lebanon, NH 03784          
(603) 298-7500                  
Erik C. Cinquemani              
Assistant Vice President        
                                
AFFILIATED COMPANY              
Charter Trust Company           
90 North Main Street            
Concord, NH 03302               
(603) 224-1350                  
(800) 639-5903                   
<PAGE>
 
<TABLE> 
<CAPTION> 
-----------------                                     -----------------------
BOARD OF ADVISORS                                     SHAREHOLDER INFORMATION 
<S>                          <C>                      <C> 
Philip D. Allen /(1)/        Jeffrey A. Lantz         CORPORATE HEADQUARTERS                  
Prunella O. Anastos          Victor W. Laro                                                   
Benjamin K. Barton           Paul J. Linehan          New Hampshire Thrift Bancshares, Inc.   
Kenneth O. Barton            Robert  MacNeil          The Carriage House                      
George O. Binzel             Elizabeth W. Maiola      PO Box 37                               
William A. Bittinger         Raymond A. Manning       New London, New Hampshire 03257-0037    
Paul R. Boucher              John J. Marcotte                                                 
James F. Briggs              Jerry N. Mathis          TRANSFER AGENT                          
Robert S. Burgess            David W. McClintic                                               
Walton W. Chadwick           Denise A. McClintic      ChaseMellon Shareholder Services, L.L.C.
Earle W. Chandler            Thomas F. McCormick      Overpeck Centre                         
F. Read Clarke               J. David McCrillis       85 Challenger Road                      
Jacqueline C. Cote           John C. McCrillis        Ridgefield Park, NJ  07660              
Robert J. Cricenti           Paul  Olsen              Tel: 1-800-851-9677                     
Richard F. Curtis            Daniel P. O'Neill        Website: http://www.cmssonline.com      
Ernest G. Dennis, Jr.        David N. Reney                                                   
Terri C. Dudley              Genelle M. Richards      INDEPENDENT ACCOUNTANTS                 
William J. Faccone, Sr.      J. Barrie Sellers                                                
Gordon B. Flint, Sr.         Edwin G. Sielewicz       Shatswell, MacLeod & Company, P.C.      
John W. Flynn, Jr.           Fredric M. Smith         83 Pine Street                          
John W. Flynn, Sr.           Herbert N. Smith         West Peabody, Massachusetts 01960-3635   
Charles E. Goyette, Jr.      Fred F. Stockwell      
Sam N. Hale                  Earl F. Strout         
Sheffield J. Halsey          James R. Therrien        ---------------------------
Louise K. Hastings           Janis H. Wallace         INFORMATION ON COMMON STOCK 
Howard T. Heintz             James P. Wheeler       
Douglas J. Homan             Bradford C. White        The common stock is traded over-the-counter and quoted 
Rita M. Hurd                 John W. Wiggins, Sr.     on the NASDAQ National  Market System under the symbol NHTB.  
Lisa S. Hustis               Peter Wittman            There were approximately 756 shareholders of record on 
Alf E. Jacobson              Thomas B. Woodger        December 31, 1996.                            
Robert B. Jennings           Michael J. Work          
Michael D. Johnson           /(1)/ Honorary           The following table sets forth the Company's high and low 
John J. Kiernan, Jr.                                  prices for the common stock as reported by NASDAQ for the 
                                                      periods indicated:
</TABLE> 

<TABLE> 
<CAPTION>                          
                                                      1996                  HIGH        LOW   
                                                      -------------------------------------- 
                                                      <S>               <C>         <C>      
                                                      First Quarter     $   10 1/2  $   9 1/4
                                                      Second Quarter        10 7/16     9 1/2
                                                      Third Quarter         12 1/2      9 3/4
                                                      Fourth Quarter        13 1/2     11 3/8 
</TABLE>                             

            This Annual Report has been written by the Bank's staff.

                                      56