FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

For the fiscal year ended December 31, 1996
Commission file number 33-22807-B

                               PEMI BANCORP, INC.
                               ------------------
             (exact name of registrant as specified in its charter)

        New Hampshire                                    02-0386832
        -------------                                    ----------
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                        identification No.)

         287 Highland Street
       Plymouth, New Hampshire                              03264
       -----------------------                              -----
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code: (603) 536-3339

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

Title of each class                  Name of each exchange on which registered
None                                 None
-------------------                  -----------------------------------------

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

                                      None
                                ---------------
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (ss.  229.405 of this chapter) is not contained  herein,  and
will not 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-K or any amendment to this Form 10-K. [X] - Not Applicable.

The  aggregate  market value of the common stock held by  non-affiliates  of the
registrant  was  approximately  $7,483,374  on February 28, 1997.  On that date,
554,324 shares of common stock were held by non-affiliates of the registrant.

On March 7, 1997, 690,401 shares of common stock were issued and outstanding.

<PAGE>

                                TABLE OF CONTENTS
Part I
         Item 1 - Business
         Item 2 - Properties
         Item 3 - Legal Proceedings
         Item 4 - Submission of Matters to a Vote of
                    Security Holders

Part II
         Item 5 - Market for Registrant's Common Stock
                    and Related Security Holder Matters
         Item 6 - Selected Financial Data
         Item 7 - Management's Discussion and Analysis
                    of Financial Condition and Results
                    of Operations
         Item 8 - Financial Statements and Supplementary
                    Data
         Item 9 - Changes in and Disagreements with
                    Accountants on Accounting and
                    Financial Disclosure

Part III
         Item 10 - Directors and Executive Officers
                     of the Registrant
         Item 11 - Executive Compensation
         Item 12 - Security Ownership of Certain
                     Beneficial Owners and Management
         Item 13 - Certain Relationships and
                     Related Transactions

Part IV
         Item 14 - Exhibits, Financial Statement
                     Schedules, and Reports on Form 8-K

Signatures

<PAGE>

                             BUSINESS OF THE COMPANY
THE COMPANY

         The Company was  organized in March of 1985 for the purpose of becoming
a bank holding  company,  to own and control one hundred  percent  (100%) of the
stock of Pemigewasset National Bank (the "Bank"). The Company's primary asset is
the stock of the Bank and the Company's  primary  activity is in connection with
the operation of the Bank.

THE BANK

         The Bank is a national banking association  organized under the laws of
the  United  States  in 1881.  The  Bank has  served  the  banking  needs of the
Plymouth,  New Hampshire  community  since its  organization.  The Bank has paid
dividends in each year since 1882. The Bank operates out of five locations:  The
Downtown  Plymouth  office which was  constructed in 1955 and served as the Main
Office  until June 1990;  the  Campton  office,  constructed  in 1975;  the West
Plymouth office,  constructed in 1979; the Ashland office,  constructed in 1987;
and the North  Woodstock  office,  opened in 1993.  In 1990,  the West  Plymouth
office was  refurbished  with 16,000 sq. ft. of working space being added to the
facility.  This  location  became the Main  Office in June  1990.  The Bank also
expects to open a branch  facility  within the Plymouth  Regional High School in
September 1997. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation in accordance with the Federal Deposit Insurance Act.

         The Bank provides  loans and services to  individuals  and  businesses,
including commercial, industrial, consumer and real estate loans.

         The  Bank  offers  various  types  of  checking   accounts,   including
commercial  accounts,  personal  checking  accounts,  and money market accounts.
Various types of savings accounts, individual retirement accounts,  certificates
of deposit and other time deposit accounts are also offered.

         The  Bank  makes  consumer  loans,  including  automobile,   education,
equipment and home  improvement  loans. In addition to consumer loans,  the Bank
extends secured and unsecured business and personal loans, as well as mortgages,
on commercial and residential real estate.

EMPLOYEES

         As of December 31, 1996 there were 73 full and 4 part-time employees of
the  Company  and the Bank.  The  employees  of the Company and the Bank are not
represented by any collective  bargaining unit. Relations between management and
employees are considered to be good.

<PAGE>

                                       -2-
LOCATION

         The  Bank is  located  in  Grafton  County,  Plymouth,  New  Hampshire.
Plymouth is located almost directly in the center of the State of New Hampshire.
The Bank is adjacent to the White  Mountains,  and the Lakes  Region.  The White
Mountain  National  Forest (one of the most popular  public  forest areas in the
United States),  Waterville Valley, Cannon Mountain, Loon Mountain, and Gunstock
Mountain are also located nearby. Because of its location, vacationers are drawn
to the  Plymouth  area  on a year  round  basis.  Skiing  continues  to  attract
individuals  to the  Plymouth  area in the  winter,  while  area  lakes  attract
potential  business  opportunities  for  the  Bank to the  Plymouth  area in the
summer.  Plymouth is also the home of Plymouth  State  College,  a New Hampshire
State college with an enrollment of  approximately  4,000  students.  Interstate
I-93, a major  interstate  highway running north and south from Plymouth and the
Tenney Mountain  Highway,  the major highway leading west from Plymouth,  offers
sites    to    attract    new    businesses.     Toward    the    north,     the
Campton-Thornton-Waterville Valley areas are the site of housing and condominium
projects.  Although  business in the Bank's  market area,  and New  Hampshire in
general,  was  strong  during  the  1980s,  during  the  early  1990's  the area
experienced  a slowdown  in  economic  activity.  The  economic  slowdown  had a
negative  effect on the  economy  and the  business of the Company and the Bank.
More recently, regional and local economic conditions appear to have stabilized.

COMPETITION

         The Bank encounters competition in all phases of its business.  Several
competitive financial  institutions have offices in the Plymouth,  New Hampshire
banking market,  including Bank of New Hampshire,  Fleet Bank,  Meredith Village
Savings  Bank,  Franklin  Savings  Bank and  Citizens  Bank.  A number  of these
institutions  have higher lending limits and greater resources than the Bank and
provide certain services that the Bank does not provide.  In addition,  the Bank
faces  competition from a savings bank in Plymouth,  Community  Guaranty Savings
Bank, which commenced operations in May, 1988.

         Based on information published by the Federal Reserve Bank of Boston in
June 1995,  the Plymouth,  New Hampshire  banking  market  consists of seven (7)
commercial  and savings  banks with a total of eleven (11) banking  offices.  As
reflected  in said  report,  the Company  has a 41.32  percent  market  share of
deposits in the market.

<PAGE>

                                       -3-

                             PLYMOUTH, NEW HAMPSHIRE
                       ALL INSTITUTIONS, BY TOTAL DEPOSITS

                                                        Number of     Percent
                                                         Banking      of Total
                                                         Offices      Deposits
                                                         -------      --------
1.  Pemi Bancorp, Inc., Plymouth.........                   5          41.32%
    (Pemigewasset National Bank of
    Plymouth)
2.  Royal Bank of Scotland PLC, Edinburgh                   1          13.95%
    (First NH Bank)
3.  Meredith Village Savings Bank........                   1          10.70%
4.  Bank of New Hampshire Corp.,
    Manchester...........................                   1          10.44%
5.  Community Guaranty Savings Bank......                   1          10.01%
6.  Franklin Savings Bank................                   1           8.89%
7.  Fleet Financial Group, Providence.....                  1           4.69%
    (Fleet Bank-NH)                                       ---         -------
All Commercial Banking and Thrift                          11         100.00%
Organizations

NOTE: The table is based on June 30, 1995 deposit  data and reflects all mergers
      and  bank  holding  company  acquisitions  completed  by June  30, 1996 as
      published by the Federal Reserve Bank of Boston.

          Banks compete on the basis of price,  including rates paid on deposits
and charged on borrowings,  convenience and quality of service. Savings and loan
associations  are able to  compete  aggressively  with  commercial  banks in the
important area of consumer  lending.  Credit unions and small loan companies are
each significant factors in the consumer market. Insurance companies, investment
firms, credit and mortgage companies, brokerage firms, cash management accounts,
money-market  funds and retailers are all  significant  competitors  for various
types of business.  Many non-bank  competitors  are not subject to the extensive
regulation  described  below under "BUSINESS OF THE COMPANY" and thus in certain
respects  may have a  competitive  advantage  over  banks in  providing  certain
services.

         In  marketing  its  services,  the Bank  emphasizes  its  position as a
hometown bank with personal  service,  continuity of personnel,  flexibility and
prompt responsiveness to the needs of its customers. Moreover, the Bank competes
for both  deposits  and loans by offering  competitive  rates,  well  positioned
branch and ATM locations and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the NYCE, CIRRUS and Mastercard automatic teller machine networks which allow
the Bank to deliver certain financial services to customers  regardless of their
proximity to the primary service area of the Bank.

<PAGE>
                                       -4-

RECENT DEVELOPMENTS

          During 1996,  the Bank purchased  certain  assets and assumed  certain
deposits from First NH's branch office on U.S. Route 49, Campton, New Hampshire.
The purchase was approved by the Office of the  Comptroller  of the Currency and
was   consummated  in  April,   1996.  The   transaction  did  not  involve  the
establishment  of a new branch by the Bank,  because  the Bank and First NH Bank
shared the Campton  facility  since 1975. The Bank continues to operate a branch
at the same location. As a result of the transaction, there was no change in the
Community   Reinvestment   Act  Statement  of  the  Bank,   which   received  an
"outstanding"  Community  Reinvestment Act Compliance  rating from the Office of
the Comptroller of Currency at its most recent examination.

          On March 14, 1997,  the Boards of Directors of the Company,  the Bank,
The  Berlin  City  Bank,  a New  Hampshire  chartered  commercial  bank with its
principal  place of business in Berlin,  New Hampshire  and Northway  Financial,
Inc., a New Hampshire  corporation,  which is being formed by Berlin to become a
multi-bank  holding  company  for  Berlin and the Bank,  executed  a  definitive
agreement and plan of merger. The financial information reflected in this Annual
Report does not take into  account the  potential  effects of such  transaction.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Other Matters").

SUPERVISION AND REGULATION

         The earnings of the Bank and,  therefore,  the earnings of the Company,
are affected not only by general economic conditions, both domestic and foreign,
but also by the policies of the Federal  Government and regulatory  authorities,
including  the  Federal  Reserve  Board,  the Office of the  Comptroller  of the
Currency and the Federal  Deposit  Insurance  Corporation.  The Federal  Reserve
Board  influences  conditions  in the money and capital  markets,  which  affect
interest rates and the growth in bank credit and deposits. Federal Reserve Board
monetary  policies  have  had a  significant  effect  on  operating  results  of
commercial  banks in the  past  and are  expected  to  continue  to do so in the
future.  The Company cannot  accurately  predict changes in such policies or the
effect such policies may have on the Bank's future  business and earnings.  Bank
earnings are heavily  dependent on both the change in loan volume and the margin
between the lending rate and the cost of bank funds.

          As a bank holding  company  registered with the Federal Reserve Board,
the Company is required to file periodic reports and such additional information
as the Federal  Reserve Board may require  pursuant to the Bank Holding  Company
Act of 1956, as amended. The Federal Reserve Board also conducts examinations of
the Company.

<PAGE>
                                       -5-

          The Bank Holding Company Act of 1956, as amended,  generally  requires
every bank holding  company to obtain the prior approval of the Federal  Reserve
Board before acquiring direct or indirect ownership or control of more than five
percent (5%) of the voting shares of any bank.  However,  no acquisition  may be
approved if it is prohibited by applicable state law.

          The Bank  Holding  Company  Act of 1956,  as amended,  also  generally
prohibits a bank  holding  company,  with  certain  exceptions,  from  acquiring
control  of any other  company  and from  engaging  in any  business  other than
banking or activities which are not incidental to managing or controlling  banks
without the prior  approval of the Federal  Reserve Board.  The Federal  Reserve
Board is authorized to approve, among other things, the ownership of shares by a
bank holding  company in any company the activities of which the Federal Reserve
Board has  determined  to be so  closely  related  to  banking  or  managing  or
controlling  banks  as  to  be  a  proper  incident  thereto.   In  making  such
determination,  the Federal  Reserve  Board is  required  to weigh the  expected
benefit to the public, such as greater convenience,  increased  competition,  or
gains in  efficiency,  against the risks of possible  adverse  effects,  such as
undue concentration of resources, decreased or unfair competition,  conflicts or
unsound banking practices.

          In addition,  federal legislation prohibits the acquisition of control
of a bank or bank holding  company  without prior notice to appropriate  federal
bank regulatory agencies.

          The Bank is a national banking association,  organized pursuant to the
provisions of the National Bank Act. As such, its primary  regulatory  authority
is the Comptroller of the Currency of the United States (the "Comptroller"). The
Comptroller regularly examines national banks and their operations. In addition,
operations of national  banks are subject to federal  statutes and  regulations.
Such statutes and regulations relate to required reserves,  investments,  loans,
mergers, payment of dividends,  issuance of securities and many other aspects of
operations.

         With respect to the ability of a national  bank to pay  dividends,  the
Comptroller's approval is required if the total dividends declared by a national
bank in any year will exceed the total of its net profits for that year combined
with its retained  net profits for the  preceding  two years,  less any required
transfer to surplus.  The Comptroller  also has authority to prohibit a national
bank from engaging in unsafe or unsound  practices in conducting the business of
the Bank.

