SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB/A

(Mark One)

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

For the Fiscal Year Ended June 30, 2001

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from ___________________ to ______________________

Commission File Number: 0-23945

                              SERVICE BANCORP, INC.
                              ---------------------
                 (Name of Small Business Issuer in its Charter)

             Massachusetts                                      04-3430806
  ---------------------------------------                 ---------------------
    (State or Other Jurisdiction of                          (I.R.S. Employer
     Incorporation or Organization)                         Identification No.)

  81 Main Street, Medway, Massachusetts                          02053
  ---------------------------------------                 ---------------------
  (Address of Principal Executive Office)                     (Zip Code)

                                 1-800-339-4346
                ------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

      Securities Registered Pursuant to Section 12(b) of the Exchange Act:

                                      None
                ------------------------------------------------
      Securities Registered Pursuant to Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of Class)

      Indicate by check mark whether the Issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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 there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B not contained in this form, and no
disclosure will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendments to this Form 10-KSB. |_|

      The Issuer's revenues for the fiscal year ended June 30, 2001 were $17.3
million.

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the issuer, computed by reference to the price at which the
common equity was sold as of September 7, 2001 ($13.10) was $7,667,050. The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the issuer that such person is an affiliate
of the issuer pursuant to Rule 12b-2 of the Exchange Act. As of September 7,
2001, there were issued and outstanding 1,644,124 shares of the Registrant's
Common Stock, par value $0.01 per share.

                       DOCUMENTS INCORPORATED BY REFERENCE

      1.    Sections of Annual Report to Stockholders for the fiscal year ended
            June 30, 2001 (Parts II and III).

      2.    Proxy Statement for the 2001 Annual Meeting of Stockholders (Part
            III).
<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20594

                                 Form 10-KSB/A

                              AMENDMENT TO REPORT
                          FILED PURSUANT TO SECTION 13
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                              SERVICE BANCORP, INC.
                   ------------------------------------------
                   (Name of Small Business Issuer in Its Charter)

                                AMENDMENT NO. 1

      The undersigned registrant hereby amends, among other things, Exhibit 13
to its 2001 Annual Report on Form 10-KSB to update the Independent Auditors'
Report on page 16 of the Annual Report to include the conforming signature of
Wolf & Company, P.C., Independent auditors, as part of such Form 10-KSB and
Exhibit 23 thereto to correct the date of such auditors' consent.

      Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
threunto to duly authorized.

Date:   October 15, 2001                            SERVICE BANCORP, INC.


                                                    By: /s/ Pamela J. Montpelier
                                                        ------------------------
                                                        Pamela J. Montpelier
                                                        President and Chief
                                                        Executive Officer
<PAGE>

                                     PART I

ITEM 1. Description of Business.

Service Bancorp, Inc.

      Service Bancorp, Inc. (the "Company") was organized as a Massachusetts
corporation at the direction of the Board of Directors of Strata Bank (the
"Bank" and formerly Summit Bank) and the Board of Trustees of Service Bancorp,
MHC (the "Mutual Company") for the purpose of acting as the holding company of
the Bank. The Company's assets consist primarily of the outstanding capital
stock of the Bank and cash and investments of $2.8 million, representing a
portion of the net proceeds from the Company's stock offering completed October
7, 1998. At June 30, 2001, 736,430 shares of the Company's common stock, par
value $0.01 per share, were held by the public, and 907,694 shares were held by
the Mutual Company. The Company's principal business is overseeing and directing
the business of the Bank and investing the net stock offering proceeds retained
by it.

      At June 30, 2001, the Company had total assets of $244.1 million, total
deposits of $191.8 million and total equity of $18.4 million.

      The Company's office is located at 81 Main Street, Medway, Massachusetts
02053. Its telephone number is 1-800-339-4346.

Strata Bank

      The Bank was organized in 1871 as a Massachusetts-chartered mutual savings
bank and was reorganized into the stock form of ownership in August 1997 as part
of the Bank's original mutual holding company reorganization. No common stock
was offered for sale to depositors or other persons at the time of the
reorganization in 1997. The Bank's deposits are insured by the Bank Insurance
Fund, as administered by the Federal Deposit Insurance Corporation ("FDIC"), up
to the maximum amount permitted by law, and by the Depositors Insurance Fund in
excess of the maximum FDIC insurance. The Bank is a community-oriented savings
bank engaged primarily in the business of offering FDIC-insured deposits to
customers through its branch offices and using those deposits, together with
funds generated from operations and borrowings, to make one- to four-family
residential mortgage loans, commercial real estate loans, commercial business
loans, construction loans and consumer loans, and to invest in mortgage-backed
and other securities.

      The Bank's main office is located at 81 Main Street, Medway, Massachusetts
02053. Its telephone number is 1-800-339-4346.

Service Bancorp, MHC

      The Mutual Company was formed in August 1997 as part of the Bank's
conversion from mutual to stock form. The Mutual Company is a
Massachusetts-chartered mutual holding company with the powers set forth in its
Charter and By-laws and under Massachusetts law. The Mutual Company owns 55.2%
of the voting stock of the Company. The Mutual Company is subject to regulation
and supervision by the Federal Reserve Bank ("FRB") and the Massachusetts
Division of Banks (the "Division"). The Mutual Company does not engage in any
business activity other than to hold the Company's common stock and to invest
any liquid assets of the Mutual Company.

      The Mutual Company's offices are located at 81 Main Street, Medway,
Massachusetts 02053, and its telephone number is 1-800-339-4346.


                                     - 2 -
<PAGE>

Market Area

      The Bank operates eight full-service banking offices in the Massachusetts
towns of Medway, Franklin, Medfield, Millis and Bellingham, all of which are
located in Norfolk County, Milford, located in Worcester County, and Hopkinton,
located in Middlesex County. In addition, the Bank has opened two
limited-service banking locations at assisted living facilities in Franklin and
Worcester. The Bank's deposits are gathered from the general public primarily in
these towns and surrounding communities. The Bank's lending activities are
concentrated primarily in these counties and nearby surrounding markets in the
greater Boston metropolitan area. Consistent with large metropolitan areas in
general, the economy in the Bank's market area is based on a mixture of service,
manufacturing, wholesale/retail trade, and state and local government.
Maintaining operations in a large metropolitan area serves as a benefit to the
Bank in periods of economic growth, while at the same time fosters significant
competition for the financial services provided by the Bank. Future growth
opportunities for the Bank depend in part on national economic factors, the
future growth in the Bank's market area, and the intensity of the competitive
environment for financial institutions.

      Norfolk County has experienced a significant population growth since the
mid-1990s, with the county showing a higher growth rate than the Commonwealth of
Massachusetts as a whole. Population growth has been supported by the outward
expansion of the greater Boston metropolitan area, with Norfolk County's
proximity to Boston and more affordable housing attracting a number of
individuals wishing to maintain jobs in greater Boston. Within Norfolk County,
the town of Franklin in particular has experienced considerable growth in recent
years in population and employment, and is one of the fastest growing towns in
Massachusetts. The increased demand for housing resulting from this growth has
had a positive impact on real estate values and on loan demand in the area in
recent years.

Competition

      The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's service area of Norfolk, Worcester and Middlesex
Counties has a high density of financial institutions, many of which are
branches of significantly larger institutions that have greater financial
resources than the Bank, and all of which are competitors of the Bank to varying
degrees. The Bank's competition for loans comes principally from commercial
banks, savings banks, savings and loan associations, mortgage banking companies,
credit unions, insurance companies and other financial service companies. Its
most direct competition for deposits has historically come from commercial
banks, savings banks, savings and loan associations and credit unions. The Bank
faces additional competition for deposits from non-depository competitors, such
as the mutual fund industry, securities and brokerage firms and insurance
companies. Competition may also increase as a result of federal legislation
enacted in 1999 which is intended to modernize the financial service industry.

Lending Activities

      Loan Portfolio Composition. The types of loans that the Bank may originate
are subject to federal and state laws and regulations. Interest rates charged by
the Bank on loans are affected primarily by the demand for such loans, the
supply of money available for lending purposes and the rates offered by
competitors. These factors are, in turn, affected by national, regional and
local economic conditions, the levels of federal government spending and
revenue, monetary policies of the Federal Reserve Board, and tax policies.

      The Bank's loan portfolio consists primarily of first mortgage loans
secured by one- to four-family residential real estate and commercial real
estate located in the Bank's primary lending area. The


                                     - 3 -
<PAGE>

Bank also provides financing for construction projects, home equity and second
mortgage loans and other consumer loans, and commercial business loans.

      At June 30, 2001, the Bank's gross loan portfolio totaled $123.8 million,
of which $66.4 million, or 53.6%, were one- to four-family residential mortgage
loans, and $31.1 million, or 25.1%, were commercial real estate loans. Home
equity loans were $9.1 million, or 7.4% of gross loans, construction loans were
$4.7 million, or 3.8% of gross loans, and commercial business loans were $10.2
million, or 8.2% of gross loans at June 30, 2001.

      The following information relates to the composition of the Bank's loan
portfolio in dollar amounts and in percentages (before deferred fees and
premiums, and allowances for loan losses) as of the dates indicated.

<TABLE>
<CAPTION>
                                                                                         June 30,
                                                      ----------------------------------------------------------------------------
                                                                2001                        2000                      1999
                                                      ------------------------     -----------------------      ------------------
                                                      Amount           Percent     Amount          Percent      Amount     Percent
                                                      ------           -------     ------          -------      ------     -------
                                                                                   (Dollars in Thousands)
<S>                                                    <C>              <C>          <C>             <C>        <C>          <C>
Real estate loans:
One- to four-family.........................           $ 66,392         53.62%       $61,689         57.56%     $46,793      53.93%
Commercial and multi-family.................             31,109         25.12         25,035         23.36       20,981      24.18
Construction................................              4,713          3.81          2,743          2.56        4,974       5.73
                                                       --------        ------        -------        ------      -------     ------
      Total real estate loans...............            102,214         82.55         89,467         83.48       72,748      83.84
                                                       --------        ------        -------        ------      -------     ------
Other loans:
Consumer loans:
   Collateral...............................                626          0.51            634          0.59          513       0.59
   Home equity..............................              9,132          7.37          7,684          7.17        5,192       5.99
   Other....................................              1,688          1.36          1,629          1.52        1,829       2.11
                                                       --------        ------        -------        ------      -------     ------
      Total consumer loans..................             11,446          9.24          9,947          9.28        7,534       8.69

Commercial business loans...................             10,167          8.21          7,763          7.24        6,481       7.47
                                                       --------        ------        -------        ------      -------     ------
Total other loans...........................             21,613         17.45         17,710         16.52       14,015      16.16
                                                       --------        ------        -------        ------      -------     ------
Total gross loans...........................            123,827        100.00%       107,177        100.00%      86,763     100.00%
                                                                       ======                       ======                  ======
Net deferred loan (fees) costs..............                 54                           37                        (51)
Deferred premium............................                 15                           10                         12
Allowance for loan losses...................               (974)                        (802)                      (740)
                                                       --------                      -------                    -------
Total loans, net............................           $122,922                     $106,422                    $85,984
                                                       ========                     ========                    =======
</TABLE>

      Loan Originations. Substantially all of the Bank's consumer and commercial
loan origination activity is conducted by loan personnel throughout the Bank's
branch network and at its executive offices. The Bank relies on referrals from
existing customers, attorneys, accountants and other real estate professionals
to generate business within its lending area. Existing borrowers are an
important source of business since many of its commercial real estate and
commercial business loan customers have more than one loan outstanding with the
Bank. Construction loans are obtained primarily from builders who have an
established relationship with the Bank. Consumer loans are largely generated
through existing customers and walk-in customers. Loan generation is further
supported by advertising and networks built through the community activities of
Bank employees.