          The Bank is also subject to applicable provisions of New Hampshire law
insofar as they do not conflict with or are not  otherwise  preempted by federal
banking law.

<PAGE>
                                       -6-

          The banking industry in the United States,  which includes  commercial
banks,  savings and loan  associations,  mutual  savings  banks,  capital  stock
savings banks,  credit unions,  and bank and savings and holding  companies,  is
part  of the  broader  financial  services  industry  which  includes  insurance
companies,  mutual funds, and the brokerage industry.  In recent years,  intense
market demands and economic  pressures have eroded once clearly defined industry
classifications and have forced the financial services institutions to diversify
their services,  increase returns on deposits, and become more cost effective as
a result  of  competition  with one  another  and  with new  types of  financial
services companies, including non-bank competitors.

          The present bank regulatory scheme is undergoing  significant  change,
both as it affects the  banking  industry  itself and as it affects  competition
between banks and non-bank  financial  institutions.  There has been significant
regulatory change in the bank merger and acquisitions  area, in the products and
services  banks can  offer,  and in the  non-banking  activities  in which  bank
holding  companies can engage.  Banks are now actively  competing  with non-bank
financial institutions for products such as money market funds.

          Federal banking laws now permit  adequately  capitalized  bank holding
companies to venture across state lines to offer banking  services  through bank
subsidiaries to a wider geographic  market.  In light of this change in the law,
it is possible for large  organizations to enter many new markets  including the
market served by the Bank. Certain of these competitors, by virtue of their size
and resources,  may enjoy certain  efficiencies and competitive  advantages over
the Bank in the pricing, delivery, and marketing of their products and services.
It is not possible to assess what impact these changes in the regulatory  scheme
will have on the Company or the Bank.

STATISTICAL INFORMATION

          The  following  supplementary   information  required  under  Guide  3
(Statistical Disclosure by Bank Holding Companies) should be read in conjunction
with the related financial statements and notes thereto which are a part of this
report.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY;
   INTEREST RATES AND INTEREST DIFFERENTIAL

          The following  tables present the condensed  average balance sheets as
of  December  31 of each of the  years  indicated.  The total  dollar  amount of
interest income from earning assets and the resultant yields are calculated on a
taxable  equivalent  basis. The interest paid on interest  bearing  liabilities,
expressed both in dollars and rates, is also shown in the tables:

<PAGE>



                                      -7-
<TABLE>
<CAPTION>



                               PEMI BANCORP, INC.

                      YIELDS EARNED AND RATES PAID SCHEDULE
  
                                           Period Ended December 31, 1996                     Period Ended December 31, 1995  
                                    -------------------------------------------        -------------------------------------------
                                    Average                               Yield/         Average                            Yield/ 
                                    Balance                Interest        Rate          Balance             Interest        Rate  
                                   ---------              ---------      -------       -----------          ---------      ------  
<S>                                <C>                   <C>                <C>         <C>               <C>                <C>   
Interest earning assets:
  Interest bearing
  deposits                        $                      $                              $    11,471       $       683        5.95% 
  Federal funds sold                 1,384,863               76,596         5.53%         2,263,151           127,364        5.63  
  Taxable investment
    securities                      25,156,002            1,616,581         6.43         17,261,405         1,093,942        6.34  
  Tax-exempt investment
    securities                       4,537,938              377,979         8.33          2,557,887           239,064        9.35  
  Loans (net of unearned
  income)(2)(3)                     84,284,021            8,306,188         9.85         84,357,156         8,189,866        9.71  
                                   -----------           ----------                    ------------         ---------              
      Total interest
        earning assets             115,362,824           10,377,344         9.00        106,451,070         9,650,919        9.07  
                                                         ----------                                         ---------              
Non-interest earning
 assets                              9,495,505                                            8,970,001                                
                                  ------------                                         ------------                                
      Total assets                $124,858,329                                         $115,421,071                                
                                  ============                                         ============                                

Interest bearing
 liabilities:
  Now and Money Market            $ 27,793,406              587,491         2.11       $ 28,301,004           626,646       2.21   
  Savings deposit                   15,337,440              394,099         2.57         13,677,079           365,854       2.67   
  Time $100,000 and over             5,191,984              308,670         5.95          4,167,647           234,681       5.63   
  Other time                        39,439,407            2,342,180         5.94         33,678,596         1,852,138       5.50   
  Short-term borrowings              7,499,657              436,240         5.82          7,201,797           451,440       6.27   
  Long-term borrowings               1,348,105               85,006         6.31          3,014,813           162,468       5.39   
                                   -----------            ---------                    ------------         ---------              
       Total interest
       bearing                      96,609,999            4,153,686         4.30         90,040,936         3,693,227       4.10   
       liabilities                 -----------            ---------                    ------------         ---------              
</TABLE>


                                           Period Ended December 31, 1994
                                    -------------------------------------------
                                      Average                            Yield/
                                      Balance           Interest(1)       Rate
                                    ----------         ------------     ------
 
Interest earning assets:
  Interest bearing
  deposits                        $     23,407          $      863         3.69
  Federal funds sold                   922,192              34,206         3.71
  Taxable investment
    securities                      18,954,061           1,138,808         6.01
  Tax-exempt investment
    securities                       2,558,120             242,877         9.49
  Loans (net of unearned
  income)(2)(3)                     83,666,752           7,254,678         8.67
                                  ------------          ----------
      Total interest
        earning assets             106,124,532           8,671,432         8.17
                                                        ----------
Non-interest earning
 assets                              9,265,614
                                  ------------
      Total assets                $115,390,146
                                  ============

Interest bearing
 liabilities:
  Now and Money Market            $ 32,797,203             712,397         2.17
  Savings deposit                   14,669,681             361,663         2.47
  Time $100,000 and over             3,979,398             182,893         4.60
  Other time                        30,556,971           1,371,466         4.49
  Short-term borrowings                962,416              47,363         4.92
  Long-term borrowings               7,604,542             376,319         4.95
                                   -----------           ---------
       Total interest
       bearing                      90,570,211           3,052,101         3.37
       liabilities                 -----------           ---------

<PAGE>

                                                       -8-

<TABLE>
<CAPTION>

<S>                                <C>                   <C>                <C>         <C>               <C>                <C> 
  Non-interest bearing
  liabilities:
    Demand deposits                 14,366,249                                           12,664,966                               
    Other                            2,024,270                                            1,591,422                               
                                  ------------                                         ------------                               
     Total non-interest
     bearing liabilities            16,390,519                                           14,256,388                               
                                  ------------                                         ------------                               
    Stockholders' equity            11,857,811                                           11,123,747                               
                                  ------------                                         ------------                               
     Total liabilities
     and stockholders'
     equity                       $124,858,329                                         $115,421,071                               
                                  ============                                         ============                               
Net interest income/
 interest rate margin                                   $6,223,658         4.70                           $ 5,957,692       4.97  
                                                        ==========                                        ===========             

Earning balance/
 net yield on interest
 earning assets                   $ 18,752,825                             5.39        $ 16,410,134                         5.60  
                                  ============                                         ============                               
</TABLE>


 Non-interest bearing
  liabilities:
    Demand deposits                 12,891,149
    Other                            1,500,588
                                  ------------
     Total non-interest
     bearing liabilities            14,391,737
                                  ------------
    Stockholders' equity            10,428,198
                                  ------------
     Total liabilities
     and stockholders'
     equity                       $115,390,146
                                  ============
Net interest income/
 interest rate margin                                   $5,619,331         4.80
                                                        ==========

Earning balance/
 net yield on interest
 earning assets                   $ 15,554,321                             5.30
                                  ============

(1)  Tax effect  increases in interest  income on municipal loans and securities
     were  $177,594  for 1996,  $148,105  for 1995 and  $147,446  for 1994.  The
     federal  tax rate of 34% was used for the three years  ended  December  31,
     1996.

(2)  Included  in  interest on loans are loan fees which  totaled  $319,841  for
     1996, $199,164 for 1995 and $202,900 for 1994.

(3)  Includes nonaccruing loan balances and interest received on such loans.


<PAGE>



                                       -9-


CHANGE IN NET INTEREST INCOME

          The following table shows,  for each period  indicated,  the effect on
net interest  income of volume and rate changes.  The combined effect of changes
in both volume and rate which cannot be separately identified has been allocated
proportionately to the change due to volume and the change due to rate.

<TABLE>



                                     1996 as compared to 1995                      1995 as compared to 1994
                                        Due to a change in                             Due to a change in
                              --------------------------------------         -------------------------------------
                              Volume            Rate           Total         Volume           Rate           Total
                              ------            ----           -----         ------           ----           -----
<S>                         <C>             <C>              <C>           <C>              <C>            <C> 
Interest and
dividend income:
  Interest bearing     
  deposits                  $   (683)       $               $   (683)      $    (562)       $   382        $   (180)
  Federal funds sold         (48,546)         (2,222)        (50,768)         68,706         24,452          93,158
  Taxable investment
  securities                 506,906          15,733         522,639        (105,249)        60,383         (44,866)
  Tax-exempt
  investment
  securities                 167,491         (28,576)        138,915             (23)         (3,790)        (3,813)
  Loans (net of
  earned income)              (6,799)        123,121         116,322          60,192         874,996        935,188
                            --------        --------        --------       ---------        --------       --------
    Total interest
    and dividend
    income                   618,369         108,056         726,425          23,064         956,423        979,487
                            --------        --------        --------       ---------        --------       --------
Interest and
dividend expense:
  Now and money
  market                     (11,115)        (28,040)        (39,155)        (98,716)         12,965        (85,751)
  Regular savings             42,490         (14,245)         28,245         (24,804)         28,995          4,191
  Time deposits,
  $100,000 and over           60,093          13,896          73,989           9,032          42,756         51,788
  Other time                 333,886         156,156         490,042         150,119         330,553        480,672
  Short-term
  borrowings                  18,139         (33,339)        (15,200)        387,669          16,408        404,077
  Long-term
  borrowings                (101,574)         24,112         (77,462)       (244,728)         30,877       (213,851)
                            --------        --------        --------       ---------        --------       --------
    Total interest
    and dividend
    expense                  341,919         118,540         460,459         178,572         462,554        641,126
                            --------        --------        --------       ---------        --------       --------
Net interest income         $276,450        $(10,484)       $265,966       $(155,508)       $493,869       $338,361
                            ========        ========        ========       =========        ========       ========
</TABLE>


<PAGE>

                                      -10-

INVESTMENT PORTFOLIO

          As of December 31, 1993,  the Company  adopted  Statement of Financial
Accounting  Standard No. 115 (SFAS 115),  "Accounting for Certain Investments in
Debt  and  Equity  Securities".  SFAS 115  provides  for the  categorization  of
investments  into three  groups and  further  provides  for the  accounting  and
reporting   treatment  of  each  group.   Investments   may  be   classified  as
held-to-maturity,  available-for-sale, or trading. The Company does not purchase
or hold any investment  securities for the purpose of trading such  investments.
The following table sets forth the carrying amounts of the Company's  investment
securities as of December 31, 1996 and 1995:


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

Investments available-for-sale
  (at market):

     U.S. Treasury Securities and                 $  2,489,922      $1,011,563
       obligations of government
       corporation and agencies
     Obligations of states and
       political subdivisions                        3,259,182       2,055,546

Mortgage-backed Securities                          12,707,554       5,046,368
                                                   -----------      ----------
   Total........................                   $18,456,658      $8,113,477
                                                   ===========      ==========



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


Investments held-to-maturity (at amortized cost):

          U.S. Treasury Securities and              $  500,528     $ 1,301,634
            obligations of government
            corporation and agencies
          Obligations of states and
            political subdivisions                   1,531,166       1,717,256
 
Mortgage-backed Securities                           9,943,442      11,980,920
                                                   -----------     -----------

   Total.....................                      $11,975,136     $14,999,810
                                                   ===========     ===========

Federal Reserve Bank Stock                         $    80,250     $    80,250
Federal Home Loan Bank Stock                       $   739,600     $   739,600


<PAGE>

                                      -11-


The following  table sets forth the  maturities  of investment  securities as of
December 31, 1996 and the weighted average yields of such securities (calculated
on the  basis  of the cost  and  effective  yields  weighted  for the  scheduled
maturity of each security).  Various securities included below are redeemable at
various  times.  Fully  taxable   equivalent   adjustments  have  been  made  in
calculating  yields on  obligations  of states and political  subdivisions.  For
securities with variable or adjustable  interest rates, the rate in effect as of
December 31, 1996 was used for this schedule.


<TABLE>
<CAPTION>

                       Under                   1-5                 5-10              Over 10
                      1 Year        Yield     Years       Yield    Years    Yield     Years      Yield     Total        Yield
                      ------        -----     -----       -----    -----    -----     -----      -----     -----        -----
<S>                   <C>            <C>   <C>            <C>   <C>          <C>   <C>            <C>   <C>              <C> 
Held-to-maturity
   securities
U.S. Treasury
 securities and
 obligations of
 U.S. government
 corporations and
 agencies            $  500,528      6.74%  $                %  $               %   $                   $   500,528      6.74%
Obligations of
 states and
 political
 subdivisions           160,466      6.73   1,370,700     6.72                                            1,531,166      6.72
Mortgage-backed
 securities             139,181      8.93     985,380     7.87   4,438,222   6.69   4,380,659     6.99    9,943,442      6.93
                     ----------            ----------           ----------         ----------           -----------
Total                 $ 800,175      7.21  $2,356,080     7.25  $4,438,222   6.69  $4,380,659     6.99  $11,975,136      6.92
                      =========            ==========           ==========         ==========           ===========     
                      


Available-for-sale
  securities
U.S. Treasury
 securities and
 obligations of
 U.S. government
 corporations and
 agencies             $ 501,247      6.86% $1,987,694     6.52%  $             %   $                 %   $2,488,941      6.53%
Obligation of
 states and political
 subdivisions                                 171,690     7.16     834,274   5.41   2,213,027     5.33    3,218,991      5.37

Mortgage-backed
 securities             170,038      6.11     545,540     7.63   2,055,462   6.61  10,013,040     6.89   12,784,080      6.88
                     ----------            ----------           ----------        -----------           -----------
   Total
                      $ 671,285      6.50  $2,704,924     6.80  $2,889,736   6.26 $12,226,067     6.63  $18,492,012      6.60
                     ==========            ==========           ==========        ===========           ===========
Total portfolio *    $1,471,460      6.96  $5,061,004     6.98  $7,327,958   6.54 $16,606,726     6.74  $30,467,148      6.72
                     ==========            ==========           ==========        ===========           ===========
</TABLE>


* Does not include  Federal Home Loan Bank stock and Federal  Reserve Bank stock
with carrying amounts of $739,600 and $80,250, respectively.


LOAN PORTFOLIO

          Four  areas  in  which  the  Bank  has  directed  most of its  lending
activities are (i) commercial and commercial real estate loans, (ii) residential
real estate  loans,  (iii)  municipal  loans,  and (iv)  consumer  loans.  As of
December 31, 1996,  these four categories  accounted for  approximately  30.32%,
60.15%, 1.05% and 8.41% respectively, of the Bank's loan portfolio.

          The following  table  summarizes the  distribution  of the Bank's loan
portfolio as of December 31 of each of the years indicated:


<PAGE>

                                      -12-

                                                       (In Thousands)
   
                                               1996                    1995
                                               ----                    ----
Commercial and
Commercial Real Estate                       $26,841                  $24,431
Residential Real Estate                       53,243                   50,127
Municipal                                        931                    1,054
Consumer                                       7,441                    6,081
Other Loans                                       60                       16
                                             -------                  -------
  Total*                                     $88,516                  $81,709
                                             =======                  =======


*    Before  unearned  income and allowance for possible loan losses.  Loans are
     not categorized according to the same criteria used in the annual report.

         Loan maturities for commercial,  real estate,  municipal,  and consumer
loans at December 31, 1996 were as follows:

                                        Maturities (In Thousands)
                        -------------------------------------------------------
                        Within         One to          Over Five
                       One Year      Five  Years         Years          Total
                       --------      -----------         -----          -----
Commercial
and Commercial
Real Estate.            $2,623        $ 5,775          $18,443         $26,841
Residential
Real Estate.               758            907           51,578          53,243
Municipal...               568            107              256             931
Consumer....               695          6,684               62           7,441
Other.......                60              0                0              60
                        ------        -------          -------         -------
  Total*                $4,704        $13,473          $70,339         $88,516
                        ======        =======          =======         =======


         Loan  maturities  for  variable and fixed rate loans with a maturity of
greater than one year at December 31, 1996 were as follows before  allowance for
possible loan losses and unearned income:

                                           Maturities (In Thousands)
                                          ---------------------------
                                             One to         Over Five
                                          Five Years          Years
                                          ----------          -----
Variable rate                               $ 4,267          $53,745
Fixed rate                                    9,206           16,594
                                            -------          -------
  Total*                                    $13,473          $70,339
                                            =======          =======

*    The figures used in the maturity  analysis  also include  loans  subject to
     interest rate adjustment within the specified time categories.

<PAGE>



                                      -13-


NONACCRUAL AND PAST DUE LOANS

         It is the policy of the Bank to discontinue  the accrual of interest on
loans when, in management's  judgment,  the collection of the full amount of the
loan is  doubtful.  This will  generally  occur once the loan has become 90 days
past due, unless the loan is well secured and in the process of collection.  The
following  table sets forth  information  on nonaccrual and past due loans as of
December 31 for each of the years indicated:


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

Loans on nonaccrual                      $530,784           $495,705

Loans past due 90 days or
 more and still accruing                   87,141             45,598
                                         --------           --------

  Total                                  $617,925           $541,303
                                         ========           ========


         The  amount  of  interest  income  recorded  during  1996  and  1995 on
nonaccrual  loans  outstanding at December 31, 1996 and 1995 amounted to $49,312
and $22,470,  respectively.  Had these loans  performed in accordance with their
original terms, the amount recorded would have been $114,920 and $70,303 in 1996
and 1995, respectively.

         Total loans not included above which are "troubled debt restructurings"
as defined in Statement of Financial Accounting Standards No. 15, "Accounting by
Debtors and  Creditors  for Troubled Debt  Restructuring"  is $260,943.  If such
restructured loans had been current in accordance with their original terms, the
gross  interest  income that would have been recorded in the year ended December
31,  1996  would  have  been  $27,078.  The  amount of  interest  income on such
restructured  loans  included in net income for the year ended December 31, 1996
was $22,901.

         Loans past due 90 days or more still  accruing  interest as of December
31, 1996 consisted  primarily of first mortgage loans which are currently in the
process of  collection  and as to which  management  believes  there is adequate
security.

         The  difference  between  gross  interest  income  that would have been
reported for the fiscal year ended  December 31, 1996 had the  nonaccrual  loans
above been current,  and interest income on these loans that was included in net
income, is $65,608.

<PAGE>

                                      -14-


SUMMARY OF LOAN LOSS EXPERIENCE

         The following table summarizes historical data of the Bank with respect
to loans outstanding,  loan losses and recoveries,  and changes in the allowance
for possible loan losses:

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

Allowance for possible loan losses,
 beginning of period                           $1,359,979           $1,566,919
                                               ----------           ----------
Charge offs:
  Real estate-mortgage loans                     (103,600)            (172,612)
  Real estate commercial/
  industrial loans                               (105,500)            (177,280)
  Loans to individuals                           ( 31,601)            ( 24,514)
                                               ----------          -----------

                                                 (240,701)            (374,406)
                                               ----------          -----------


Recoveries:
  Real estate-mortgage loans                      10,494               23,563

  Real estate
  Commercial/industrial loans                     10,906               29,547

  Loans to individuals                            13,626                1,856
                                               ---------           ----------

                                                  35,026               54,966
                                               ---------           ----------

Net charge offs                                 (205,675)            (319,440)
                                               ---------           ----------

Provision for loan losses                        152,000              112,500
                                               ---------           ----------


Allowance for possible loan
 losses, end of period                        $1,306,304           $1,359,979
                                              ==========           ==========

Ratio of net charge offs to
 average loans                                      .24%                 .38%

Ratio of allowance for loan
 losses to year-end loans                          1.48%                1.66%

         The provisions to the allowance for possible loan losses are sufficient
to maintain  the  allowance at a level which in the  judgment of  management  is
adequate to absorb any potential loss in existing loans.

<PAGE>



                                      -15-


         The  following  table  reflects the  allocation  of the  allowance  for
possible loan losses and the percent (based on loan  portfolio  schedule on page
12) of loans in each category of total  outstanding  loans as of December 31 for
each of the years indicated:

                                   1996                          1995
                                   ----                          ----
                           Amount        Percent        Amount         Percent
Residential Real
Estate                   $  473,431       60.15%       $  486,327       61.35%
Commercial and
Commercial Real Estate      793,789       30.32%          824,329       29.90%
Consumer                     37,516        8.41%           46,481        7.44%
Municipal                     1,568        1.05%            2,842        1.29%
Other Loans                       0         .07%                0         .02%
                         ----------      -------       ----------      -------
  Total                  $1,306,304      100.00%       $1,359,979      100.00%
                         ==========      =======       ==========      =======


         The provisions to the allowance for possible loan losses are charged to
operating expenses and are based on past experience, current economic conditions
and  management's  judgment of the amount  necessary to cover possible losses on
the collection of loans.  The Bank records  provisions for estimated loan losses
which are charged against earnings in the period they are established.

DEPOSITS

         Most of the Bank's  deposits have been obtained  from  individuals  and
from small and medium-sized businesses.  In addition, the Bank attracts deposits
from  municipalities  and other  governmental  agencies.  Customer  deposits are
insured by the Federal Deposit Insurance Corporation, up to applicable limits.

         As of December 31, 1996, the Bank had a total of $16,116,453  in demand
deposit  accounts  and  $89,568,915  in NOW and money  market,  time and savings
deposit  accounts for  individuals,  corporations  and other entities.  Of total
deposits of  $105,685,368,  eighty-five  percent (85%) were in interest  bearing
categories and fifteen percent (15%) were in non-interest bearing categories.


<PAGE>

                                      -16-


         The  following  table shows the average  deposits and average  interest
rate paid for the last two years:

                              Year Ended                     Year Ended
                         December 31, 1996                December 31, 1995
                       ----------------------         -----------------------
                          Average     Yield/            Average        Yield/
                          Balance      Rate             Balance         Rate
                       ------------   ------          -----------      ------
Demand deposits        $ 14,366,249      0%           $12,664,966         0%
NOW and Money Market
  Accounts               27,793,406   2.11%            28,301,004      2.21%
Savings                  15,337,440   2.57%            13,677,079      2.67%
Time, $100,000 and over   5,191,984   5.95%             4,167,647      5.63%
Other time deposits      39,439,407   5.94%            33,678,596      5.50%
                       ------------                   -----------
    Total              $102,128,486                   $92,489,292
                       ============                   ===========

         As of  December  31,  1996,  the Bank had time  deposits  in amounts of
$100,000 or more aggregating $5,392,466. These certificates of deposit mature as
follows:

         Maturity                                          Amount
         --------                                          ------
3 months or less                                         $1,338,677
Over 3 months through 6 months                            1,147,289
Over 6 months through 12 months                             601,321
Over 12 months                                            2,305,179
                                                         ----------
   Total                                                 $5,392,466
                                                         ==========

RETURN ON EQUITY AND ASSETS

         The following  summarizes  various  operating ratios of the Company for
the last two years:

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

Return on average total assets
(net income divided by average
total assets)                          1.02%                  1.10%

Return on average stockholders'
equity (net income divided
by average stockholders' equity)      10.77%                 11.46%

Dividend payout ratio (dividends
declared per share divided by
net income per share)                 35.13%                 27.07%

Equity to assets ratio (average
stockholders' equity divided by
average total assets)                 9.50%                  9.64%

<PAGE>

                                      -17-

SHORT-TERM BORROWINGS

         The Company engages in certain  borrowing  arrangements  throughout the
year.  These  are  ordinary  consequences  of  bank  business.  Such  short-term
borrowings  consist of Federal Funds purchased and Federal Home Loan Bank (FHLB)
advances.  The following table  summarizes  short-term  borrowings whose average
balance  outstanding  during the year  exceeded  thirty  percent  (30%) of total
stockholders' equity at December 31 for the years indicated:

                                                    Federal Home Loan Bank
                                                           advances
                                                         December 31,
                                                  -------------------------
                                                     1996           1995
                                                     ----           ----
Balance at end of period                          $ 4,908,225    $7,000,000
Maximum amount outstanding
 at any month-end during period                   $10,691,525    $9,000,000
Average amount outstanding                        $ 7,499,657    $7,201,797
Weighted Average interest rate                          5.82%         6.27%
Weighted Average interest rate at
 end of period                                          5.92%         6.09%


                               ITEM 2 - PROPERTIES

         The Bank owns its main office in West  Plymouth,  New Hampshire and its
branch offices in Plymouth,  Campton, Ashland and North Woodstock New Hampshire.
The Bank  conducts its banking  business  through its  principal  office in West
Plymouth,  New Hampshire and through its four branch  offices.  In general,  all
premises occupied by the Bank are considered to be in good condition.

         While  the Bank  does not have  any  plans to close  any of its  branch
offices,  the federal banking laws and regulations  impose certain  notification
and filing  requirements on depository  institutions which must be complied with
prior to the closing of any branches.

         The  following  table lists the  properties  owned by the Company.  The
Company  owns all of the  offices,  from which the  Company  and Bank  currently
operate.

<PAGE>

                                      -18-

OFFICE LOCATION

Highland Street
W. Plymouth, NH
(Main Office)

1-3 Highland Street
Plymouth, NH

Route 49
Campton, NH

Route 3
Ashland, NH

Route 3
North Woodstock, NH

         At December 31, 1996 the total net book value of the Company's premises
and equipment  was  $3,979,403.  Net book value  amounts  represent the net book
value of land and improvements of these properties.

         The  following  table sets forth  information  with regard to automated
teller machines owned and operated by the Company.

LOCATION

287 Highland Street
Plymouth, NH

1-3 Highland Street
Plymouth, NH

Shop-N-Save
Old Route 25
Plymouth, NH

Route 49
Campton, NH

North Main Street
Ashland, NH

<PAGE>

                                      -19-

                           ITEM 3 - LEGAL PROCEEDINGS

         There are no known  pending  material  legal  proceedings  to which the
Company  or the Bank  are a party,  or to  which  any of  their  properties  are
subject,  other  than  ordinary  litigation  arising  in the  normal  course  of
business.

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

         During the fourth quarter of 1996, no matter was submitted to a vote of
stockholders of the Company.