      The Bank's ability to originate residential real estate loans depends on
the strength of the economy, trends in interest rates, customer demands and
competition. During May 2001, the Bank entered into an affiliation with Marathon
Mortgage Company of Hopkinton, Massachusetts. This affiliation allows the Bank
to offer an expanded product line. The new Strata Mortgage Center, staffed by
Marathon Mortgage loan originators, will be a source of new residential real
estate loan originations for


                                     - 4 -
<PAGE>

the Bank. In addition, the Bank has the opportunity to purchase loans directly
from Marathon Mortgage Company.

      Loan Sales and Servicing. While the Bank has not originated for sale large
commercial real estate and commercial business loans, the Bank may originate
such loans for sale in the future to accommodate customers seeking larger loans
without assuming credit risks that exceed policy guidelines. In addition,
generally one- to four-family residential loans are underwritten to conform to
secondary market guidelines. While the Bank has the ability to sell in the
secondary market, no sales have taken place for over three years as the Bank has
retained all originations in its portfolio. Such sales might be considered in
the future.

      Loan Purchases. To supplement originations of one- to four-family
residential mortgage loans, the Bank has purchased adjustable-rate one- to
four-family mortgage loans secured by residential properties in the New England
area originated by other New England-based financial institutions and mortgage
companies. All purchased loans are priced at market rates and must meet the
underwriting standards applied to loans originated by the Bank. Such loan
purchases totaled $10.5 million, $9.7 million and $9.3 million for the years
ended June 30, 2001, 2000 and 1999, respectively. The Bank has purchased only
whole loans and participates in loans originated by others.

      The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated.

<TABLE>
<CAPTION>
                                                                        Years Ended June 30,
                                                             -------------------------------------------
                                                               2001              2000              1999
                                                             -------           -------            ------
                                                                           (In Thousands)
<S>                                                           <C>              <C>               <C>
Originations by Type:
Real estate loans:
    One- to four-family.........................              $8,789           $22,142           $22,859
    Commercial and multi-family.................              11,144             7,041            11,284
    Construction................................               6,442             6,809             7,275
Other loans:
    Consumer....................................               8,543             6,300             5,127
    Commercial business.........................               7,836             5,666             7,161
                                                             -------           -------            ------
      Total loans originated....................              42,754            47,958            53,706
                                                             -------           -------            ------
Purchases:
Real estate loans:
    One- to four-family.........................              10,528             9,686             4,447
    Commercial and multi-family.................                  --                --             4,896
                                                             -------           -------            ------
    Total loans purchased.......................              10,528             9,686             9,343
                                                             -------           -------            ------
Sales and Repayments:
Sales of real estate loans:
    One- to four-family.........................                  --              --               5,809
Principal repayments............................              36,632            37,230            47,871
                                                             -------           -------            ------
    Total reductions............................              36,632            37,230            53,680
                                                             -------           -------            ------

Net increase ...................................             $16,650           $20,414            $9,369
                                                             =======           =======            ======
</TABLE>


                                     - 5 -
<PAGE>

      Loan Maturity and Repricing. The following table sets forth certain
information as of June 30, 2001, regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than the period in which they contractually mature, and fixed-rate
loans are included in the period in which the final contractual repayment is
due. This table does not include prepayments on scheduled principal
amortizations.

<TABLE>
<CAPTION>
                                                                       At June 30, 2001
                                          ----------------------------------------------------------------------------
                                                          One       Three      Five        Ten
                                            Within      Through    Through    Through    Through    Beyond
                                             One         Three      Five        Ten       Twenty    Twenty
                                            Year         Years      Years      Years      Years      Years      Total
                                          ---------     -------    -------    -------    -------    ------    --------
                                                                         (In Thousands)
<S>                                       <C>           <C>        <C>        <C>        <C>        <C>       <C>
Real estate loans:
   One- to four-family ...............    $  14,854     $15,311    $10,719    $ 9,158    $ 7,336    $9,014    $ 66,392
   Commercial and multi-family .......        2,069       6,705      7,729      9,613      4,396       597      31,109
   Construction ......................        3,304         174        465        350        420        --       4,713
                                          ---------     -------    -------    -------    -------    ------    --------
      Total real estate loans ........       20,227      22,190     18,913     19,122     12,152     9,611     102,214
Other loans:
   Consumer ..........................        7,196       1,761      1,047      1,442         --        --      11,446
   Commercial business ...............        5,729       2,430      1,493        515         --        --      10,167
                                          ---------     -------    -------    -------    -------    ------    --------
Total loans ..........................    $  33,152     $26,381    $21,453    $21,078    $12,152    $9,611     123,827
                                          =========     =======    =======    =======    =======    ======
Net deferred loan costs ..............                                                                              54
Deferred premiums ....................                                                                              15
Allowance for loan losses ............                                                                            (974)
                                                                                                              --------
   Net loans .........................                                                                        $122,922
                                                                                                              ========
</TABLE>

      Prepayments and scheduled principal amortization totaled $36.6 million,
$37.2 million and $47.9 million for the years ended June 30, 2001, 2000 and
1999, respectively.

      The following table sets forth at June 30, 2001, the dollar amount of
gross loans, net of unadvanced funds on loans, contractually due or scheduled to
reprice after June 30, 2002, and whether such loans have fixed interest rates or
adjustable interest rates. This table does not include prepayments on scheduled
principal amortizations.

                                                  Due or Repricing After
                                                      June 30, 2002
                                              ----------------------------------
                                              Fixed      Adjustable        Total
                                              -----      ----------        -----
                                                       (In Thousands)
Real estate loans:
   One- to four-family ...............       $23,642       $27,896       $51,538
   Commercial and multi-family .......        17,753        11,287        29,040
   Construction ......................           535           874         1,409
                                             -------       -------       -------
      Total real estate loans ........        41,930        40,057        81,987

Other loans:
   Consumer loans ....................         4,250            --         4,250
   Commercial business ...............         3,593           845         4,438
                                             -------       -------       -------
      Total loans ....................       $49,773       $40,902       $90,675
                                             =======       =======       =======


                                     - 6 -
<PAGE>

      One- to Four-Family Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage loans secured by one- to four-family
residences located in the Bank's primary lending area, with maturities ranging
from fifteen to thirty years. One- to four-family mortgage loan originations
historically have been obtained by the Bank through relationships established
with real estate brokers within the Bank's market area and by personnel at the
Bank's eight full-service operating offices. However, all mortgages originated
since June 2001 have been through the new Strata Mortgage Center. At June 30,
2001, the Bank's one- to four-family mortgage loans totaled $66.4 million, or
53.6% of gross loans.

      The Bank currently offers the following adjustable-rate mortgage loan
programs: a one-year adjustable-rate loan that reprices annually, a three-year
adjustable-rate loan that reprices every third year, a "5-1" loan where the
interest rate is fixed for the first five years and is adjusted on an annual
basis thereafter, and a "5-5" loan where each adjustment is for a five-year
period. The interest rates on the adjustable-rate loans are indexed to the
comparable-term U.S. Treasury securities rate, with the initial rate of interest
being dependent upon the length of the repricing term (i.e., a higher rate is
charged for loans with an initial three-year repricing term). Initial rates on
ARM loans are typically discounted from the fully-indexed rate. The one-year
adjustable-rate loan and the 5-1 adjustable-rate loans are subject to interest
rate caps of 2% for each adjustment period up to a maximum of 6% over the life
of the loan. The three-year and "5-5" adjustable-rate loans are subject to a 3%
cap for each adjustment period up to a maximum of 6% over the life of the loan.
As of June 30, 2001, the interest rates offered by the Bank on the types of
adjustable-rate loans ranged from 100 basis points to 250 basis points below the
fully indexed rates at the loan inception.

      The volume and type of adjustable-rate loans originated by the Bank are
affected by market factors such as interest rates, consumer preferences and the
availability of funds. While the origination of adjustable-rate loans helps
reduce the Bank's exposure to increases in interest rates, credit risk can
increase if borrowers are unable to make the larger payments that result from
upward interest rate adjustments. Periodic and lifetime caps on interest rate
increases help to reduce the risks associated with adjustable-rate loans but
also limit the Bank's sensitivity to interest rate risk.

      One- to four-family residential mortgage loans are generally underwritten
in accordance with FNMA and FHLMC guidelines, with some exceptions on
adjustable-rate loans originated for retention in the Bank's loan portfolio.
Loans are originated in amounts up to 95% of the lower of the appraised value or
the selling price of the property securing the loan. The Bank offers a blended
mortgage that enables borrowers to obtain a conventional mortgage for up to 80%
of the property's appraised value with a second mortgage available at elevated
rates for up to 10% of the appraised value. Loans over 80% to value are required
to either obtain a blended mortgage product or obtain outside private mortgage
insurance.

      Commercial Real Estate Mortgage Lending. Origination of loans secured by
commercial real estate is the Bank's most significant area of lending activity
after one- to four-family residential mortgage lending. The loans are generally
secured by office and manufacturing buildings, office warehouses, apartments and
retail stores primarily located in the Bank's market area. At June 30, 2001,
commercial real estate mortgage loans totaled $31.1 million, or 25.1% of gross
loans, an increase of $6.1 million, or 24.3%, since June 30, 2000.

      Pursuant to the Bank's underwriting policies, a number of factors are
considered before a commercial real estate loan is made. The qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property, are
evaluated. When evaluating the qualifications of the borrower for a multi-family
mortgage loan, the Bank considers the financial resources of the borrower, the
borrower's experience in owning or managing


                                     - 7 -
<PAGE>

similar property, and the borrower's payment history with the Bank and other
financial institutions. Factors considered in evaluating the underlying property
include the net operating income of the mortgaged premises before debt service
and depreciation, the debt service coverage ratio (the ratio of net operating
income to debt service) and the ratio of the loan amount to the appraised value.

      According to the Bank's policy, multi-family mortgage loans may be made in
an amount up to 80% of the appraised value (as determined by the Bank or a
qualified independent appraiser) or the sales price of the underlying property,
whichever is lower, provided the debt service coverage ratio is not less than
120%. The appraisal process takes into consideration geographic location,
comparable sales, vacancy rates, if applicable, operating expenses and historic,
current and projected economic conditions. Appraisals are obtained from
independent licensed and certified fee appraisers for all loan requests over
$250,000, as required under the Bank's commercial real estate policy.

      Commercial real estate loans are offered both as adjustable-rate and
fixed-rate loans. Typical terms for loans provide for a five-year repricing
term, with up to a 25-year amortization. The adjustable-rate is generally tied
to either the Prime Rate as published in the Wall Street Journal or the
applicable treasury security index. In the near future, the Bank will implement
pricing tied to the U.S. Treasury indices where appropriate. The Bank from time
to time will partially fund fixed-rate loans through fixed-rate borrowings from
the FHLB of Boston obtained for periods that approximate the fixed-rate terms of
the loans originated.

      A number of the Bank's commercial real estate borrowers have done business
with the Bank for many years and have more than one loan outstanding. The Bank
generally originates commercial real estate loans of $150,000 to $750,000, a
range the Bank views as being too small for larger commercial banks. The Bank
will consider all requests regardless of size. Should the terms of a request
exceed the Bank's legal lending limits, the Bank will consider participating a
portion of the relationship with another financial institution. At June 30,
2001, the largest commercial real estate borrower had aggregate loans
outstanding of $2.0 million, or 11.1% of core capital. Including this borrower,
there were 34 borrowers each with aggregate commercial loans outstanding at June
30, 2001 of $500,000 or more, the cumulative total of which was $26.2 million,
or 21.1% of gross loans. At June 30, 2001, all of these loans were performing in
accordance with their contractual terms.

      Loans secured by commercial real estate generally involve larger principal
amounts and a greater degree of risk than one- to four-family residential
mortgage loans. Because payments of loans secured by commercial real estate are
often dependent on successful operation or management of the properties,
repayment of such loans may, to a greater extent, be subject to adverse
conditions in the real estate market or the economy.

      The Bank intends to emphasize its commercial real estate lending
activities in its primary lending area depending on the demand for such loans
and trends in the real estate market and the economy. Accordingly, the Bank has
expanded the staff of the commercial loan department in the origination and
underwriting areas because of this increased emphasis.

      Construction Lending. The Bank provides funding for construction projects
involving residential properties within its primary lending area. These loans
may be for the construction of new properties or the rehabilitation of existing
properties. Most of the Bank's construction lending activities consist of
construction loans on pre-sold property. The Bank underwrites
construction-permanent loans for owner-occupied one- to four-family property
according to its own internal guidelines for adjustable-rate and fixed-rate
mortgages. For this type of construction loan, the Bank will lend up to 90% of
the lesser of appraised value upon completion of construction or the cost of
construction, provided private mortgage insurance coverage is obtained for any
loan with a loan-to-value or loan-to-cost ratio in excess of 80%.


                                     - 8 -
<PAGE>

For loans on one- to four-family properties being constructed for sale, the Bank
lends up to 80% of the lesser of completed value or project cost (and up to 70%
for speculative loans). Typically, loan proceeds are disbursed in increments as
construction progresses as determined by property inspections and title
rundowns.

      At June 30, 2001, total construction loan commitments outstanding amounted
to $7.1 million, or 5.7% of gross loans. The Bank had funded all but $2.4
million of this amount.

      Construction financing is generally considered to involve a higher degree
of risk than long-term financing on improved, occupied real estate. Risk of loss
on a construction loan is largely dependent upon the accuracy of the initial
estimate of construction costs, the estimated time to sell or rent the completed
property at an adequate price or rate of occupancy, and market conditions. If
the estimates and projections prove to be inaccurate, the Bank may be confronted
with a project which, upon completion, has a value that is insufficient to
assure full loan repayment.

      Home Equity Lending. The Bank offers home equity lines of credit and
fixed-term loans secured by one- to four-family owner-occupied properties in its
primary lending area. Loans are offered in amounts up to 80% of the value of the
property, less the first lien. Values are determined by a recent tax bill from
the town where the property is located showing the assessed value of the
property. Fixed-term home equity loans are written at fixed rates, and are
amortized for terms of up to 10 years, while home equity lines of credit are
written with adjustable rates, and may be extended for up to 15 years (with a 5-
year draw period and a 10-year repayment period). At June 30, 2001, the Bank had
$9.1 million in home equity loans, or 7.4% of gross loans.

      Commercial Loans. The Bank originates both secured and unsecured
commercial business loans to businesses located in the Bank's primary lending
area. Commercial business loans are originated as both fixed-rate loans and
adjustable-rate loans set at a percentage above the Prime Rate as published in
the Wall Street Journal. Fixed-rate loans generally are originated for terms of
seven years or less. The Bank anticipates that commercial business lending (and,
specifically, the Bank's "Small Business Express" loan program, which features
lines of credit that can be used as overdraft protection or term loans of up to
$50,000) may be an area of growth for the Bank. At June 30, 2001, commercial
business loans totaled $10.2 million, or 8.2% of gross loans.

      Consumer Loans. The Bank's origination of consumer loans, other than home
equity loans, has been fairly limited. This consumer loan portfolio includes
direct automobile loans and various other types of installment loans, including
loans secured by deposits, as well as a modest amount of revolving credit
balances. Consumer lending is expected to remain a limited part of the Bank's
overall lending program. At June 30, 2001, consumer loans other than home equity
loans totaled $2.3 million, or 1.9% of gross loans.

      Loan Approval Procedures and Authority. The Board of Directors annually
approves the lending policies and loan approval limits for the Bank as well as
the independent appraisers used by the Bank. Loans may be approved by loan
officers, management, the Loan Committee or the Board of Directors, depending on
the type and size of the loan and the borrower's aggregate loan balances with
the Bank. Where the borrower's aggregate loan balances with the Bank are
$250,000 and below, individual loan officers (depending on lending limits) may
approve loans, and where the borrower's aggregate loan balances with the Bank
are between $250,001 and $750,000, the loan request must be approved by the Loan
Committee. The Loan Committee is made up of the President, Vice President and
Chief Lending Officer, Vice President-Retail Banking and the head of the loan
servicing department. Where the borrower's aggregate borrowings with the Bank
exceed $750,000, the loan request must be approved by the Board of Directors.


                                     - 9 -
<PAGE>

      The Bank requires an environmental site assessment to be performed by an
independent professional for all non-residential mortgage loans over $250,000.
For all commercial real estate loans, the Bank must properly evaluate
environmental risks. It is also the Bank's policy to require title and hazard
insurance on all mortgage loans. In addition, the Bank may require borrowers to
make payments to a mortgage escrow account for the payment of property taxes.
Any exceptions to the Bank's loan policies must be made in accordance with the
limitations set out in each policy. Typically, the exception authority ranges
from the Chief Lending Officer to the Board of Directors, depending on the size
and type of loan involved.

Delinquent Loans, Other Real Estate Owned and Classified Assets

      Delinquent Loans. The Chief Lending Officer reviews the status of all
delinquent loans on an on going basis. The actions taken by the Bank with
respect to delinquencies vary depending upon the nature of the loan and the
period of delinquency. Notices are generated by the Bank's service bureau when a
loan is five and twelve days past due. Collection letters are used in addition
to and as a supplement to telephone calls. Where allowed, late charges are
assessed once a loan becomes past due the required number of days.

      On loans secured by one- to four-family residences, the Bank attempts to
work out a payment schedule with the borrower in order to avoid foreclosure. If
a satisfactory payment plan is not arranged, the Bank typically refers the loan
to legal counsel and foreclosure procedures are initiated after the 120th day of
delinquency. At any time prior to a sale of the property at foreclosure,
foreclosure proceedings will be terminated if the borrower and the Bank are able
to work out a satisfactory payment plan. On loans secured by commercial real
estate properties, the Bank also seeks to reach a satisfactory payment plan so
as to avoid foreclosure. If a satisfactory payment plan is not arranged, the
Bank typically refers the loan to legal counsel for foreclosure after the loan
becomes 120 days past due. Prior to any foreclosure, the Bank requires an
updated appraisal of the property.

      Other Real Estate Owned. Property acquired through foreclosure or
acceptance of a deed in lieu of foreclosure is classified in the Bank's
financial statements as other real estate owned ("OREO"). When a property is
placed in OREO, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. Estimated fair value usually
represents the sales price a buyer would be willing to pay on the basis of
current market conditions, including normal loan terms from other financial
institutions, less estimated costs to sell the property. Management inspects all
OREO properties periodically. When a decline in estimated fair value of a
property is deemed to have taken place, management establishes an allowance for
such decline by a charge to income. The adequacy of the allowance for OREO is
evaluated by management and reviewed with the Loan Committee on a quarterly
basis, taking into consideration each property in the portfolio and current real
estate market conditions. At June 30, 2001, the Bank had no OREO.

      Classified Assets. Consistent with regulatory guidelines, the Bank
provides for the classification of loans and other assets considered to be of
lesser quality. Such ratings coincide with the "Substandard," "Doubtful" and
"Loss" classifications used by regulators in their examination of financial
institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets include those
characterized by the distinct possibility that the insured financial institution
will sustain some loss if the deficiencies are not corrected. Assets classified
as Doubtful have all the weaknesses inherent in assets classified Substandard
with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve and/or charge-off is not warranted.
Assets


                                     - 10 -
<PAGE>

which do not currently expose the insured financial institution to sufficient
risk to warrant classification in one of the aforementioned categories but
otherwise possess weaknesses are designated "Special Mention."

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

      On the basis of management's review of its assets, the Bank had classified
a total of $149,000 of its loans and other assets as follows:

                                                        June 30, 2001
                                                        -------------
                                                        (In Thousands)

             Special Mention...............                  $ --
             Substandard...................                   149
             Doubtful......................                    --
             Loss..........................                    --
                                                             ----
             Total classified loans........
                  loans and other assets...                  $149
                                                             ====
             General allowance.............                  $974
                                                             ====
             Specific allowance............                  $ --
                                                             ====
             Charge-offs...................                  $ --
                                                             ====

      The FDIC, in conjunction with the other federal banking agencies, has
adopted an inter-agency policy statement on allowances for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of a financial institution's valuation methodology.
Generally, the policy statement recommends that financial institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management analyze all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
establish acceptable valuation processes that meet the objectives set forth in
the policy statement. While the Bank believes that it has established adequate
allowances for losses on loans and OREO, there can be no assurance that the
regulators, in reviewing the Bank's loan portfolio and OREO, will not request
the Bank to materially increase at that time its allowances for losses, thereby
negatively affecting the Bank's financial condition and earnings at that time.
Although management believes that adequate specific and general loss allowances
have been established, actual losses are dependent upon future events and, as
such, further additions to the level of specific and general loss allowances may
become necessary.

      Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of


                                     - 11 -
<PAGE>

principal and/or interest become doubtful. Foreclosed assets include assets
acquired in settlement of loans.

                                                                 June 30,
                                                         -----------------------
                                                         2001     2000      1999
                                                         ----     ----      ----
                                                             (In Thousands)
Non-accruing loans:
   One- to-four-family real estate ..................    $122     $160     $317
   Commercial and multi-family real estate ..........      --      117       --
   Consumer .........................................      11        2       --
   Commercial business ..............................      16      153       81
                                                         ----     ----     ----
      Total .........................................     149      432      398
                                                         ----     ----     ----

Accruing loans delinquent more than 90 days:
   One- to four-family real estate ..................      --      123      233
   Commercial and multi-family real estate ..........      --      310       --
   Consumer .........................................      --        3       --
                                                         ----     ----     ----
      Total .........................................      --      436      233
                                                         ----     ----     ----
Foreclosed assets ...................................      --       --       --
                                                         ----     ----     ----
Total non-performing assets and delinquent loans ....    $149     $868     $631
                                                         ====     ====     ====
Total as a percentage of total assets ...............    0.06%    0.40%    0.35%
                                                         ====     ====     ====

      In addition, for all years presented, the Bank had troubled debt
restructurings (which involve forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates).
The loan balances were $16,000, $59,000 and $345,000, respectively, at June 30,
2001, 2000 and 1999.

      The following table sets forth delinquencies in the Bank's loan portfolio
as of the dates indicated:

<TABLE>
<CAPTION>
                                                            At June 30, 2001                          At June 30, 2000
                                             -------------------------------------------   --------------------------------------
                                                  60-89 Days           90 Days or More        60-89 Days        90 Days or More
                                             --------------------    -------------------   -----------------   ------------------
                                             Number      Principal              Principal  Number   Principal  Number    Principal
                                              of          Balance     Number     Balance    of       Balance     of       Balance
                                             Loans       of Loans    of Loans   of Loans   Loans    of Loans   Loans     of Loans
                                             -----       --------    --------   --------   -----    --------   -----     --------
                                                                              (Dollars in Thousands)
<S>                                               <C>      <C>          <C>      <C>        <C>     <C>          <C>     <C>
One- to four-family real
    estate ....................                   2        $300           1        $122       3       $258         2       $203
Commercial and multi-
    family real estate ........                  --          --          --          --      --         --         1         58
Consumer loans ................                   1           1           2          11       4         13         5          6
Commercial business ...........                   2          35          --          --       1          2         1        350
                                               ----        ----        ----        ----    ----       ----      ----       ----
    Total loans ...............                   5        $336           3        $133       8       $273        10       $617
                                               ====        ====        ====        ====    ====       ====      ====       ====
Delinquent loans to gross
    loans .....................                            0.27%                   0.11%              0.25%                0.58%
                                                           ====                    ====               ====                 ====
</TABLE>


                                     - 12 -
<PAGE>

<TABLE>
<CAPTION>
                                                                    At June 30, 1999
                                                     --------------------------------------------
                                                         60-89 Days             90 Days or More
                                                     -------------------     --------------------
                                                     Number     Principal    Number     Principal
                                                      of         Balance      of          Balance
                                                     Loans      of Loans     Loans       of Loans
                                                     -----      --------     -----       --------
                                                                (Dollars in Thousands)
<S>                                                    <C>        <C>           <C>       <C>
  One- to four-family real
       estate .........................                4          $309          1         $185
  Commercial and multi-
       family real estate .............               --            --         --           --
  Consumer loans ......................                2             2         --           --
  Commercial business .................               --            --          3           80
                                                    ----          ----       ----         ----
       Total loans ....................                6          $311          4         $265
                                                    ====          ====       ====         ====
  Delinquent loans to gross loans .....                           0.36%                   0.31%
                                                                  ====                    ====
</TABLE>

Allowance for Loan Losses

      The allowance for loan losses is established through provisions for loan
losses based on management's on going evaluation of the risks inherent in the
Bank's loan portfolio. Factors considered in the evaluation process include (1)
growth of the loan portfolio, (2) the risk characteristics of the types of loans
in the portfolio, (3) geographic and large borrower concentrations, (4) current
regional economic and real estate market conditions that could affect the
ability of borrowers to pay, (5) the value of underlying collateral, and (6)
trends in loan delinquencies and charge-offs. The allowance for loan losses is
maintained at an amount management considers adequate to cover estimated losses
in its loan portfolio which are deemed probable and estimable based on
information currently known to management.

      The following table sets forth activity in the Bank's allowance for loan
losses for the years indicated.

<TABLE>
<CAPTION>
                                                                        Year Ended June 30,
                                                               ------------------------------------
                                                               2001            2000            1999
                                                               ----            ----            ----
                                                                       (Dollars in Thousands)
<S>                                                            <C>              <C>            <C>
Balance at beginning of year .........................         $802             $740           $577
Charge-offs:
    Commercial and multi-family real estate ..........           58               27             --
    Consumer .........................................           12               19             22
    Commercial business ..............................            7              131             --
                                                               ----             ----           ----
      Total charge-offs ..............................           77              177             22
                                                               ----             ----           ----
Recoveries:
   Consumer ..........................................            9                8              7
   Commercial business ...............................           22               11             --
                                                               ----             ----           ----
      Total recoveries ...............................           31               19              7
                                                               ----             ----           ----
Net charge-offs ......................................           46              158             15
Additions charged to operations ......................          218              220            178
                                                               ----             ----           ----
Balance at end of year ...............................         $974             $802           $740
                                                               ====             ====           ====

Ratio of net charge-offs during the year to
   average loans outstanding during the year .........         0.04%            0.17%          0.02%
Ratio of net charge-offs during the year to
   average non-performing assets .....................         15.69%           31.41%         4.54%
</TABLE>


                                     - 13 -
<PAGE>

      The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:

<TABLE>
<CAPTION>
                                                      June 30, 2001                                  June 30, 2000
                                        -----------------------------------------      ------------------------------------------
                                                                       Percent of
                                                          Loan          Loans in                                      Percent of
                                        Amount of       Amounts          each          Amount of                    Loans in each
                                        Loan Loss          by         Category to      Loan Loss   Loan Amounts      Category to
                                        Allowance       Category      Total Loans      Allowance    by Category      Total Loans
                                        ---------       --------      -----------      ---------    -----------      -----------
                                                                         (Dollars in Thousands)
<S>                                        <C>          <C>               <C>            <C>          <C>               <C>
One- to four-family real
  estate .........................         $217         $ 66,392          53.62%         $197         $ 61,689          57.56%
Commercial and multi-
  family real estate .............          313           31,109          25.12           265           25,035          23.36
Construction .....................           70            4,713           3.81            26            2,743           2.56
Home equity ......................           46            9,132           7.37            38            7,684           7.17
Consumer loans ...................           19            2,314           1.87            16            2,263           2.11
Commercial business ..............          180           10,167           8.21           162            7,763           7.24
Unallocated ......................          129               --             --            98               --             --
                                           ----         --------         ------          ----         --------         ------
           Total .................         $974         $123,827         100.00%         $802         $107,177         100.00%
                                           ====         ========         ======          ====         ========         ======
</TABLE>

<TABLE>
<CAPTION>
                                                                        June 30, 1999
                                               ------------------------------------------------------
                                                                                       Percent of
                                                                                      Loans in each
                                               Amount of Loan       Loan Amounts       Category to
                                               Loss Allowance       by Category        Total Loans
                                               --------------       -----------        -----------
                                                               (Dollars in Thousands)
<S>                                                   <C>              <C>                 <C>
One- to four-family real estate ........              $171             $46,793             53.93%
Commercial and multi-family
   real estate .........................               204              20,981             24.18
Construction ...........................                50               4,974              5.73
Home equity ............................                14               5,192              5.99
Consumer loans .........................                 9               2,342              2.70
Commercial business ....................               241               6,481              7.47
Unallocated ............................                51                  --                --
                                                      ----             -------            ------
           Total .......................              $740             $86,763            100.00%
                                                      ====             =======            ======
</TABLE>

Investment Activities

      The investment policy of the Bank is reviewed and approved by the Board of
Directors on an annual basis. The Bank views its investment portfolio as an
alternative earning asset vehicle into which to deploy excess funds as well as
to assist in interest-rate risk management. Compliance with the Bank's
investment policy is the responsibility of the President. Investment purchases
are initiated in accordance with specific guidelines and criteria specified in
the investment policy. No sales of investment securities can be made without the
prior permission of the President. All investment transactions are reported to
and reviewed by the Board of Directors on a monthly basis.

      The Bank's current policy generally favors investment in U.S. Government
and Agency securities, corporate debt obligations and corporate equities. The
policy permits investment in mortgage-backed and mortgage-related securities but
does not allow the use of interest rate swaps, options and futures. The Bank's
current investment strategy has emphasized the purchase of U.S. Government and
Agency obligations and corporate debt obligations generally maturing within ten
years.


                                     - 14 -
<PAGE>

      At June 30, 2001, the Bank had $79.4 million, or 32.5% of total assets, in
securities consisting primarily of U.S. Government and Agency obligations ($19.2
million), mortgage-backed securities ($31.2 million), corporate obligations
($26.2 million) and marketable equity securities ($2.7 million). Also included
in investments is $1.6 million of FHLB stock. To avail itself of services
offered by that organization, in particular the ability to borrow funds, the
Bank is required to invest in the stock of the FHLB in an amount determined on
the basis of the Bank's residential mortgage loans and borrowings from the FHLB.
The stock is redeemable at par and earns dividends declared at the discretion of
the FHLB.

      SFAS No. 115 requires the Bank to designate its securities as held to
maturity, available for sale or trading depending on the Bank's intent regarding
its investments. The Bank does not currently maintain a trading portfolio of
securities. At June 30, 2001, $43.1 million, or 54.3%, of the Bank's securities
were designated as available for sale. On that date, the Bank had $36.2 million,
or 45.7%, in securities designated as held to maturity. The net unrealized loss
on securities classified as available for sale was $755,000 at June 30, 2001.

      U.S. Government and Agency Obligations. At June 30, 2001, the Bank's U.S.
Government and Agency securities portfolio totaled $19.2 million, all of which
was classified as available for sale. This portfolio consists primarily of
medium-term (maturities of 5 to 10 years) securities. The Bank's current
investment strategy, however, is to maintain investments in such instruments for
liquidity purposes, as collateral for borrowings, and for prepayment protection.
Some of the Bank's Agency debentures are callable on a semi-annual basis
following a holding period of twelve months. The Bank generally does not
purchase structured notes and there were no structured notes in the Bank's
portfolio at June 30, 2001.