                                     PART II

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

DIVIDEND HISTORY AND POLICY

         The Company has paid dividends to stockholders  on a semi-annual  basis
since its  organization as a bank holding company for the Bank in 1985. Prior to
that time,  to the best  knowledge and belief of  management,  the Bank has paid
dividends in every year since 1882.

         The following table  summarizes the Company's  dividend history for the
fiscal years ended  December 31, 1996,  December 31, 1995 and December 31, 1994,
respectively.

                                           Per Share Dividend History
                                             Years Ended December 31,
                                    -----------------------------------------
                                     1996              1995              1994
                                     ----              ----              ----
Dividends Per Share*                $ .65             $ .50             $ .40

Net Income Per Share*                1.85              1.85              1.53

Dividends/Net Income                35.13%            27.07%            26.13%

*    Based on 690,401  weighted  average shares  outstanding  for 1996,  691,188
     weighted  average shares  outstanding for 1995 and 751,020 weighted average
     shares outstanding for 1994.

         Consistent  with prudent  banking  practices  and  applicable  law, the
Company intends to continue its practice of declaring  dividends on a semiannual
basis to stockholders of record as of the date of  declaration.  However,  there
can be no assurance  that  dividends per share will not be reduced or limited in
the future.

<PAGE>

                                      -20-

         The  Company's  ability to pay  dividends  is  limited  by the  prudent
banking  principles  applicable  to  all  bank  holding  companies  and  by  the
provisions of New Hampshire  Corporate law, which limit the payment of dividends
by a corporation to an amount not to exceed the  unrestricted  earned surplus of
the corporation or the  unrestricted net earnings of the current fiscal year and
the next preceding  fiscal year taken as a single period,  unless such dividends
would render a corporation insolvent.

         As a  practical  matter,  the  Company's  ability to pay  dividends  is
generally  limited by the Bank's ability to dividend funds to the Company.  As a
national bank, the  declaration  and payment of dividends by the Bank must be in
accordance  with the  National  Bank  Act.  More  specifically,  applicable  law
provides  that the Board of  Directors  may declare  quarterly,  semiannual  and
annual  dividends so long as the Bank carries at least ten percent  (10%) of its
net profits for the preceding half year in its surplus fund, and, in the case of
annual dividends,  has carried not less than one-tenth of its net profits of the
preceding two consecutive half year periods in its surplus fund.  National banks
are  required  to obtain the  approval of the Office of the  Comptroller  of the
Currency if the total  dividends  declared by it in any calendar year exceed the
total of its net profits for that year combined with any retained net profits of
the  preceding  two years  less any  required  transfers.  In  addition  to such
statutory requirements, the payment of an excessive dividend which would deplete
a bank's capital base to an inadequate level could be considered to be an unsafe
or unsound banking practice and be a basis for supervisory  action by the Office
of the  Comptroller  of the  Currency.  As of December 31,  1996,  approximately
$2,407,449,  of the  undistributed  net  income  of the Bank  was  theoretically
available for distribution to the Company as dividends.  However, the ability of
the Bank to declare  and pay such  dividends  would be subject to safe and sound
banking practices.

         The current and future  dividend  practices of the Bank and the Company
will continue to bear a correlation to the level of the Company's and the Bank's
current and expected  earnings  stream,  the capital needs of the Bank,  and the
perceptions of the  marketplace.  Subject to the foregoing,  and consistent with
the terms of the  Agreement and Plan of Merger which the Company and Bank signed
on March 14,  1997  with The  Berlin  City Bank of  Berlin,  New  Hampshire  and
Northway  Financial,  Inc.  during  1997,  the Company  intends to maintain  its
mid-year  dividend  in the range of $.15 per share and  yearly  dividend  in the
range of $.29 per share. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Matters").

<PAGE>

                                      -21-

NATURE OF TRADING MARKET

         As  of  March  1,  1997,  the  Company's   Common  Stock  is  owned  by
approximately 412 stockholders of record. The Common Stock of the Company is not
actively  traded  and is not  listed  on any  public  exchange  or the  National
Association of Securities  Dealer's Automatic  Quotation System  ("NASDAQ").  On
rare  occasions,  shares are traded  between  individuals or through one or more
local  broker-dealers.  Because there is no established market for the Company's
shares, the following table represents management's best knowledge and belief of
the prices paid in the isolated transactions which have occurred during the past
two years. However, the prices set forth may not be indicative of current value.

                                                      PRICE
                                             ----------------------
FOR THE QUARTER ENDED                         HIGH              LOW
---------------------                         ----              ---
March 31, 1995                               $ 9.00         $  8.50
June 30, 1995                                  9.25            9.00
September 30, 1995                            10.25            9.00
December 31, 1995                             11.50           10.25

March 31, 1996                               $10.50         $  9.50
June 30, 1996                                 11.00           10.00
September 30, 1996                            12.00           11.00
December 31, 1996                             12.00           11.00

March 14, 1997                                13.50           13.00


         During the fourth  quarter of 1994 and the first  quarter of 1995,  the
Company  redeemed an aggregate of 61,500 shares of its outstanding  common stock
from eleven (11)  shareholders.  During the fourth  quarter of 1994,  a total of
29,800 shares were redeemed from six (6)  shareholders  at a price of $10.00 per
share.  The  aggregate  gross  consideration  for  the  redemption  amounted  to
$298,000. The Company did not incur any debt in connection with the redemption.

    During the first  quarter of 1995,  a total of 31,700  shares were  redeemed
from five (5)  shareholders at a price of $10.00 per share.  The aggregate gross
consideration for the redemption amounted to $317,000. The Company did not incur
any debt in connection with the redemption.

    The net effect of the  redemptions  resulted in a reduction in the Company's
outstanding  common stock by 8.2% hereby  slightly  increasing the net per share
book value to remaining shareholders.

         Regulation  Y of the Bank  Holding  Company Act  requires  bank holding
companies  to provide the  Federal  Reserve  Board with  written  notice  before
purchasing or redeeming  equity  securities if the gross  consideration  for the
purchase or redemption,  when aggregated with the net consideration  paid by the
Company  for all such  purchases  or  redemptions  during the  preceding  twelve
months,  is equal to 10% or more of the company's  consolidated  net worth.  For
purposes of Regulation Y, "net consideration" is the gross consideration paid by
a Company for all of its equity  securities  purchased  or  redeemed  during the
period, minus the gross consideration  received for all of its equity securities
sold during the period other than as part of a new issue.

<PAGE>

                                      -22-

                        ITEM 6 - SELECTED FINANCIAL DATA

         The  following  selected  financial  information  for the periods ended
December 31, 1996, 1995,  1994, 1993 and 1992 is based on the Company's  audited
consolidated financial statements.
<TABLE>
<CAPTION>


                                                                    Selected Financial Data

Balance Sheet Data                    1996                1995                1994                 1993                1992
                                     ------              ------              ------               ------              -----
<S>                               <C>                  <C>                 <C>                  <C>                 <C>         
Total assets                      $128,979,132         $117,322,517        $113,169,496         $115,449,751        $112,539,477
 Interest bearing
 deposits with other                                                                                                     
 banks                                                                                                                    99,527
 Net loans                          87,095,923           80,087,042          83,931,150           81,407,257          79,818,995
 Investment in                     
 Securities                         31,251,644           23,933,137          19,677,672           24,187,508          19,529,109
 Deposits                          105,685,368           96,416,217          91,765,597           93,769,761          97,981,681
 Borrowings                          8,702,525            7,491,525           8,991,525            9,850,700           3,139,000
 Stockholders' equity               12,213,909           11,394,058          10,719,723           10,243,299           9,597,961
Operating data
 Interest and dividend
 income                           $ 10,199,750         $  9,502,814        $  8,523,986           $8,147,431        $  9,355,064
 Interest expense                    4,153,686            3,693,227           3,052,101            3,265,243           4,272,141
                                  ------------         ------------        ------------           ----------        ------------
 Net interest and
 dividend income                    6,046,064             5,809,587           5,471,885            4,882,188           5,082,923
 Provision for loan
 losses                               152,000               112,500             120,000              180,000             975,000
                                  -----------          ------------        ------------           ----------        ------------
 Net interest and
 dividend income after
 provision for loan
 losses                             5,894,064             5,697,087           5,351,885            4,702,188           4,107,923
 Other income                         673,525               680,156             724,390              684,249             781,679
 Other expense                      4,662,318             4,474,249           4,372,877            4,423,205           4,426,466
                                  -----------          ------------        ------------           ----------        ------------
 Income before income
 taxes                              1,905,271             1,902,994           1,703,398              963,232             463,136
 Provision for income
 taxes                                628,020               627,700             552,416              131,414              23,500
                                  -----------          ------------        ------------           ----------        ------------
 Net income                       $ 1,277,251           $ 1,275,294         $ 1,150,982          $   831,818        $    439,636
                                  ===========           ===========         ===========          ===========        ============
 Per share data
 Earnings per share(1)                  $1.85                 $1.85               $1.53                $1.11               $ .58
 Dividends declared per                                                                              
 share                                    .65                   .50                 .40                  .25                 .20
 Book value per share                   17.69                 16.50               14.85                13.62               12.76
Financial ratios                                                                                     
 Net yield on interest                                                                               
 earning assets                          5.39%                 5.60%               5.30%                4.94%               5.15%
 Interest rate margin                    4.70                  4.97                4.80                 4.46                4.62
 Net income as a                                                                                     
 percentage of                                                                                       
   Average assets                        1.02                  1.10                1.00                  .74                 .39
   Average equity                       10.77                 11.46               11.04                 8.33                4.58
 Dividend payout ratio                  35.13                 27.07               26.13                22.60               34.21
 Average equity to                                                                                   
 average assets                          9.50                  9.64                9.04                 8.91                8.53
 ---------------------                                                                             
 (1) Computed using the number of weighted average shares outstanding.
</TABLE>

<PAGE>
                                      -23-

                      ITEM 7 - MANAGEMENT'S DISCUSSION AND
                       ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

INTRODUCTION

         The following discussion and related consolidated  financial statements
include Pemi Bancorp, Inc. (the "Company") and its wholly-owned subsidiary,  the
Pemigewasset National Bank (the "Bank"). The Bank operates four branches.

         In light of the economic  climate in the region,  Management is pleased
with the results for the fiscal year ended December 31, 1996,  which resulted in
net income of $1,277,251 and the declaration of dividends  amounting to $448,761
or $.65 per share.  The Bank's  capital ratios and reserves are considered to be
healthy,  the lending staff is seasoned,  the Bank's  traditional,  conservative
practices will continue,  and the Bank's facilities are modern, with ample space
for  any  foreseeable  growth.  As a  community  bank,  the  Bank's  health  and
profitability  is somewhat  dependent upon the local economy and other pressures
on  community  banks,  such as the  increasing  costs  of  regulation  and  FDIC
insurance premiums.

         Growth of the Bank during the late 1980s resulted in crowded conditions
which  necessitated  an increase  in working  space.  In 1990 the West  Plymouth
office became the main office of the Bank.

         The  Bank's  market  area  is   reasonably   stable  with  no  business
concentrations other than the resort business.

RESULTS OF OPERATIONS

         Net income for the fiscal year ended  December 31, 1996 was  $1,277,251
as compared with  $1,275,294 for the year ended 1995 and $1,150,982 for the year
ended 1994.  Interest and fees on loans, the Company's primary source of income,
for the year ended December 31, 1996 amounted to $8,257,107,  $8,123,043 in 1995
and $7,189,810 in 1994.  This represents an increase of 1.65% from 1995 to 1996.
An  increase  in loan  rates is the  primary  reason  for this  increase.  Total
interest  expense for the fiscal year ended  December 31, 1996 was $4,153,686 as
compared with  $3,693,227  for 1995 and  $3,052,101  for 1994.  These  increases
reflect an increase in short term rates.

<PAGE>

                                      -24-

         For the fiscal year ending December 31, 1996 other income  decreased by
$6,631  or .97%  from  December  31,  1995 and  decreased  $44,234  or 6.1% from
December  31, 1994 to December  31,  1995.  Other  expense in 1996  increased by
$188,069 or 4.2%  compared to an increase of $101,372 or 2.3% from 1994 to 1995.
An increase in equipment expenses primarily contributed to this result.

         At December 31, 1996,  the Bank's  Allowance  for Possible  Loan Losses
("APLL")  amounted to  $1,306,304,  which was $53,675  less than the  $1,359,979
balance at December 31, 1995.  During 1996, the Bank made provisions to the APLL
of $152,000 for loan losses as compared to $112,500 in 1995.  This compares with
provisions  of  $120,000  in 1994.  Provisions  are based on the  evaluation  by
management and the Board of current and anticipated economic conditions, changes
in character and size of the loan portfolio and other indicators. The balance in
the APLL is considered  adequate by management  and the Board to absorb the risk
of loss inherent in the Bank's loan portfolio.  Increased provisions during 1996
reflect the growth of the loan portfolio.

         In this  regard,  the APLL was  $1,306,304  or 1.48% of total  loans at
December 31, 1996, as compared  with  $1,359,979 or 1.66% of total loans for the
fiscal year ended December 31, 1995.

         As of December 31, 1996,  non-performing  loans  (nonaccrual  loans and
loans  past due 90 days or more)  totaled  $617,925,  or .70% of total  loans as
compared to $541,303 or .66% at December 31, 1995.  This  represents an increase
of $76,622.

         The ratio of APLL to nonaccrual  loans for December 31, 1996 was 246.1%
as compared to 274.3% for December 31, 1995.