      Mortgage-Backed Securities. At June 30, 2001, the Bank's mortgage-backed
securities totaled $31.2 million, with all but $167,000 classified as held to
maturity. Mortgage-backed securities are generally purchased by the Bank as a
means to deploy excess liquidity at more favorable yields than other investment
alternatives. In addition, mortgage-backed securities generate positive interest
rate spreads with minimal administrative expense and lower the Bank's overall
credit risk due to the guarantees on such securities provided by GNMA, FNMA and
FHLMC. The Bank generally does not invest in collateralized mortgage obligations
and the Bank's portfolio of mortgage-backed securities included only $167,000
invested in collateralized mortgage obligations at June 30, 2001.

      Mortgage-backed securities are created by pooling individual mortgages and
bear an interest rate that is less than the interest rate on the underlying
mortgages. Mortgage-backed securities typically represent a participation
interest in a pool of single family or multi-family mortgages, although the Bank
generally purchases only mortgage-backed securities backed by single family
mortgage loans. The issuers of such securities (generally U.S. Government
agencies and Government sponsored enterprises, including FNMA, FHLMC and GNMA)
pool and resell the participation interests in the form of securities to
investors and guarantee the payment of principal and interest to these
investors. Investments in mortgage-backed securities involve a risk that actual
prepayments on the underlying mortgage loans will be greater than estimated over
the life of the security, which may require adjustments to the amortization of
any premium or accretion of any discount relating to such instruments, thereby
affecting the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. Finally, the market value of such
securities may be adversely affected by changes in interest rates.

      Corporate Obligations. At June 30, 2001, the Bank's portfolio of corporate
debt obligations totaled $26.2 million. Corporate obligations include $21.0
million classified as available for sale and $5.2 million classified as held to
maturity. The Bank's policy generally requires that investment in corporate


                                     - 15 -
<PAGE>

debt obligations be limited to corporate bonds with an "A" rating or better by
at least one nationally recognized rating service at the time of purchase.

      Marketable Equity Securities. At June 30, 2001, the Bank's marketable
equity securities portfolio totaled $2.7 million, all of which was in common
stocks. Since June 30, 1996, the Bank's marketable equity securities portfolio
has ranged from $2.6 million to $3.8 million. While the Bank has no policy
limiting the aggregate carrying value of marketable equity securities,
applicable regulations limit the aggregate carrying value of such securities to
100% of the Bank's retained earnings. However, management has no present
intention of increasing the size of this portfolio. The Bank purchases
marketable equity securities as growth investments that can provide the
opportunity for capital appreciation that is taxed on a more favorable basis
than operating income. There can be no assurance that investment in marketable
equity securities will achieve appreciation in value and, therefore, such
investments involve higher risk. Aggregate purchases of marketable equity
securities totaled $2.0 million and $2.1 million for the twelve months ended
June 30, 2001 and 2000, respectively. At June 30, 2001, pre-tax net unrealized
losses on common stocks amounted to $708,000.

      The following table sets forth the composition of the Bank's investment
securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                                           June 30,
                                                          -------------------------------------------------------------------------
                                                                    2001                   2000                      1999
                                                          -----------------------  ----------------------    ----------------------
                                                          Amortized                Amortized                 Amortized
                                                             Cost      % of Total     Cost     % of Total      Cost      % of Total
                                                          ---------    ----------  ---------   ----------    ---------   ----------
                                                                                     (Dollars in Thousands)
<S>                                                         <C>           <C>       <C>           <C>         <C>           <C>
Securities:
Securities available for sale:
   U.S. Government and agency
     securities ......................................      $19,241       24.01%    $45,667       50.51%      $41,909       58.44%
   Federal agency mortgage-backed
     securities ......................................          167        0.21      16,876       18.67        17,620       24.50
Other debt securities ................................       21,025       26.24      19,359       21.42         9,441       13.16
                                                            -------      ------     -------      ------       -------      ------
     Total debt securities ...........................       40,433       50.46      81,902       90.60        68,970       96.17
Marketable equity securities .........................        3,457        4.32       3,724        4.12         2,746        3.83
                                                            -------      ------     -------      ------       -------      ------
     Total securities available for sale .............       43,890       54.78      85,626       94.72        71,716      100.00
                                                            -------      ------     -------      ------       -------      ------
Securities held to maturity:
   Federal agency mortgage-backed
     securities ......................................       31,046       38.74          --          --            --          --
   Other debt securities .............................        5,190        6.48       4,771        5.28            --          --
                                                            -------      ------     -------      ------       -------      ------
     Total securities held to maturity ...............       36,236       45.22       4,771        5.28            --          --
                                                            -------      ------     -------      ------       -------      ------
Total securities .....................................      $80,126      100.00%    $90,397      100.00%      $71,716      100.00%
                                                            =======      ======     =======      ======       =======      ======

Other interest-earning assets:
   Bank liquidity fund ...............................      $ 5,500       24.16%    $   500        6.41%      $   450        6.20%
   Federal funds sold ................................       15,552       68.32       5,612       71.95         5,001       68.97
   Certificates of deposit ...........................          100        0.44         100        1.28           500        6.90
   FHLB stock ........................................        1,613        7.08       1,588       20.36         1,300       17.93
                                                            -------      ------     -------      ------       -------      ------
     Total other interest-earning
       assets ........................................      $22,765      100.00%    $ 7,800      100.00%      $ 7,251      100.00%
                                                            =======      ======     =======      ======       =======      ======
</TABLE>


                                     - 16 -
<PAGE>

      The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's investment securities, at the dates
indicated.

<TABLE>
<CAPTION>
                                                                                      June 30,
                                                      --------------------------------------------------------------------------
                                                               2001                       2000                       1999
                                                      ---------------------      ----------------------     --------------------
                                                      Amortized       Fair       Amortized        Fair      Amortized      Fair
                                                         Cost         Value         Cost          Value        Cost        Value
                                                      ---------       -----      ---------        -----     ---------      -----
                                                                                    (In Thousands)
<S>                                                    <C>           <C>           <C>           <C>         <C>         <C>
Securities:
Securities available for sale:
   U.S. Government and agency
     securities ................................       $19,241       $19,165       $45,667       $43,633     $41,909     $40,870
   Federal agency mortgage-backed
     securities ................................           167           167        16,876        16,028      17,620      16,975
   Other debt securities .......................        21,025        21,054        19,359        18,621       9,441       9,216
                                                       -------       -------       -------       -------     -------     -------
     Total debt securities .....................        40,433        40,386        81,902        78,282      68,970      67,061
   Marketable equity securities ................         3,457         2,749         3,724         3,314       2,746       2,851
                                                       -------       -------       -------       -------     -------     -------
Total securities available for sale ............        43,890        43,135        85,626        81,596      71,716      69,912
                                                       -------       -------       -------       -------     -------     -------

Securities held to maturity:
   Federal agency mortgage-backed
     securities ................................        31,046        30,825            --            --          --          --
   Other debt securities .......................         5,190         5,446         4,771         4,738          --          --
                                                       -------       -------       -------       -------     -------     -------
Total securities held to maturity ..............        36,236        36,271         4,771         4,738          --          --
                                                       -------       -------       -------       -------     -------     -------
Total securities ...............................       $80,126       $79,406       $90,397       $86,334     $71,716     $69,912
                                                       =======       =======       =======       =======     =======     =======

Other interest-earning assets:
   Bank liquidity fund .........................       $ 5,500                     $   500                   $   450
   Federal funds sold ..........................        15,552                       5,612                     5,001
   Certificates of deposit .....................           100                         100                       500
   FHLB stock ..................................         1,613                       1,588                     1,300
                                                       -------                     -------                   -------
     Total other interest-earning
        assets .................................       $22,765                     $ 7,800                   $ 7,251
                                                       =======                     =======                   =======
</TABLE>


                                     - 17 -
<PAGE>

      The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Bank's
securities portfolio as of June 30, 2001.

<TABLE>
<CAPTION>
                                                        More than One      More than Five
                                      One Year or        Year to Five       Years to Ten        More than Ten
                                         Less               Years              Years                Years               Total
                                 -------------------  ------------------  ------------------  ------------------  ------------------
                                            Weighted            Weighted            Weighted            Weighted            Weighted
                                 Amortized   Average  Amortized  Average  Amortized  Average  Amortized  Average  Amortized  Average
                                   Cost       Yield     Cost      Yield      Cost     Yield      Cost     Yield      Cost     Yield
                                 ---------   -------  ---------  -------  ---------  -------  ---------  -------  ---------  -------
                                                                       (Dollars in Thousands)
<S>                                <C>        <C>      <C>        <C>      <C>        <C>      <C>         <C>      <C>       <C>
Securities available for sale:
Debt securities:
 Agency securities ............    $   --       --%    $ 1,500    4.82%    $16,741    6.46%    $ 1,000     8.00%    $19,241   6.41%
 Mortgage-backed securities ...        --       --          --      --         167    7.54          --       --         167   7.54
 Other debt securities ........     2,274     7.72      10,305    6.79       5,353    7.36       3,093     7.68      21,025   7.17
                                   ------              -------             -------             -------              -------
   Total debt securities ......     2,274     7.72     $11,805    6.54      22,261    6.68       4,093     7.76      40,266   6.81
Marketable equity securities ..        --       --          --      --          --      --       3,457     1.69       3,457   1.69
                                   ------              -------             -------             -------              -------
Total securities available
   for sale ...................    $2,274     7.72%    $11,805    6.54%    $22,261    6.68%    $ 7,496     4.98%    $43,890   6.41%
                                   ======              =======             =======             =======              =======

Securities held to maturity:
Debt securities:
 Other debt securities ........    $  492     9.54%    $ 3,841    7.84%    $   857    8.41%    $    --       --%    $ 5,190   8.10%
 Mortgage-backed securities ...        --       --         476    6.85         151    6.09      30,419     6.64      31,046   6.64
                                   ------     ----     -------             -------             -------              -------
 Total securities held to
    maturity ..................    $  492     9.54%    $ 4,317    7.73%    $ 1,008    8.06%    $30,419     6.64%    $36,236   6.85%
                                   ======              =======             =======             =======              =======
</TABLE>


                                     - 18 -
<PAGE>

Sources of Funds

      General. Deposits, repayments and prepayments of loans, proceeds from
sales of loans and securities, proceeds from maturing securities and cash flows
from operations are the primary sources of the Bank's funds for use in lending,
investing and other general purposes. The Bank utilizes borrowed funds from the
FHLB to fund its loans and investment purchases in connection with its
management of the interest rate sensitivity of its assets and liabilities.

      Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of
non-interest-bearing checking accounts and interest-bearing NOW accounts,
savings accounts and money market deposit accounts (referred to in the aggregate
as "transaction accounts") and certificate of deposit accounts. The Bank offers
Individual Retirement Accounts ("IRAs") and other qualified plan accounts.

      For the fiscal year ended June 30, 2001, the Bank had $176.8 million in
total average deposits, of which $86.8 million, or 49.1%, were transaction
accounts. Of the $85.9 million of certificate of deposit accounts at June 30,
2001, $70.4 million, or 81.9% were scheduled to mature within one year. While
this percentage is significant, based on its monitoring of historical trends in
deposit flows and its current pricing strategy for deposits, management believes
the Bank will retain a large portion of its certificate of deposit accounts upon
maturity.

      The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and the
relative attractiveness of competing deposit and investment alternatives. During
the past few years, the strength of the stock market has affected deposit flows
as some customers have opted to place their funds in instruments such as mutual
funds rather than in deposit products perceived to have less attractive returns.
The Bank's deposits are obtained predominantly from the communities surrounding
its branch offices. The Bank relies primarily on competitive pricing of its
deposit products and customer service and long-standing relationships with
customers to attract and retain these deposits. In addition, the Bank has
actively marketed its core deposit products to elderly customers in the Bank's
market area through the organization of travel clubs designed to promote savings
by the Bank's senior citizen customers. Finally, the Bank has emphasized the
acquisition of customers dissatisfied with the less personalized and more costly
services provided by merged financial institutions. However, market interest
rates and rates offered by competing financial institutions significantly affect
the Bank's ability to attract and retain deposits. The Bank uses traditional
means of advertising its deposit products, including broadcast and print media,
and generally does not solicit deposits from outside its market area. The Bank
does not use brokers to obtain deposits.


                                     - 19 -
<PAGE>

      The following table presents the deposit activity of the Bank for the
periods indicated.

<TABLE>
<CAPTION>
                                                      Years Ended June 30,
                                           ------------------------------------------
                                              2001             2000            1999
                                           ----------       ----------       --------
                                                    (Dollars in Thousands)
<S>                                        <C>              <C>              <C>
      Opening balance .............        $  176,345       $  133,138       $112,247
      Deposits ....................         1,528,332        1,058,021        904,866
      Withdrawals .................         1,519,540        1,020,029        887,973
      Interest credited ...........             6,689            5,215          3,998
                                           ----------       ----------       --------
      Ending balance ..............        $  191,826       $  176,345       $133,138
                                           ==========       ==========       ========
      Net increase ................        $   15,481       $   43,207       $ 20,891
                                           ==========       ==========       ========
      Percent increase ............              8.78%           32.45%         18.61%
                                                 ====            =====          =====
</TABLE>


                                     - 20 -
<PAGE>

      The following tables set forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize average daily balances.

<TABLE>
<CAPTION>
                                                                                Year Ended June 30,
                                    ------------------------------------------------------------------------------------------------
                                                2001                                2000                             1999
                                    ------------------------------    --------------------------------  ----------------------------
                                             Percent of                        Percent of                        Percent
                                                Total     Weighted                Total      Weighted            of Total  Weighted
                                    Average    Average     Average    Average    Average     Average    Average   Average    Average
                                    Balance   Deposits      Rate      Balance    Deposits      Rate     Balance  Deposits    Rate
                                    -------  ----------   --------    -------  -----------   ---------  -------  --------  ---------
                                                                           (Dollars in Thousands)
<S>                                <C>           <C>         <C>      <C>          <C>         <C>    <C>           <C>      <C>
Money market accounts...........   $ 15,191      8.60%       3.24%    $ 11,310     7.66%       2.84%  $  9,699      8.19%    2.70%
Savings accounts................     30,841     17.45        2.08       27,137    18.38        2.12     24,022     20.28     2.31
NOW accounts....................     19,212     10.87        0.79       16,669    11.29        0.80     16,837     14.22     0.87
Non-interest-bearing accounts...     21,552     12.19          --       14,173     9.60          --     11,583      9.78       --
                                   --------    ------                 --------   ------                           ------
   Total non-certificate
     Accounts...................     86,796     49.11        1.48       69,289    46.93        1.48     62,141     52.47     1.55
                                                                                                                  ------
Certificates of deposit:
Less than six months............      9,901      5.60        5.65       12,039     8.15        5.13      9,287      7.84     5.02
Over six through 12 months......     58,397     33.04        6.23       46,738    31.67        5.39     28,877     24.38     5.48
Over 12 through 24 months.......     18,294     10.35        5.56       16,759    11.35        5.36     15,147     12.79     5.43
Over 24 months..................      3,366      1.90        5.64        2,812     1.90        5.41      2,983      2.52     5.46
                                   --------    ------                 --------   ------               --------
   Total certificates of deposit     89,958     50.89        6.01       78,348    53.07        5.34     56,294     47.53     5.39
                                   --------    ------                 --------   ------               --------    ------
   Total average deposits.......   $176,754    100.00%       3.78     $147,637   100.00%       3.53   $118,435    100.00%    3.38
                                   ========    ======                 ========   ======               ========    ======
Certificates over $100,000......   $ 21,691                  5.86%    $ 19,170                 5.63%  $ 11,016               5.47%
                                   ========                           ========                        ========
</TABLE>


                                     - 21 -
<PAGE>

      The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 2001.

<TABLE>
<CAPTION>
                                                                         Maturity
                                              --------------------------------------------------------------
                                              3 Months or   Over 3 to   Over 6 to 12   Over 12
                                                 Less        6 Months      Months      Months        Total
                                              -----------   ---------   ------------   -------     ---------
                                                                 (Dollars in Thousands)
<S>                                             <C>          <C>          <C>          <C>          <C>
Certificates of deposit less than
  $100,000 ..........................           $18,717      $17,301      $19,591      $11,212      $66,821
  Weighted average rate .............              5.96%        5.39%        5.05%        5.44%        5.46%
Certificates of deposit of
  $100,000 or more ..................             4,173        5,422        5,193        4,306       19,094
   Weighted average rate ............              6.12%        5.29%        5.14%        5.66%        5.51%
Total certificates of deposit .......           $22,890      $22,723      $24,784      $15,518      $85,915
</TABLE>

      Borrowings. The Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. The advances are collateralized primarily by certain of the
Bank's mortgage loans and secondarily by the Bank's investment in the stock of
the FHLB. The maximum amount that the FHLB will advance to member institutions,
including the Bank, fluctuates from time to time in accordance with the policies
of the FHLB. At June 30, 2001, the Bank had $32.3 million in outstanding
advances from the FHLB and had the capacity to increase that amount to $84.0
million. The Bank expects to continue to utilize borrowings from the FHLB as
part of its management of the interest sensitivity of its assets and
liabilities.

      The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.

                                              Years Ended June 30,
                                      -----------------------------------
                                      2001            2000           1999
                                      ----            ----           ----
                                                 (In Thousands)
      Maximum balance                $32,255        $33,339        $25,993

      Average balance                 27,130         27,431         16,024

      The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.

                                                    June 30,
                                       -----------------------------------
                                       2001           2000            1999
                                       ----           ----            ----
                                              (Dollars in Thousands)
      FHLB advances                  $32,255         $26,350         $25,993

     Weighted average interest          5.59%           5.84%           5.04%


                                     - 22 -
<PAGE>

REGULATION

General

      The Bank is a Massachusetts-chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the Bank Insurance Fund ("BIF")
of the FDIC and by the Depositors Insurance Fund. The Bank is subject to
extensive regulation by the Massachusetts Division of Banks (the "Division") as
its chartering agency, and by the FDIC, as its deposit insurer. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Division concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other savings institutions. The
Bank is a member of the Federal Home Loan Bank of Boston and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System. As bank holding companies, the Mutual Company and the Company are
subject to regulation by the Federal Reserve Bank ("FRB") and the Division and
required to file reports with such regulatory bodies. Any change in such
regulations, whether by the Division, the FDIC, or the FRB could have a material
adverse impact on the Bank, the Company, or the Mutual Company. Certain of the
regulatory requirements applicable to the Bank, the Company and the Mutual
Company are referred to below or elsewhere herein.

Massachusetts Bank Regulation

      As a Massachusetts-chartered savings bank, the Bank is subject to
supervision, regulation and examination by the Division and to various
Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings, and
payment of dividends. In addition, the Bank is subject to Massachusetts consumer
protection and civil rights laws and regulations. The Division's approval is
required for a Massachusetts bank to establish or close branches, merge with
other banks, organize a holding company, issue stock and undertake certain other
activities.

      Parity Regulation. Massachusetts regulation on parity with national banks
establishes procedures allowing state-chartered banks to exercise additional or
more flexible parallel powers granted to national banks under federal law which
are otherwise not permitted under state law. Under the parity regulation, a bank
which is either "adequately capitalized" or "well capitalized," which has not
been informed in writing by the Commissioner or an applicable federal bank
regulatory agency that it has been designated to be in "troubled condition," and
which has received as least a "satisfactory" CRA rating (as defined below)
during its most recent examination by the Commissioner or other applicable
federal banking regulatory agency, may engage in certain activities in which
Massachusetts chartered banks ordinarily may not engage. Such activities
include, but are not limited to, the establishment of temporary branch offices,
investment in corporate affiliates and subsidiaries, engagement in lease
financing transactions, investment in community development and public welfare
projects, and the provision of tax planning and preparation, payroll and
financial planning services, among others. The procedures and requirements for
engaging in such activities range from an application process or expedited
review and notice process to no application or notice whatsoever. The applicable
procedures and requirements vary according to the nature of the activity to be
engaged in and the capitalization of the bank. As of the date of this document,
the Bank was "adequately capitalized," had received a CRA rating of
"satisfactory" and was not in "troubled condition" and was therefore eligible to
engage in certain of the above-referenced activities, subject to the applicable
procedures and requirements of Massachusetts Regulation.

      Investment Activities. As a Massachusetts-chartered savings bank, the Bank
may invest in preferred and common stock of any corporation provided such
investments do not involve control of any corporation and do not, in the
aggregate, exceed 4% of the Bank's deposits. Subject to certain limits, a
Massachusetts-chartered savings bank may invest up to 7% of its deposits in
investments not otherwise legally permitted, provided that any such amounts
which exceed 3% of deposits must be invested in companies organized for the
purpose of acquiring, constructing, rehabilitating, leasing, financing and
disposing of housing, and no investment in the equity securities or debt
securities of any one issuer made pursuant to such authority may exceed 2% of
the bank's deposits.


                                     - 23 -
<PAGE>

      Regulatory Enforcement Authority. Any Massachusetts bank that does not
operate in accordance with the regulations, policies and directives of the
Commissioner may be subject to sanctions for non-compliance, including seizure
of the property and business of the bank and suspension or revocation of its
charter. The Commissioner may under certain circumstances suspend or remove
officers or directors who have violated the law, conducted the Bank's business
in a manner which is unsafe, unsound or contrary to the depositors' interests,
or been negligent in the performance of their duties. In addition, upon finding
that a bank has engaged in an unfair or deceptive act or practice, the
Commissioner may issue an order to cease and desist and impose a fine on the
bank concerned. Finally, Massachusetts consumer protection and civil rights
statutes applicable to the Bank permit private individual and class action law
suits and provide for the rescission of consumer transactions, including loans,
and the recovery of statutory and punitive damages and attorneys' fees in the
case of certain violations.