         The ratio of APLL to  nonaccrual  loans plus  loans  which are past due
ninety (90) days or more for  December 31, 1996 was 211.4% as compared to 251.2%
for December 31, 1995.

         The ratio of nonperforming  assets  (non-performing  loans and OREO) to
total assets for December 31, 1996 was .52% as compared to .51% for December 31,
1995.

         Net charge-offs  totaled $205,675 or .23% of total loans as of December
31, 1996 as compared to $319,440 or .39% of total loans as of December 31, 1995.

         The Company's assets increased to $128,979,132 at year end December 31,
1996 as compared to $117,322,517 at year end December 31, 1995 and  $113,169,496
at year end 1994.  This  represents a 9.94% increase from December 31, 1995. Net
loans  increased by 8.8% from December 31, 1995 to the period ended December 31,
1996 and deposits increased by 9.61% for the same period.

<PAGE>
                                      -25-

         The average yield on interest  earning  assets for 1996,  1995 and 1994
was 9.00%,  9.07% and 8.17%,  respectively.  For 1996, this represents a 7 basis
point decrease in yield on assets. The cost of interest bearing  liabilities was
4.30% in 1996,  4.10% in 1995 and 3.37% in 1994. For 1996,  this represents a 20
basis point increase in cost of funds.

         Nonaccrual  loans totaled $530,784 as of December 31, 1996, as compared
with  $495,705 at December 31, 1995.  Management  devotes  significant  time and
resources to the  resolution of nonaccrual  loans and does not believe that this
$35,079 increase in aggregate nonaccrual loans is indicative of any trend.


LIQUIDITY AND CAPITAL RESOURCES

         Banking   institutions   measure  liquidity  as  the  ability  to  meet
unexpected deposit withdrawals of a short-term nature and to meet increased loan
demand. It is Management's objective to ensure a continuous ability to meet cash
needs as they arise. As of December 31, 1996 the Bank's liquidity ratio stood at
14.1% as compared to 11.6% at December 31,  1995.  With  available  Federal Home
Loan Bank of Boston  (FHLB)  Advances  included,  these ratios  become 32.8% and
35.5% respectively.

         The  liquidity  ratio  is  determined  by the use of the  Bank's  Basic
Surplus Model which  represents a static  analysis of the  relationship  between
liquid assets and short-term liabilities which are vulnerable to non-replacement
under  abnormally  stringent  conditions.  This  controlled  level of  liquidity
reflects the efforts of the Bank to redeploy its assets into loans to respond to
the credit needs of the  community  and  hopefully  improve the Bank's return on
assets.  Management  believes  the Bank's  liquidity  to be adequate to meet the
needs of the Bank.

         Liquidity  is measured by the Bank's  ability to raise cash when needed
at a  reasonable  cost and with a minimum  of loss.  The Bank must be capable of
meeting all  obligations  to  customers  at any time and,  therefor,  the active
management of liquidity is important.

         Given the uncertain nature of customers'  demands as well as the Bank's
desire to take advantage of earnings  enhancement  opportunities,  the Bank must
have  available  adequate  sources of on and off balance sheet funds that can be
acquired in time of need. Accordingly,  in addition to the liquidity provided by
balance  sheet cash  flows,  liquidity  must be  supplemented  with  alternative
sources such as Fed Funds and Lines of Credit,  Federal Home Loan Bank Advances,
and wholesale and retail repurchase agreements.

<PAGE>

                                      -26-

         Accordingly, when making investments and loans, their marketability and
collateral value must be considered. When the necessity for pledging arises, the
least marketable should generally be used.

         Two methods of measuring liquidity are generally utilized. The first is
a static  analysis of the  relationship  between  liquid  assets and  short-term
liabilities which are vulnerable to non-replacement  under abnormally  stringent
conditions. The second measure of liquidity operationalizes the static analysis.
It is a  cash-flow  forecast  expressed  in  terms of the  relationship  between
identified  funding needs and the estimated level of cash in flows over a 90-day
horizon.

         Monitoring  and managing both  liquidity  measurements  is important in
developing prudent and effective deposit pricing and investment strategies.

         The equity  capital of the Company as of December 31, 1996  amounted to
$12,213,909.  This  represents  a 7.20%  increase  over the  equity  capital  at
December 31, 1995. The increase is  attributable to a 9.32% increase in retained
earnings.  Equity  capital as a percent of total assets  amounted to 9.47% as of
December 31, 1996, a decrease of approximately .24% from year end 1995.

         The Bank and the  Company  are  required  to  maintain  capital  levels
consistent with the "risk-based capital guidelines" adopted by the Office of the
Comptroller of the Currency and the Federal  Reserve  System.  The Office of the
Comptroller  of the  Currency's  capital  guidelines  require  a ratio  of Total
Capital (consisting of capital,  surplus and the allowance for loan losses up to
1.25% of risk weighted assets), to be equal to at least 8.0%. Additionally,  the
Bank must  maintain  Tier 1 capital  (which under the  regulations,  consists of
Common Stockholders equity,  noncumulative perpetual preferred stock and related
surplus,   and  minority  interests  in  the  equity  accounts  of  consolidated
subsidiaries) in amounts not less than 4.00% of adjusted total assets (or 100 to
200 basis  points  higher in the case of the banks which do not receive the best
composite  ratings).  At December 31, 1996 the actual Risk Based  Capital of the
Bank was 16.01% for Tier 1 and 17.35% for Total Capital and the Leverage Capital
was 9.46%,  substantially  exceeding  current  applicable  and any known  future
minimum regulatory requirements.

<PAGE>

                                      -27-

Effects of Inflation

         Inflation affects the growth of total assets by increasing the level of
loan  demand and  creating  the need to increase  equity  capital at higher than
normal  rates in order to  maintain  an  appropriate  ratio of equity to assets.
Interest  rates in  particular  are  significantly  affected  by  inflation.  In
addition  to its  effects on  interest  rates,  inflation  directly  affects the
Company by increasing the Company's cost of funds and operating expenses.

Interest Rate Sensitivity Analysis

         The following  discussion of Interest Rate Sensitivity  Analysis should
be read in  conjunction  with the GAP Table set forth  following the  discussion
which  reflects  how the timing and  repricing of assets and  liabilities  would
impact liquidity and interest rate spread.

         The Bank's rate  sensitivity  analysis  format is divided into four (4)
sections. The first section details information concerning various maturities of
rate sensitive assets. The second section identifies rate sensitive liabilities.
The third  section  identifies  interval  GAPS and the  fourth,  cumulative  GAP
analysis.

         Rate  sensitive  assets  can  be  divided  into  two  component  parts:
Investments in Securities and Loans.  Investments have various  maturities,  are
normally  fixed rates,  and when they mature,  the  proceeds are  available  for
reinvestment.  As these securities  approach  maturity,  it is important for the
investment officer to be aware of the rate on the maturing  investment,  current
rates available on similar  investments and liquidity  requirements of the bank.
As the securities mature, the proceeds will be invested in rates higher or lower
than the maturing security, thus affecting the rate of return.

         The final  section of rate  sensitive  assets  consists  of  commercial
loans,  real estate loans and consumer loans.  Commercial loans are comprised of
both maturing loans that will be paid off, and loans that mature but will in all
likelihood  be  rewritten.  Real estate loans are comprised of those loans whose
rates will be  repriced at maturity  and  consumer  loans are those that will be
repriced and paid in full at maturity.

         Rate Sensitive  Liabilities are primarily time deposits. As the savings
instruments reach maturity, the Bank, in order to retain the deposits, will need
to offer  competitive  rates or be faced with  disintermediation.  Falling rates
indicate  it may cost the Bank  less to  retain  these  funds,  thus  increasing
profits. Conversely, rising rates may adversely affect profits.

<PAGE>

                                      -28-

         The section on interval  GAPS  indicate  the  difference  between  Rate
Sensitive Assets and Rate Sensitive Liabilities at different maturity intervals.
It is a snapshot  of the GAPS at specific  time  periods.  The ratios  measure a
tolerance range for various time periods.

         The final section on  Cumulative  GAPS measure the overall GAP position
at different time periods.

         In  analyzing  the Bank's GAP,  several  general  principles  should be
considered. First, in a more risky interest rate environment, you would expect a
smaller GAP tolerance  range  associated with a given appetite for interest rate
risk.  Conversely,  the greater the  tolerance  range,  the greater the expected
return and risk.

         The  GAPS at time  intervals  indicate  the  timing  of the  effect  of
interest  rate  changes on income.  The  Cumulative  GAP  indicates  the overall
magnitude and direction of rate risk exposure.

         The GAP measures interest rates risk exposure, not liquidity of funding
risk.

         It may be less costly to adjust the GAP in a negative direction than in
a positive  direction because capital losses may be generated if the maturity of
the investment  portfolio is shortened to move the GAP in a positive  direction.
However,  the greater the Bank's ability to replace short-term  liabilities with
long-term  liabilities,  the  easier  it is to  adjust  the  GAP  in a  positive
direction.

         Prudent  adjustment of the GAP to capitalize on expected  interest rate
trends will  usually  result in a negative  impact on short term  earnings.  For
example, if rates are expected to rise by more than the consensus rate forecast,
a somewhat positive GAP is appropriate.

         Generally,  the smaller the GAP, the smaller the fluctuation in the net
interest margin resulting from changes in levels of interest rates.

         If  Risk  Sensitivity  Analysis  indicated  that  the  Bank  was  Asset
Sensitive  (meaning that it had more rate  sensitive  assets than rate sensitive
liabilities),  then  rising  rates  will have a  positive  impact  on  earnings;
however, falling rates will negatively affect earnings.

         Should the analysis indicate liability  sensitivity,  then rising rates
will tend to reduce  earnings  and  falling  rates  will tend to have a positive
impact on earnings.

<PAGE>

                                      -29-

         The  Bank's  primary  tool  in  managing  Interest  Rate  Risk  will be
asset/liability  funding matrix reports.  Income  simulation will be utilized to
quantify  the  potential  impact on  earnings of changes in  interest  rates.  A
standard  gap  report  will also be  utilized  to  provide  supporting  detailed
information.  Management has monitored deposit runoff in both rising and falling
rate environments, and based upon this analysis, has developed simulation models
of interest  rate risk as well as liquidity  cash flows that reflect the results
of assumptions.

<PAGE>

                                      -30-

                               PEMI BANCORP, INC.
                            RATE SENSITIVITY ANALYSIS
                             AS OF DECEMBER 31, 1996
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                 0-3          3 months        6 months        1 year to     Over 5
                               Months        to 6 months      to 1 year        5 years       years         Total
                               ------        -----------      ---------        -------       -----         -----                  
<S>                            <C>            <C>             <C>             <C>           <C>           <C>     
Interest earning assets:
  Loans                       $ 18,951        $  8,528        $ 15,326        $27,692       $17,619       $ 88,116
  FHLB/FRB Bank stock              740                                                           80            820
  Available-for-sale
  securities*                      501                             170          2,705        15,116         18,492
  Held-to-maturity
  securities*                                      500             300          2,356         8,819         11,975
                              --------        --------        --------        -------       -------       --------
    Total interest
    earning assets            $ 20,192        $  9,028        $ 15,796        $32,753       $41,634       $119,403
                              ========        ========        ========        =======       =======       ========
Interest bearing
liabilities:
  Time CD's $100,000 and
  over                        $  1,467        $  1,019        $    501        $ 2,405       $             $  5,392
  Other time deposits            9,924           5,945          10,770         13,962            35         40,636
  Money market accounts         13,493                                                                      13,493
  Regular savings                                                4,227                       11,412         15,639
  NOW accounts                     128                                                       14,281         14,409
  FHLB advances                  1,211           3,500             197          3,795                        8,703
                              --------        --------        --------        -------       -------       --------
     Total interest
     bearing liabilities      $ 26,223        $ 10,464        $ 15,695        $20,162       $25,728       $ 98,272
                              ========        ========        ========        =======       =======       ========

Period sensitivity gap        $ (6,031)       $ (1,436)       $    101        $12,591       $15,906       $ 21,131
Cumulative sensitivity
gap                             (6,031)         (7,467)         (7,366)         5,225        21,131
Period sensitivity gap
as a percentage of
interest earning assets          (5.05)%         (1.20)%          .08%         10.54%         13.32%
Cumulative sensitivity
gap as a percentage
of interest earning
assets                           (5.05)%         (6.25)%        (6.17)%         4.38%         17.70%
* Amortized cost
</TABLE>

<PAGE>

                                      -31-

OTHER MATTERS

         On March 14, 1997,  the Boards of  Directors of the Company,  the Bank,
The Berlin City Bank ("Berlin"),  a New Hampshire chartered commercial bank with
its principal place of business in Berlin, New Hampshire and Northway Financial,
Inc. ("Northway"), a New Hampshire corporation,  which is being formed by Berlin
to become a  multi-bank  holding  company  for Berlin  and the Bank,  executed a
definitive agreement and plan of merger (the "Agreement").

         Pursuant to the terms of the  Agreement,  Northway will become the bank
holding company for Berlin in a transaction  whereby each issued and outstanding
share of Berlin common stock will be exchanged for 16 shares of Northway  common
stock (the  "Northway  Common  Stock").  Thereafter,  Northway  will acquire the
common stock of the Company in a transaction whereby each share of the Company's
common  stock  issued  and  outstanding  prior  to the  effective  time  will be
exchanged for 1.0419 shares of Northway Common Stock.