      Depositors Insurance Fund. All Massachusetts-chartered savings banks are
required to be members of the Depositors Insurance Fund ("DIF"), a corporation
that insures savings bank deposits not covered by federal deposit insurance. The
DIF is authorized to charge savings banks an annual assessment of up to 1/16th
of 1% of a savings bank's deposits.

Insurance of Accounts and Regulation by the FDIC

      The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
charges deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a risk to the insurance fund. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Commissioner an opportunity to take such action, and may terminate deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.

      The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state bank if that bank was "critically undercapitalized" on average during the
calendar quarter beginning 270 days after the date on which the bank became
"critically undercapitalized." For this purpose, "critically undercapitalized"
means having a ratio of tangible capital to total assets of less than 2%. The
FDIC may also appoint a conservator or receiver for a state bank on the basis of
the institution's financial condition or upon the occurrence of certain events,
including: (i) insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others); (ii) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the bank will be unable to meet the demands of its depositors or
to pay its obligations in the normal course of business; and (v) insufficient
capital, or the incurring or likely incurring of losses that will deplete
substantially all of the institution's capital with no reasonable prospect of
replenishment of capital without federal assistance.

      On September 30, 1996, legislation was enacted to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions by
recapitalizing the SAIF to the required ratio of 1.25% of insured deposits. The
legislation provided (i) that the holders of SAIF-assessable deposits pay a
one-time special assessment to recapitalize the SAIF, (ii) for the merger of the
BIF and the SAIF, with such merger being conditioned upon the prior elimination
of the thrift charter, and (iii) that BIF-insured institutions would share in
part in the obligation to repay Financing Corporation bonds that were issued in
1987 to help finance losses to the former insurance fund for state and federal
savings associations. As of this date, Congress has not eliminated the thrift
charter, and the Company cannot determine if, or when, such action would be
taken.

Regulatory Capital Requirements

      FDIC-insured savings banks are subject to risk-based capital guidelines
that establish a framework for making regulatory capital requirements more
sensitive to the risk profiles of each institution. The Bank is


                                     - 24 -
<PAGE>

required to maintain certain levels of regulatory capital in relation to
risk-weighted assets. The ratio of such regulatory capital to risk-weighted
assets is referred to as the Bank's "risk-based capital ratio." Risk-based
capital ratios are determined by allocating assets and specified off-balance
sheet items to four risk-weighted categories ranging from 0% to 100%, with
higher levels of capital being required for the categories perceived as
representing greater risk.

      These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio equal to at least 8% of risk-weighted assets, of which at least 4%
must be Tier I capital.

      In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage capital ratio (Tier I capital to adjusted total assets as
specified in the regulations). These regulations provide for a minimum Tier I
leverage ratio of 3% for banks that meet certain specified criteria, including
that they have the highest examination rating and are not experiencing or
anticipating significant growth. All other banks are required to maintain a Tier
I leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points. The FDIC may, however, set higher leverage and risk-based capital
requirements on individual institutions when particular circumstances warrant.
Savings banks experiencing or anticipating significant growth are expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.

      The FDIC has also proposed that a bank's interest rate risk exposure
should be quantified using either the measurement system set forth in the
proposal or the institution's internal model for measuring such exposure.
Management of the Bank has not determined what effect, if any, the proposed
interest rate risk component would have on the Bank's capital if adopted as
proposed.

Standards for Safety and Soundness

      The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit program; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by federal
law. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.

Limitations on Dividends and Other Capital Distributions

      The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. Massachusetts law also
restricts the Bank from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state and federal law and
regulations, or (ii) the amount of the Bank's liquidation account established in
connection with the Reorganization.


                                     - 25 -
<PAGE>

Prompt Corrective Action

      The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).

      "Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of additional restrictions, including an
order by the FDIC to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks or to dismiss directors or officers, and restrictions
on interest rates paid on deposits, compensation of executive officers and
capital distributions by a parent holding company.

      Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.

Activities and Investments of Insured State-Chartered Banks

      Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things: (i) acquiring or retaining a majority interest in a
subsidiary; (ii) investing as a limited partner in a partnership, the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation, or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets; (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions; and (iv) acquiring or retaining, through a subsidiary,
up to 10% of the voting shares of a depository institution if certain
requirements are met.

      Federal law and FDIC regulations permit certain exceptions to the
foregoing limitations. For example, certain state-chartered banks, such as the
Bank, may continue to invest, up to certain limits, in common or preferred stock
listed on a National Securities Exchange or the National Market System of
NASDAQ, and in the shares of an investment company registered under the
Investment Company Act of 1940, as amended. Such banks may also continue to sell
savings bank life insurance. As of June 30, 2001, the Bank had marketable equity
securities with a cost of $3.5 million pursuant to this exception.


                                     - 26 -
<PAGE>

Transactions with Affiliates and Insiders of the Bank

      Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate; the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances or letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.

      Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal shareholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.

Bank Holding Company Regulation

      General. Bank holding companies are subject to comprehensive regulation
and regular examinations by the FRB and the Division. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound practices.
As a savings bank, the Bank may elect to have the Company and the Mutual Company
regulated as savings and loan holding companies by the Office of Thrift
Supervision ("OTS"). Regulation as a savings and loan holding company would
require application to, and prior approval of, the OTS.

      The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 was
signed into law on November 12, 1999 and became effective March 11, 2000. This
federal legislation is intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. As a result of the legislation, bank holding companies are permitted
to engage in a wider variety of financial activities than permitted under prior
law, particularly with respect to insurance and securities activities. In
addition, in a change from prior law, bank holding companies are in a position
to be owned, controlled or acquired by any company engaged in
financially-related activities. To the extent that it permits banks, securities
firms and insurance companies to affiliate, the financial services industry may
experience further consolidation. This additional consolidation could result in
a growing number of larger financial institutions that offer a wider variety of
financial services


                                     - 27 -
<PAGE>

than the Company might be able to offer. This could adversely impact the
Company's ability to retain and attract customers that prefer to obtain all of
their financial services from one provider and, ultimately, the Company's
profitability.

      The Company is subject to capital adequacy guidelines for bank holding
companies (on a consolidated basis) which are substantially similar to those of
the FDIC for the Bank. The Company's stockholders' equity exceeds these
requirements.

      Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary bank. Under this policy, the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.

      A bank holding company must obtain Massachusetts Board of Bank
Incorporation and FRB approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.

      The Bank Holding Company Act of 1956, as amended, also prohibits a bank
holding company, with certain exceptions, from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank or bank holding company, or from engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by FRB
regulation or order, have been identified as activities closely related to the
business of banking or managing or controlling banks. The list of activities
permitted by the FRB includes, among other things, operating a savings
institution, mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance agent
for certain types of credit-related insurance; leasing property on a
full-payout, non-operating basis; selling money orders, travelers' checks and
United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers. The Company
and the Mutual Company have no present plans to engage in any of these
activities.

      Interstate Banking and Branching. Federal law allows the FRB to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of the bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The FRB is prohibited from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. Individual states continue to
have authority to limit the percentage of total insured deposits in the state
which may be held or controlled by a bank or bank holding company to the extent
such limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit referred to above.

      Additionally, beginning on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transactions are prohibited by the law of any state, unless the home state
of one of the banks "opted out" by adopting a law which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.

      In 1996, the Massachusetts legislature enacted a new interstate banking
statute pursuant to which an out-of-state bank may (subject to various
regulatory approvals and to reciprocity in its home state) establish and
maintain bank branches in Massachusetts by (i) merging with a Massachusetts bank
that has been in existence


                                     - 28 -
<PAGE>

for at least three years, (ii) acquiring a branch or branches of a Massachusetts
bank without acquiring the entire bank, or (iii) opening such branches de novo.
Massachusetts banks' ability to exercise similar interstate banking powers in
other states depend upon the laws of the other states. For example, according to
the law of the bordering state of New Hampshire, out-of-state banks may acquire
New Hampshire banks by merger, but may not acquire individual branches or
establish de novo bank branches in New Hampshire.

      Federal law authorizes the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The appropriate federal banking agencies are required to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and FRB have adopted such regulations. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to meet the credit needs of the
communities which they serve. Should the FDIC determine that a bank's interstate
branch is not reasonably helping to meet the credit needs of the communities
serviced by the interstate branch, the FDIC is authorized to close the
interstate branch or not permit the bank to open a new branch in the state in
which the bank previously opened an interstate branch.

      Dividends. The FRB has issued a policy statement expressing their view
that a bank holding company should pay cash dividends only to the extent that
its net income for the past year is sufficient to cover both the cash dividends
and a rate of earnings retention that is consistent with the holding company's
capital needs, asset quality and overall financial condition. The FRB may
prohibit a bank holding company from paying any dividends if its bank subsidiary
is classified as "undercapitalized."

      The FRB has imposed certain restrictions regarding the waiving of dividend
payments by the Company to its mutual holding company parent. To date, the
mutual holding company has not waived any dividends paid by the Company. If, in
the future, the mutual holding company sought to waive dividends paid by the
Company and obtained the approval of the FRB to do so, the cumulative amount of
waived dividends would not be available for payment by the Company to minority
stockholders and would be maintained in a restricted capital account. While such
account would not have to be reflected in the Company's financial statements, it
would not be available for distribution to minority stockholders if the mutual
holding company parent decided to convert to stock form in the future.

      Limitations on Certain Capital Transactions. Under the Division's
regulations, the Company is prohibited from repurchasing any shares of its stock
within three years of its date of issuance unless the repurchase is limited to
(i) stock repurchases at amounts designated by the Commissioner where compelling
and valid business reasons are established to the satisfaction of the
Commissioner and (ii) stock repurchases in amounts up to the shares covered by
qualified employee stock benefit plans.

      Bank holding companies are required to give the FRB prior written notice
of any purchase or redemption of their outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
twelve months, is equal to 10% or more of their consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.

Federal Securities Law

      The common stock of the Company is registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.


                                     - 29 -
<PAGE>

Federal Reserve System

      The FRB requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At June 30,
2001, the Bank was in compliance with these reserve requirements. Savings banks
are authorized to borrow from the Federal Reserve Bank "discount window," but
FRB regulations require savings banks to exhaust other reasonable alternative
sources of funds, including FHLB borrowings, before borrowing from the Federal
Reserve Bank.

Community Reinvestment Act

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

      Massachusetts has its own statutory counterpart to the Community
Reinvestment Act which is also applicable to the Bank. The Massachusetts version
is generally similar to the Community Reinvestment Act but utilizes a
five-tiered descriptive rating system. Massachusetts law requires the
Commissioner to consider, but not be limited to, a bank's record of performance
under Massachusetts law in considering any application by the bank to establish
a branch or other deposit-taking facility, to relocate an office, or to merge or
consolidate with or acquire the assets and assume the liabilities of any other
banking institution. The Bank's most recent rating under the Massachusetts law
was "satisfactory."