         The  transaction,  which is subject to  approval  by state and  federal
regulators  and by the respective  shareholders  of each  institution,  has been
structured to be tax-free to the shareholders of each institution.

         Upon  consummation,  the Board of Directors of Northway will consist of
six of the current  directors of Berlin and four of the current directors of the
Company.  William  J.  Woodward,  the  current  Chairman,  President  and  Chief
Executive  Officer of Berlin will serve as Chairman of the Board,  President and
Chief Executive  Officer of Northway.  Fletcher W. Adams, the current  President
and Chief  Executive  Officer of the  Company  and the Bank,  will serve as Vice
Chairman of the Board of Directors of Northway.

         The parties  anticipate  consummating the transactions  contemplated by
the Agreement in the second half of 1997. The financial information reflected in
this Annual  Report does not take into  account  the  potential  effects of such
transaction.

<PAGE>
                                      -32-

              ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 Index to Financial Statements                            Page
 -----------------------------                            ----
          Accountants' Opinion, January 16, 1997
          except for Note 10, as to which the
          date is March 7, 1997......................     F-1

          Consolidated Balance Sheets at December
          31, 1996 and 1995..........................     F-2

          Consolidated Statements of Income for
          Years Ended December 31, 1996, 1995
          and 1994...................................     F-3

          Consolidated Statements of Changes in
          Stockholders' Equity for Years Ended
          December 31, 1996, 1995 and 1994...........     F-4

          Consolidated Statements of Cash Flows
          for Years Ended December 31, 1996,
          1995 and 1994..............................     F-5

          Notes to Financial Statements..............     F-7

<PAGE>


The Board of Directors
and Stockholders
Pemi Bancorp, Inc.
Plymouth, New Hampshire

                          INDEPENDENT AUDITORS' REPORT

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

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

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




                                              SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts
January 16, 1997, except for Note 10,
   as to which the date is March 7, 1997


                                      F-1
<PAGE>


                                         PEMI BANCORP, INC. AND SUBSIDIARY

                                            CONSOLIDATED BALANCE SHEETS

                                            DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS                                                                                   1996               1995
------                                                                               ------------      ------------
<S>                                                                                  <C>               <C>         
Cash and due from banks                                                              $  4,979,633      $  4,918,670
Federal funds sold                                                                                        3,300,000
                                                                                     ------------      ------------
           Cash and cash equivalents                                                    4,979,633         8,218,670
Investments in available-for-sale securities (at fair value)                           18,456,658         8,113,477
Investments in held-to-maturity securities (fair values of $11,879,497 as of
   December 31, 1996 and $14,926,264 as of December 31, 1995)                          11,975,136        14,999,810
Federal Reserve Bank stock, at cost                                                        80,250            80,250
Federal Home Loan Bank stock, at cost                                                     739,600           739,600
Loans, net                                                                             87,095,923        80,087,042
Premises and equipment                                                                  3,979,403         3,481,386
Other real estate owned                                                                    54,193            61,701
Accrued interest receivable                                                               863,612           855,135
Other assets                                                                              754,724           685,446
                                                                                     ------------      ------------
                                                                                     $128,979,132      $117,322,517
                                                                                     ============      ============


LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Demand deposits                                                                     $  16,116,453     $  14,023,174
Savings and NOW deposits                                                               43,540,576        40,933,371
Time deposits                                                                          46,028,339        41,459,672
                                                                                    -------------     -------------
           Total deposits                                                             105,685,368        96,416,217
Advances from Federal Home Loan Bank of Boston                                          8,702,525         7,491,525
Other liabilities                                                                       2,377,330         2,020,717
                                                                                    -------------     -------------
           Total liabilities                                                          116,765,223       105,928,459
                                                                                    -------------     -------------
Stockholders' equity:
   Common stock, par value $1.00 per share; authorized 2,000,000 shares;
     issued 751,901 shares; outstanding 690,401 shares                                    751,901           751,901
   Paid-in capital                                                                      2,384,329         2,384,329
   Retained earnings                                                                    9,714,379         8,885,889
   Treasury stock, at cost (61,500 shares)                                               (615,000)         (615,000)
   Net unrealized holding loss on available-for-sale securities                           (21,700)          (13,061)
                                                                                    -------------      ------------
           Total stockholders' equity                                                  12,213,909        11,394,058
                                                                                    -------------      ------------
                                                                                     $128,979,132      $117,322,517
                                                                                     ============      ============




 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                      F-2
<PAGE>


                                         PEMI BANCORP, INC. AND SUBSIDIARY

                                         CONSOLIDATED STATEMENTS OF INCOME

                                   YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                     1996            1995            1994
                                                                 -----------      ----------      ----------
Interest and dividend income:
<S>                                                              <C>              <C>             <C>       
   Interest and fees on loans                                    $ 8,257,107      $8,123,043      $7,189,810
   Interest and dividends on securities:
     Taxable                                                       1,616,581       1,093,942       1,138,808
     Tax-exempt                                                      249,466         157,782         160,299
   Other interest                                                     76,596         128,047          35,069
                                                                 -----------      ----------      ----------
           Total interest and dividend income                     10,199,750       9,502,814       8,523,986
                                                                 -----------      ----------      ----------
Interest expense:
   Interest on deposits                                            3,632,440       3,079,319       2,628,419
   Interest on advances from FHLB                                    519,604         610,675         418,929
   Interest on other borrowed funds                                    1,642           3,233           4,753
                                                                 -----------      ----------      ----------
           Total interest expense                                  4,153,686       3,693,227       3,052,101
                                                                 -----------      ----------      ----------
           Net interest and dividend income                        6,046,064       5,809,587       5,471,885
Provision for loan losses                                            152,000         112,500         120,000
                                                                 -----------      ----------      ----------
           Net interest and dividend income after provision
              for loan losses                                      5,894,064       5,697,087       5,351,885
                                                                 -----------      ----------      ----------
Other income:
   Service charges on deposit accounts                               259,879         253,302         266,532
   Securities gains, net                                                                              22,405
   Other income                                                      216,325         241,273         241,159
   Other deposit fees                                                178,022         178,781         161,369
   Gain on sales of other real estate owned, net                      19,299           6,800          32,925
                                                                 -----------      ----------      ----------
           Total other income                                        673,525         680,156         724,390
                                                                 -----------      ----------      ----------
Other expense:
   Salaries and employee benefits                                  2,390,189       2,376,100       2,282,176
   Occupancy expense                                                 340,735         297,112         308,864
   Equipment expense                                                 525,625         446,449         407,169
   Writedown of other real estate owned                               25,000          79,494          47,500
   Other real estate owned expense                                    16,400          13,450          42,560
   FDIC deposit insurance premium                                      2,000         135,165         240,722
   Stationery and supplies                                           135,582         123,672         109,353
   Postage expense                                                   116,380         101,773          95,298
   Other expense                                                   1,110,407         901,034         839,235
                                                                 -----------      ----------      ----------
           Total other expense                                     4,662,318       4,474,249       4,372,877
                                                                 -----------      ----------      ----------
           Income before income taxes                              1,905,271       1,902,994       1,703,398
Income taxes                                                         628,020         627,700         552,416
                                                                 -----------      ----------      ----------
           Net income                                            $ 1,277,251      $1,275,294      $1,150,982
                                                                 ===========      ==========      ==========
           Net income per share                                  $      1.85      $     1.85      $     1.53
                                                                 ===========      ==========      ==========







 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                      F-3

<PAGE>
<TABLE>
<CAPTION>


                                            PEMI BANCORP, INC. AND SUBSIDIARY

                                CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                       YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

                                                                                             Net Unrealized
                                                                                             Holding Gain
                                                                                             (Loss) On
                                 Common          Paid-in         Retained      Treasury      Available-For-
                                 Stock           Capital         Earnings      Stock         Sale Securities      Total
                                 -----------     -----------     ----------    ---------      --------------  -----------
<S>                              <C>              <C>            <C>           <C>              <C>           <C>        
Balance, December 31, 1993       $751,901         $2,384,329     $7,105,574    $                $   1,495     $10,243,299
Net income                                                        1,150,982                                     1,150,982
Net change in unrealized
   holding gain on available-
   for-sale securities                                                                            (75,797)        (75,797)
Dividends declared ($.40
   per share)                                                      (300,761)                                     (300,761)
Treasury stock purchased                                                        (298,000)                        (298,000)
                                 --------          ----------     ----------    ---------        ---------     -----------    
Balance, December 31, 1994        751,901          2,384,329      7,955,795     (298,000)         (74,302)     10,719,723
Net income                                                        1,275,294                                     1,275,294
Net change in unrealized
   holding loss on available-
   for-sale securities                                                                              61,241         61,241
Dividends declared ($.50
   per share)                                                      (345,200)                                     (345,200)
Treasury stock purchased                                                        (317,000)                        (317,000)
                                 --------         ----------     ----------    ---------        ---------     -----------
Balance, December 31, 1995        751,901          2,384,329      8,885,889     (615,000)         (13,061)     11,394,058
Net income                                                        1,277,251                                     1,277,251
Net change in unrealized
   holding loss on available-
   for-sale securities                                                                             (8,639)         (8,639)
Dividends declared ($.65
   per share)                                                      (448,761)                                     (448,761)
                                 --------         ----------     ----------    ---------        ---------     -----------
Balance, December 31, 1996       $751,901         $2,384,329     $9,714,379    $(615,000)       $(21,700)     $12,213,909
                                 ========         ==========     ==========    =========        =========     ===========






 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>
<TABLE>
<CAPTION>


                                         PEMI BANCORP, INC. AND SUBSIDIARY

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

                                                                         1996              1995              1994
                                                                    ------------       -----------       -----------
Cash flows from operating activities:
<S>                                                                 <C>                <C>               <C>        
   Net income                                                       $  1,277,251       $ 1,275,294       $ 1,150,982
   Adjustments to reconcile net income to net cash provided by
     operating activities:
       Donation of other real estate owned                                                   5,000
       Securities gains, net                                                                                 (22,405)
       Amortization, net of accretion of securities                      134,807           110,687           194,800
       Depreciation and amortization                                     354,777           317,405           284,257
       Provision for loan losses                                         152,000           112,500           120,000
       Deferred tax expense                                              100,020           108,700           152,985
       Increase (decrease) in taxes payable                              (10,856)         (160,143)          170,430
       Increase in interest receivable                                    (8,477)          (98,319)          (16,763)
       Increase (decrease) in interest payable                           281,263           471,682           (58,962)
       Increase (decrease) in accrued expenses                            40,979           (80,240)          (94,948)
       (Increase) decrease in prepaid expenses                           (71,657)          (67,966)            7,255
       Increase (decrease) in other liabilities                           24,254             4,277               (88)
       Amortization of core deposit intangible                            13,125
       (Increase) decrease in other assets                                  (394)              266            64,226
       Change in unearned income                                        (148,754)          (33,647)          (12,202)
       Gain on sales of other real estate owned, net                     (19,299)           (6,800)          (32,925)
       Writedown of other real estate owned                               25,000            79,494            47,500
                                                                    ------------       -----------       -----------

   Net cash provided by operating activities                           2,144,039         2,038,190         1,954,142
                                                                    ------------       -----------       -----------

Cash flows from investing activities:
   Proceeds from sales of other real estate owned                        134,307            78,506           206,765
   Purchases of Federal Home Loan Bank stock                                              (143,600)          (46,500)
   Purchases of available-for-sale securities                        (12,513,768)       (5,421,630)          (97,489)
   Proceeds from maturities of available-for-sale securities           2,120,332           258,355           881,886
   Purchases of held-to-maturity securities                                             (1,590,598)       (2,760,777)
   Proceeds from maturities of held-to-maturity securities             2,926,048         2,631,095         6,236,832
   Net (increase) decrease in loans                                   (7,175,272)        3,715,789        (2,721,844)
   Capital expenditures                                                 (627,794)         (248,004)         (300,226)
   Recoveries of previously charged-off loans                             35,026            54,966           164,778
                                                                    ------------       -----------       -----------

   Net cash provided by (used in) investing activities               (15,101,121)         (665,121)        1,563,425
                                                                    ------------       -----------       -----------
</TABLE>

                                      F-5
<PAGE>
<TABLE>
<CAPTION>


                                         PEMI BANCORP, INC. AND SUBSIDIARY

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                                    (continued)

                                                                    1996              1995              1994
                                                                ------------       ------------       ------------

<S>                                                             <C>                <C>                <C>         

Cash flows from financing activities:
   Cash received from acquisition of branch                        6,355,157
   Purchases of treasury stock                                                         (317,000)          (298,000)
   Repayment of advances from FHLB                               (37,391,621)       (25,589,000)       (19,052,000)
   Advances from FHLB                                             38,602,621         24,089,000         18,192,825
   Net increase (decrease) in demand deposits, NOW and
     savings accounts                                                924,325         (3,134,595)           330,315
   Net increase (decrease) in time deposits                        1,586,572          7,785,215         (2,334,479)
   Dividends paid                                                   (359,009)          (330,360)          (210,533)
                                                                ------------       ------------       ------------

   Net cash provided by (used in) financing activities             9,718,045          2,503,260         (3,371,872)
                                                                ------------       ------------       ------------

Net increase (decrease) in cash and cash equivalents              (3,239,037)         3,876,329            145,695
Cash and cash equivalents at beginning of year                     8,218,670          4,342,341          4,196,646
                                                                ------------       ------------       ------------
Cash and cash equivalents at end of year                        $  4,979,633       $  8,218,670       $  4,342,341
                                                                ============       ============       ============

Supplemental disclosures:
   Loans transferred to other real estate owned                 $    195,000       $      8,000       $    190,000
   Loans originating from sales of other real estate owned            62,500             13,500            264,625
   Held-to-maturity securities transferred to available-
     for-sale securities                                                              1,389,021            468,862
   Interest paid                                                   3,872,423          3,221,545          3,111,063
   Income taxes paid                                                 538,856            679,143            229,001

   Assets acquired and liabilities assumed from another
     financial institution:
       Cash received                                            $  6,355,157
       Overdraft protection loans                                      4,381
       Premises and equipment                                        225,000
       Core deposit intangible                                       175,000
       Deposits                                                    6,758,254
       Miscellaneous liabilities                                       1,284









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

</TABLE>
                                      F-6
<PAGE>


                        PEMI BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

NOTE 1 - NATURE OF OPERATIONS

Pemi Bancorp, Inc. (Company) is a New Hampshire corporation that was organized
in 1985 to become the holding company of The Pemigewasset National Bank (Bank).
The Company's primary activity is to act as the holding company for the Bank.
The Bank is a federally chartered bank which was incorporated in 1881 and is
headquartered in Plymouth, New Hampshire. The Bank operates its business from
five banking offices located in New Hampshire. The Bank is engaged principally
in the business of attracting deposits from the general public and investing
those deposits in residential and real estate loans, and in consumer and small
business loans.

NOTE 2 - ACCOUNTING POLICIES

The accounting and reporting policies of the Company and its subsidiary conform
to generally accepted accounting principles and predominant practices within the
banking industry. The consolidated financial statements of the Company were
prepared using the accrual basis of accounting. The significant accounting
policies of the Company and its subsidiary are summarized below to assist the
reader in better understanding the financial statements and other data contained
herein.

         PERVASIVENESS OF ESTIMATES:

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

         BASIS OF PRESENTATION:

         The consolidated financial statements include the accounts of the
         Company and its wholly-owned subsidiary, the Bank. All significant
         intercompany accounts and transactions have been eliminated in the
         consolidation.

         CASH AND CASH EQUIVALENTS:

         For purposes of reporting cash flows, cash and cash equivalents include
         cash on hand, cash items, Federal Home Loan Bank overnight deposits,
         demand deposits due from banks and federal funds sold.

         SECURITIES:

         Investments in debt securities are adjusted for amortization of
         premiums and accretion of discounts computed on the straight-line
         method which has substantially the same effect as using the interest
         method. Gains or losses on sales of investment securities are computed
         on a specific identification basis.

         The Company classifies debt and equity securities into one of three
         categories: held-to-maturity, available-for-sale, or trading. This
         security classification may be modified after acquisition only under
         certain specified conditions. In general, securities may be classified
         as held-to-maturity only if the Company has the positive intent and
         ability to hold them to maturity. Trading securities are defined as
         those bought and held principally for the purpose of selling them in
         the near term. All other securities must be classified as
         available-for-sale.

                                      F-7
<PAGE>


               --   Held-to-maturity securities are measured at amortized cost
                    in the balance sheet. Unrealized holding gains and losses
                    are not included in earnings or in a separate component of
                    capital. They are merely disclosed in the notes to the
                    consolidated financial statements.

               --   Available-for-sale securities are carried at fair value on
                    the balance sheet. Unrealized holding gains and losses are
                    not included in earnings, but are reported as a net amount
                    (less expected tax) in a separate component of capital until
                    realized.

               --   Trading securities are carried at fair value on the balance
                    sheet.  Unrealized holding gains and losses for trading
                    securities are included in earnings

         LOANS:

         Loans receivable that management has the intent and ability to hold for
         the foreseeable future or until maturity or payoff are reported at
         their outstanding principal balances reduced by amounts due to
         borrowers on unadvanced loans, any charge-offs, the allowance for loan
         losses and net deferred fees or costs on originated loans, or
         unamortized premiums or discounts on purchased loans.

         Interest on loans is generally recognized on a simple interest basis.

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

         Cash receipts of interest income on impaired loans is credited to
         principal to the extent necessary to eliminate doubt as to the
         collectibility of the net carrying amount of the loan. Some or all of
         the cash receipts of interest income on impaired loans is recognized as
         interest income if the remaining net carrying amount of the loan is
         deemed to be fully collectible. When recognition of interest income on
         an impaired loan on a cash basis is appropriate, the amount of income
         that is recognized is limited to that which would have been accrued on
         the net carrying amount of the loan at the contractual interest rate.
         Any cash interest payments received in excess of the limit and not
         applied to reduce the net carrying amount of the loan are recorded as
         recoveries of charge-offs until the charge-offs are fully recovered.

         ALLOWANCE FOR POSSIBLE LOAN LOSSES:

         An allowance is available for losses which may be incurred in the
         future on loans in the current portfolio. The allowance is increased by
         provisions charged to current operations and is decreased by loan
         losses, net of recoveries. The provision for loan losses is based on
         management's evaluation of current and anticipated economic conditions,
         changes in the character and size of the loan portfolio, and other
         indicators. The balance in the allowance for possible loan losses is
         considered adequate by management to absorb any reasonably foreseeable
         loan losses.

         As of January 1, 1995, the Company adopted Statement of Financial
         Accounting Standards No. 114, "Accounting by Creditors for Impairment
         of a Loan," as amended by SFAS No. 118. According to SFAS No. 114, a
         loan is impaired when, based on current information and events, it is
         probable that a creditor will be unable to collect all amounts due
         according to the contractual terms of the loan agreement. The Statement
         requires that impaired loans be measured on a loan by loan basis by
         either the present value of expected future cash flows discounted at
         the loan's effective interest rate, the loan's observable market price,
         or the fair value of the collateral if the loan is collateral
         dependent.

                                      F-8
<PAGE>


         The Statement is applicable to all loans, except large groups of
         smaller balance homogeneous loans that are collectively evaluated for
         impairment, loans that are measured at fair value or at the lower of
         cost or fair value, leases, and convertible or nonconvertible
         debentures and bonds and other debt securities. The Company considers
         its residential real estate loans and consumer loans that are not
         individually significant to be large groups of smaller balance
         homogeneous loans.

         Factors considered by management in determining impairment include
         payment status, net worth and collateral value. An insignificant
         payment delay or an insignificant shortfall in payment does not in
         itself result in the review of a loan for impairment. The Company
         applies SFAS No. 114 on a loan-by-loan basis. The Company does not
         apply SFAS No. 114 to aggregations of loans that have risk
         characteristics in common with other impaired loans. Interest on a loan
         is not generally accrued when the loan becomes ninety or more days
         overdue. The Company may place a loan on nonaccrual status but not
         classify it as impaired, if (i) it is probable that the Company will
         collect all amounts due in accordance with the contractual terms of the
         loan or (ii) the loan is an individually insignificant residential
         mortgage loan or consumer loan. Impaired loans are charged-off when
         management believes that the collectibility of the loan's principal is
         remote. Substantially all of the Company's loans that have been
         identified as impaired have been measured by the fair value of existing
         collateral.

         The financial statement impact of adopting the provisions of this
         Statement was not material.

         PREMISES AND EQUIPMENT:

         Premises and equipment are stated at cost, less accumulated
         depreciation and amortization. Cost and related allowances for
         depreciation and amortization of premises and equipment retired or
         otherwise disposed of are removed from the respective accounts with any
         gain or loss included in income or expense. Depreciation and
         amortization are calculated principally on the straight-line method
         over the estimated useful lives of the assets.

         OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:

         Other real estate owned includes properties acquired through
         foreclosure and properties classified as in-substance foreclosures in
         accordance with Financial Accounting Standards Board Statement No. 15,
         "Accounting by Debtors and Creditors for Troubled Debt Restructuring."
         These properties are carried at the lower of cost or estimated fair
         value less costs to sell. Any writedown from cost to estimated fair
         value required at the time of foreclosure or classification as
         in-substance foreclosure is charged to the allowance for possible loan
         losses. Expenses incurred in connection with maintaining these assets,
         subsequent writedowns and gains or losses recognized upon sale are
         included in other expense.

         Beginning in 1995, in accordance with Statement of Financial Accounting
         Standards No. 114 "Accounting by Creditors for Impairment of a Loan,"
         the Company classifies loans as in-substance repossessed or foreclosed
         if the Company receives physical possession of the debtor's assets
         regardless of whether formal foreclosure proceedings take place.

         INCOME TAXES:

         The Company recognizes income taxes under the asset and liability
         method. Under this method, deferred tax assets and liabilities are
         established for the temporary differences between the accounting basis
         and the tax basis of the Company's assets and liabilities at enacted
         tax rates expected to be in effect when the amounts related to such
         temporary differences are realized or settled.

                                      F-9
<PAGE>


         FAIR VALUES OF FINANCIAL INSTRUMENTS:

         Statement of Financial Accounting Standards No. 107, "Disclosures about
         Fair Value of Financial Instruments," requires that the Company
         disclose estimated fair value for its financial instruments. Fair value
         methods and assumptions used by the Company in estimating its fair
         value disclosures are as follows:

         Cash and cash equivalents: The carrying amounts reported in the balance
         sheet for cash and federal funds sold approximate those assets' fair
         values.

         Securities (including mortgage-backed securities): Fair values for
         securities are based on quoted market prices, where available. If
         quoted market prices are not available, fair values are based on quoted
         market prices of comparable instruments.

         Loans receivable: For variable-rate loans that reprice frequently and
         with no significant change in credit risk, fair values are based on
         carrying values. The fair values for other loans are estimated using
         discounted cash flow analyses, using interest rates currently being
         offered for loans with similar terms to borrowers of similar credit
         quality. The carrying amount of accrued interest approximates its fair
         value.

         Deposit liabilities: The fair values disclosed for demand deposits
         (e.g., interest and non-interest checking, passbook savings, and money
         market accounts) are, by definition, equal to the amount payable on
         demand at the reporting date (i.e., their carrying amounts). Fair
         values for fixed-rate certificates of deposit are estimated using a
         discounted cash flow calculation that applies interest rates currently
         being offered on certificates to a schedule of aggregated expected
         monthly maturities on time deposits.

         Off-balance sheet instruments: The fair value of commitments to
         originate loans is estimated using the fees currently charged to enter
         similar agreements, taking into account the remaining terms of the
         agreements and the present creditworthiness of the counterparties. For
         fixed-rate loan commitments and the unadvanced portion of loans, fair
         value also considers the difference between current levels of interest
         rates and the committed rates. The fair value of letters of credit is
         based on fees currently charged for similar agreements or on the
         estimated cost to terminate them or otherwise settle the obligation
         with the counterparties at the reporting date.


                                      F-10
<PAGE>


NOTE 3 - SECURITIES

Debt securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are as follows as of December 31:
<TABLE>
<CAPTION>
<S>                                                           <C>            <C>            <C>           <C>         

                                                                              Gross           Gross
                                                               Amortized     Unrealized     Unrealized
                                                                 Cost         Holding        Holding          Fair
                                                                 Basis         Gains          Losses          Value
                                                               ---------     -----------   -------------     -------
Available-for-sale securities:
   December 31, 1996:
     Debt securities issued by the U.S. Treasury and other
       U.S. government corporations and agencies              $ 2,488,941     $ 16,759       $ 15,778      $ 2,489,922
     Debt securities issued by states of the United States
       and political subdivisions of the states                 3,218,991       45,320          5,129        3,259,182
     Mortgage-backed securities                                12,784,080       44,094        120,620       12,707,554
                                                              -----------     --------       --------      ----------
                                                              $18,492,012     $106,173       $141,527      $18,456,658
                                                              ===========     ========       ========      ===========

   December 31, 1995:
     Debt securities issued by the U.S. Treasury and other
       U.S. government corporations and agencies             $  1,009,035   $    2,528      $             $  1,011,563
     Debt securities issued by states of the United States
       and political subdivisions of the states                 2,032,067       34,429         10,950        2,055,546
     Mortgage-backed securities                                 5,093,654       11,789         59,075        5,046,368
                                                             ------------    ---------      ---------     ------------
                                                             $  8,134,756    $  48,746      $  70,025     $  8,113,477
                                                             ============    =========      =========     ============
</TABLE>
<TABLE>
<CAPTION>
<S>                                                           <C>            <C>            <C>           <C>         

                                                                                Gross         Gross
                                                               Amortized     Unrealized     Unrealized
                                                                  Cost        Holding        Holding          Fair
                                                                 Basis         Gains          Losses          Value
                                                               ---------     ----------    ------------      ------- 
Held-to-maturity securities:
   December 31, 1996:
     Debt securities issued by the U.S. Treasury              $   500,528      $ 2,206       $             $   502,734
     Debt securities issued by states of the United States
       and political subdivisions of the states                 1,531,166       35,395                       1,566,561
     Mortgage-backed securities                                 9,943,442       18,391        151,631        9,810,202
                                                              -----------      -------       --------      -----------
                                                              $11,975,136      $55,992       $151,631      $11,879,497
                                                              ===========      =======       ========      ===========
   December 31, 1995:
     Debt securities issued by the U.S. Treasury and other
       U.S. government corporations and agencies              $ 1,301,634      $ 7,167       $  2,504      $ 1,306,297
     Debt securities issued by states of the United States
       and political subdivisions of the states                 1,717,256       52,642                       1,769,898
     Mortgage-backed securities                                11,980,920       31,463        162,314       11,850,069
                                                              -----------      -------       --------      -----------
                                                              $14,999,810      $91,272       $164,818      $14,926,264
                                                              ===========      =======       ========      ===========
</TABLE>

                                      F-11
<PAGE>


The scheduled maturities of held-to-maturity securities and available-for-sale
securities were as follows as of December 31, 1996:
<TABLE>
<CAPTION>
<S>                                                <C>               <C>              <C>               <C>        

                                                         Held-to-maturity                   Available-for-sale
                                                            securities:                         securities:
                                                   -------------------------         ------------------------------
                                                   Amortized                         Amortized
                                                     Cost             Fair             Cost              Fair
                                                     Basis            Value            Basis             Value
                                                   ---------         -------         ----------         -------
Debt securities other than mortgage-backed 
  securities:
     Due within one year                           $   660,994       $   666,484      $   501,247       $   501,875
     Due after one year through five years           1,370,700         1,402,811        2,159,384         2,168,680
     Due after five years through ten years                                               834,274           844,112
     Due after ten years                                                                2,213,027         2,234,438
Mortgage-backed securities                           9,943,442         9,810,202       12,784,080        12,707,553
                                                   -----------       ----------       -----------       -----------
                                                   $11,975,136       $11,879,497      $18,492,012       $18,456,658
                                                   ===========       ===========      ===========       ===========
</TABLE>

There were no sales of available-for-sale or held-to-maturity securities in
1996, 1995 and 1994.