Consumer Protection and Fair Lending Regulations

      The Bank is subject to a variety of federal and Massachusetts statutes and
regulations that are intended to protect consumers and prohibit discrimination
in the granting of credit. These statutes and regulations provide for a range of
sanctions for non-compliance, including imposition of administrative fines and
remedial orders, and referral to the Attorney General for prosecution of a civil
action for actual and punitive damages and injunctive relief. Certain of these
statutes authorize private individual and class action lawsuits and the award of
actual, statutory and punitive damages and attorneys' fees for certain types of
violations.

Federal Home Loan Bank System

      The Bank is a member of the FHLB of Boston, which is one of 12 regional
FHLBs that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB.

      As a member, the Bank is required to purchase and maintain stock in the
FHLB of Boston. At June 30, 2001, the Bank owned $1.6 million of FHLB stock. In
past years, the Bank has received dividends on its FHLB stock. The dividend
yield from FHLB stock was 6.25% for the year ended June 30, 2001. No assurance
can be given that such dividends will continue in the future at such levels.


                                     - 30 -
<PAGE>

      Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.

Federal Taxation

      General. The Mutual Company, the Company and the Bank are subject to
federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to these entities.

      Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
fiscal year ending June 30 for filing its consolidated federal income tax
returns.

      Bad Debt Reserves. The Bank is permitted to establish a reserve for bad
debts and to make annual additions to the reserve. These additions can, within
specified formula limits, be deducted in arriving at the Bank's taxable income.
In addition, the 1996 Act requires the recapture (over a six-year period) of the
excess of tax bad debt reserves accumulated after October 31, 1988. The amount
of such reserve subject to recapture by the Bank as of June 30, 2001 was
$63,000.

      Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to November 1, 1988 were subject to recapture into
taxable income should the Bank fail to meet certain thrift asset and
definitional tests. New federal legislation eliminated these thrift related
recapture rules. However, under current law, pre-1988 reserves remain subject to
recapture should the Bank make certain non-dividend distributions or cease to
maintain a bank charter. At June 30, 1996, the Bank's total federal pre-1988
reserve was $1.1 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made.

      Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.

      Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1996. At June 30, 2001, the Bank had no net
operating loss carryforwards for federal income tax purposes.

      Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Because the Mutual Company owns less than 80%
of the outstanding common stock of the Company, the Mutual Company is not
permitted to file a consolidated federal income tax return with the Company and
the Bank. The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated return, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf.


                                     - 31 -
<PAGE>

State Taxation

      Massachusetts State Taxation. For Massachusetts income tax purposes, a
consolidated tax return cannot be filed. Instead, the Company and each of its
subsidiaries file an annual income tax return. The Company and the Bank are
subject to an annual Massachusetts excise tax at a rate of 10.50% of their net
income for the year ended June 30, 2001. In addition, the Bank's two
wholly-owned subsidiaries are both securities corporations and, accordingly, are
subject to an excise tax at the rate of 1.32% of their gross income. For these
purposes, Massachusetts law defines "net income" as gross income from all
sources without any exclusions, less the following deductions: all deductions
(but not credits) which are allowable under the Code except for those deductions
under the Code relating to (1) dividends received, (2) losses sustained in other
taxable years and (3) taxes on or measured by income, franchise taxes for the
privilege of doing business and capital stock taxes imposed by any state of the
United States, the District of Columbia, the Commonwealth of Puerto Rico, any
territory or possession of the United States or any foreign country, or a
political subdivision of any of the foregoing. The Company and the Bank are not
permitted to carry their losses forward or back for Massachusetts tax purposes.
The Company may apply to the Massachusetts Department of Revenue to be
classified as a Massachusetts security corporation, if certain requirements are
met. Bank holding companies that are so classified are subject to a state tax
rate of 0.33% of gross income.

Environmental Issues

      The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on property securing their loans. In
addition, the existence of hazardous materials may make it unattractive for a
lender to foreclose on such properties. Although environmental risks are usually
associated with loans secured by commercial real estate, risks also may be
substantial for loans secured by residential real estate if environmental
contamination makes the property unsuitable for use. This could also have a
negative effect on nearby property values. The Bank attempts to control its risk
by requiring appropriate environmental assessments as part of its underwriting
of all non-residential real estate mortgage loans over $250,000.

      The Bank believes its procedures regarding the assessment of environmental
risk are adequate and, as of June 30, 2001, the Bank was unaware of any
environmental issues which would subject it to any material liability. However,
no assurance can be given that the values of properties securing loans in the
Bank's portfolio will not be adversely affected by unforeseen environmental
risks.

Employees

      As of June 30, 2001, the Bank had 89 full-time equivalent employees. The
employees are not represented by a collective bargaining unit, and the Bank
considers its relationship with its employees to be good.


                                     - 32 -
<PAGE>

ITEM 2. Description of Property.

      The following table sets forth certain information regarding the Company's
offices at June 30, 2001.

                                           Year       Leased/
                 Location                 Opened       Owned         Deposits
          ---------------------------   ----------   ---------    --------------
                                                                  (In Thousands)
          81 Main Street
          Medway, Massachusetts            1871       Owned           $58,437

          1098 Main Street
          Millis, Massachusetts            1962       Owned            31,436

          18 North Meadow Road
          Medfield, Massachusetts          1990      Leased            17,262

          1000 Franklin Village Drive
          Franklin, Massachusetts          1993      Leased            41,181

          281A East Central Street
          Franklin, Massachusetts          1997      Leased             9,575

          555 Plantation Street*
          Worcester, Massachusetts         2000      Leased               544

          267 Hartford Avenue
          Bellingham, Massachusetts        1999       Owned            12,221

          59 Main Street
          Hopkinton, Massachusetts         1999      Leased            11,449

          140 South Main Street
          Milford, Massachusetts           2000      Leased             8,033

          4 Forge Hill Road*
          Franklin, Massachusetts          1999      Leased             1,688

      ----------------------
      *Limited service branch at Senior Living Center

ITEM 3. Legal Proceedings.

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

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

      No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.

                                     PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters.

      The "Common Stock and Related Matters" section of the Company's Annual
Report to Stockholders is incorporated herein by reference.


                                     - 33 -
<PAGE>

ITEM 6. Management's Discussion and Analysis or Plan of Operations.

      The "Management's Discussion and Analysis of Financial Condition and
Results of Operation" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.

ITEM 7. Financial Statements.

      The financial statements are contained in the Company's Annual Report to
Stockholders and are incorporated herein by reference.

ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Disclosure.

      None.

                                    PART III

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

      The "Proposal 1--Election of Directors" section of the Company's
definitive Proxy Statement for the Company's 2001 Annual Meeting of Stockholders
(the "2001 Proxy Statement") is incorporated herein by reference.

ITEM 10. Executive Compensation.

      The "Proposal I--Election of Directors" section of the Company's 2001
Proxy Statement is incorporated herein by reference.

ITEM 11. Security Ownership of Certain Beneficial Owners and Management.

      The "Proposal I--Election of Directors" section of the Company's 2001
Proxy Statement is incorporated herein by reference.

ITEM 12. Certain Relationships and Related Transactions.

      The "Transactions with Certain Related Persons" section of the Company's
2001 Proxy Statement is incorporated herein by reference.

ITEM 13. Exhibits and Reports on Form 8-K.

      (a)   Exhibits

      3.1   Stock Holding Company Charter of Service Bancorp, Inc. (incorporated
            herein by reference to the Company's registration statement on SB-2,
            file No. 333-156851 (the "SB-2"))

      3.2   By-laws of Service Bancorp, Inc. (incorporated herein by reference
            to the Company's SB-2)

      4.    Form of Stock Certificate of Service Bancorp, Inc. (incorporated
            herein by reference to the Form SB-2)

      10.1  Deferred Compensation and Income Continuation Agreement
            (incorporated herein by reference to the Company's SB-2)

      10.2  Employee Stock Ownership Plan (incorporated herein by reference to
            the Company's SB-2)


                                     - 34 -
<PAGE>

      10.3  Supplemental Executive Retirement Plan (incorporated herein by
            reference to the Company's SB-2)

      13.   Annual Report to Stockholders

      21.   Subsidiaries of the Registrant

      23.   Consent of Wolf & Company, P.C.

      (b)   Reports on Form 8-K

      None.


                                     - 35 -
<PAGE>

SIGNATURES

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

Date: September 24, 2001                    SERVICE BANCORP, INC.


                                            By:   /s/  Pamela J. Montpelier
                                                  ------------------------------
                                                  Pamela J. Montpelier
                                                  President and Chief Executive
                                                  Officer

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.


By:   /s/  Pamela J. Montpelier             By:   /s/  Warren W. Chase, Jr.
      ----------------------------------          ------------------------------
      Pamela J. Montpelier                        Warren W. Chase, Jr.
      President, Chief Executive Officer          Senior Vice President and
      and Director (Principal Executive           Treasurer (Principal Financial
      Officer)                                    and Accounting Officer)

Date  September 24, 2001                    Date: September 24, 2001


By:   /s/ William L. Casey                  By:   /s/  Richard Giusti
      ----------------------------------          ------------------------------
      William L. Casey, Director                  Richard Giusti, Director
      (Chairman of the Board)

Date: September 24, 2001                    Date: September 24, 2001


By:   /s/ John Hasenjaeger                  By:   /s/ Thomas R. Howie
      ----------------------------------          ------------------------------
      John Hasenjaeger, Director                  Thomas R. Howie, Director

Date: September 24, 2001                    Date: September 24, 2001


By:   /s/ Kenneth C.A. Isaacs               By:   /s/ Paul V. Kenney
      ----------------------------------          ------------------------------
      Kenneth C.A. Isaacs, Director               Paul V. Kenney, Director

Date: September 24, 2001                    Date: September 24, 2001


By:   /s/ Eugene R. Liscombe                By:   /s/ Robert A. Matson
      ----------------------------------          ------------------------------
      Eugene R. Liscombe, Director                Robert A. Matson, Director

Date: September 24, 2001                    Date: September 23, 2001


                                     - 36 -
<PAGE>


By:   /s/ James W. Murphy                   By:   /s/ Lawrence E. Novick
      ----------------------------------          ------------------------------
      James W. Murphy, Director                   Lawrence E. Novick, Director

Date: September 24, 2001                    Date: September 24, 2001


By:   /s/ Eugene G. Stone                   By:   /s/ Kelly A. Verdolino
      ----------------------------------          ------------------------------
      Eugene G. Stone, Director                   Kelly A. Verdolino, Director

Date: September 24, 2001                    Date: September 24, 2001


                                     - 37 -