In 1995, the Bank transferred at fair value certain debt securities from
securities classified as held-to-maturity to securities classified as
available-for-sale. The unrealized holding loss of $16,480 ($26,850 less tax
effect of $10,370) at the date of transfer has been recognized as a separate
component of shareholders' equity. The transfer was a result of a reassessment
of the appropriateness of the classification of all securities held at December
31, 1995. In accordance with a Special Report of the Financial Accounting
Standards Board regarding SFAS No. 115 this transfer will not call into question
the intent of the Bank to hold other debt securities to maturity in the future.

During 1994, the amortized cost of a security held-to-maturity that was
transferred to available-for-sale at fair value amounted to $468,862, and the
related unrealized loss amounted to $69,165. Such security was transferred as a
result of the Company's understanding that there was a significant deterioration
in the issuer's creditworthiness.

There were no securities of issuers whose aggregate carrying amount exceeded 10%
of stockholders' equity as of December 31, 1996.

A total par value of $1,545,062 and $1,144,343 of debt securities was pledged to
secure treasury tax and loan, deposits and office of U. S. Trustees (Bankruptcy
courts) as of December 31, 1996 and 1995, respectively.

NOTE 4 - LOANS

Loans consisted of the following as of December 31:
<TABLE>
<CAPTION>
<S>                                                                                       <C>               <C>    

                                                                                         1996              1995
                                                                                      -----------       -----------
Commercial, financial and agricultural                                                $13,749,755       $12,362,986
Real estate - construction and land development                                           882,416           363,295
Real estate - residential                                                              53,242,528        50,126,739
Real estate - commercial                                                               12,209,054        11,705,038
Consumer                                                                                7,440,546         6,081,178
Obligations of states and political subdivisions                                          931,444         1,054,165
Other                                                                                      59,934            15,824
                                                                                      -----------       -----------
                                                                                       88,515,677        81,709,225
Allowance for possible loan losses                                                     (1,306,304)       (1,359,979)
Unearned income                                                                          (113,450)         (262,204)
                                                                                      -----------       -----------
           Net loans                                                                  $87,095,923       $80,087,042
                                                                                      ===========       ===========
</TABLE>

                                      F-12
<PAGE>


Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 1996.
Total loans to such persons and their companies amounted to $370,608 as of
December 31, 1996. During the year ended December 31, 1996, advances totaled
$78,932 and repayments totaled $149,892.

Changes in the allowance for possible loan losses were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
<S>                                                                       <C>              <C>              <C>    

                                                                         1996             1995              1994
                                                                      ----------       ----------        ----------
Balance at beginning of period                                        $1,359,979       $1,566,919        $1,730,493
Loans charged off                                                       (240,701)        (374,406)         (448,352)
Provision for loan losses                                                152,000          112,500           120,000
Recoveries of loans previously charged off                                35,026           54,966           164,778
                                                                      ----------       ----------        ----------
Balance at end of period                                              $1,306,304       $1,359,979        $1,566,919
                                                                      ==========       ==========        ==========
</TABLE>

Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31:
<TABLE>
<CAPTION>
<S>                                                                <C>            <C>            <C>            <C>    

                                                                          1996                          1995
                                                                --------------------------     -------------------------
                                                                Recorded        Related        Recorded       Related
                                                                Investment      Allowance      Investment     Allowance
                                                                In Impaired     For Credit     In Impaired    For Credit
                                                                Loans           Losses         Loans          Losses
                                                                -----------     ----------     -----------    ----------
Loans for which there is a related allowance for credit losses     $ 97,412       $9,048         $211,076       $22,691

Loans for which there is no related allowance for credit losses                                   413,366
                                                                   --------       ------         --------       -------

           Totals                                                  $ 97,412       $9,048         $624,442       $22,691
                                                                   ========       ======         ========       =======

Average recorded investment in impaired loans during the year
   ended December 31                                               $132,269                      $728,973
                                                                   ========                      ========

Related amount of interest income recognized during the time, in the year ended
   December 31, that the loans were impaired

           Total recognized                                        $ 25,245                      $      0
                                                                   ========                      ========
           Amount recognized using a cash-basis method of
              accounting                                           $ 25,245                      $      0
                                                                   ========                      ========
</TABLE>

As of December 31, 1996, loans restructured in a troubled debt restructuring
before January 1, 1995, the effective date of SFAS No. 114, that are not
impaired based on the terms specified by the restructuring agreement totaled
$260,943. The gross interest income that would have been recorded in the year
ended December 31, 1996 if such restructured loans had been current in
accordance with their original terms was $27,078. The amount of interest income
on such restructured loans that was included in net income for the year ended
December 31, 1996 was $22,901.

NOTE 5 - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment as of December 31:
<TABLE>
<CAPTION>
<S>                                                                                    <C>               <C>        

                                                                                          1996              1995
                                                                                       ----------        ----------
Land                                                                                   $  448,851        $  409,251
Buildings                                                                               3,229,269         3,061,241
Furniture and equipment                                                                 2,637,556         1,992,390
                                                                                       ----------        ----------
                                                                                        6,315,676         5,462,882
Accumulated depreciation and amortization                                              (2,336,273)       (1,981,496)
                                                                                       ----------        ----------
                                                                                       $3,979,403        $3,481,386
                                                                                       ==========        ==========

</TABLE>
                                      F-13
<PAGE>


NOTE 6 - DEPOSITS

The aggregate amount of time deposit accounts (including CDs), each with a
minimum denomination of $100,000, was approximately $5,392,466 and $4,889,539 as
of December 31, 1996 and 1995, respectively.

For time deposits as of December 31, 1996, the aggregate amount of maturities
for each of the following five years ended December 31, and thereafter are:

        1997                                                  $31,162,674
        1998                                                   12,866,828
        1999                                                    1,398,527
        2000                                                      424,339
        2001                                                      175,971
                                                              -----------
                                                              $46,028,339
                                                              ===========

NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON

Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB). The components of these borrowings are as follows as of December 31,
1996:

                                                                      Weighted
                                                                       Average
                                                                       Rate to
                         Maturity Date               Balance          Maturity
                         -------------               -------          --------
                           1997                    $4,908,225           5.92%
                           1998                     3,711,700           6.12
                           1999                        82,600           7.43
                                                   ----------
                             Total                 $8,702,525
                                                   ==========

Advances are secured by the Company's stock in that institution, its residential
real estate mortgage portfolio and the remaining U.S. government and agencies
obligations not otherwise pledged.

NOTE 8 - ACQUISITION OF BRANCH

On April 22, 1996, the Company purchased certain assets and assumed deposits
from First New Hampshire Bank's branch office in Campton, New Hampshire. On that
day, the Company recorded the following entries to record this transaction.

Loans                                            $    4,381
Premises and equipment                              225,000
Core deposit intangible                             175,000
Cash                                              6,355,157
           Other liabilities                                               1,284
           Deposits                                                    6,758,254

The transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branch office are included in the 1996
income statement of the Company from the date of the transaction to December 31,
1996.

The core deposit intangible is being amortized over 10 years. During 1996
amortization expense amounted to $13,125.


                                      F-14
<PAGE>


NOTE 9 - INCOME TAXES

The components of income tax expense are as follows for the years ended December
31:

                                       1996              1995              1994
                                     ----------        ----------        -------
Current:
   Federal                            $438,000          $431,000        $349,233
   State                                90,000            88,000          50,198
                                      --------          --------        --------
                                       528,000           519,000         399,431
                                      --------          --------        --------
Deferred:
   Federal                              82,971            90,269        124,262
   State                                17,049            18,431         28,723
                                      --------          --------        -------
                                       100,020           108,700        152,985
                                      --------          --------        -------
Total income tax expense              $628,020          $627,700       $552,416
                                      ========          ========       ========

The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended
December 31:

                                         1996             1995             1994
                                         % of             % of             % of
                                        Income           Income           Income
                                        ------           ------           ------
Federal i                                34.0%            34.0%            34.0%
Increase (decrease) in tax resulting from:
   Tax-exempt income                     (6.2)            (5.1)            (5.7)
   Unallowable expenses                    .8               .6               .6
   Other, net                             1.3               .5               .5
State tax, net of                         3.1              3.0              3.0
                                         ----             ----             ----
                                         33.0%            33.0%            32.4%
                                         ====             ====             ====

The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
<TABLE>
<CAPTION>

                                                                 1996            1995
                                                               ---------       --------
<S>                                                            <C>             <C>  

Deferred tax assets:
   Allowance for loan                                          $360,553        $379,099
   Loan origination fees                                         76,921          96,151
   Nonaccrual loans                                              25,634          30,326
   Other real estate owned valuatio                              13,650           7,800
   Net unrealized holding loss on available-for-sale securities  13,654           8,218
   Other, net                                                                     5,647
                                                               --------        --------
     Gross deferred tax assets                                  490,412         527,241
                                                               --------        --------

Deferred tax liabilities:
   Other, net                                                    (5,192)
   Depreciation                                                (136,780)       (115,916)
   Pension                                                      (40,666)        (16,553)
                                                               --------        --------
     Gross deferred tax liabilities                            (182,638)       (132,469)
                                                               --------        --------
Net deferred tax assets                                        $307,774        $394,772
                                                               ========        ========
</TABLE>

Deferred tax assets as of December 31, 1996 and 1995 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.

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


                                      F-15
<PAGE>


NOTE 10 - CONTINGENCY

The Bank intends to file with the Internal Revenue Service an application to
resolve certain problems concerning the eligibility of its defined benefit
pension and 401K plans. Bank management and counsel estimate that the sanction
that would be imposed by the IRS is between $25,000 and $200,000.

NOTE 11 - EMPLOYEE BENEFITS

The Company has a qualified defined benefit pension plan covering substantially
all of its employees who meet certain eligibility requirements. The benefit
provision of the plan is 50% of monthly compensation reduced by 1/20 for each
year of service less than 20 years.

The following table sets forth the funded status of the plan and amounts
recognized in the Company's balance sheet as of December 31:
<TABLE>
<CAPTION>
<S>                                                                                   <C>               <C>         

                                                                                         1996              1995
                                                                                      -----------       -----------
Actuarial present value of benefit obligations:
   Accumulated benefit obligation (including vested benefits of
     $1,304,460 and $1,092,112, respectively)                                         $ 1,330,688       $ 1,108,148
                                                                                      ===========       ===========

   Projected benefit obligation for services rendered to date                         $(1,577,755)      $(1,394,760)

   Plan assets at fair value, primarily invested in individual
     life insurance policies and investments                                            1,621,693         1,525,046
                                                                                       ----------       -----------

   Plan assets greater than projected benefit obligation                                   43,938           130,286

   Unrecognized net transition asset                                                      (28,821)          (32,938)

   Unrecognized net loss (gain)                                                            89,156           (54,905)
                                                                                       ----------        ----------


   Prepaid pension cost included in other assets on the balance sheets                 $  104,273        $   42,443
                                                                                       ==========        ==========

</TABLE>
Net periodic pension cost included the following components for the years ended
December 31:
<TABLE>
<CAPTION>
<S>                                                                    <C>              <C>               <C>      

                                                                          1996             1995              1994
                                                                       ---------        ---------         ---------
Service cost-benefits earned during the period                         $  93,526        $  80,997         $  72,773
Interest cost on projected benefit obligation                            104,065           82,665            91,875
Actual (return) loss on plan assets                                     (149,152)        (254,441)           34,815
Net amortization and deferral                                             25,131          162,825          (122,656)
                                                                       ---------        ---------         ---------
Net periodic pension cost                                              $  73,570        $  72,046         $  76,807
                                                                       =========        =========         =========
</TABLE>

The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.0% and 4.0%. The expected long-term rate of return on assets
was 8.0%.

The Bank has a 401(k) plan. To be eligible, employees must have attained age
twenty-one, completed six months of service and be credited with 1,000 hours of
service. The Bank matches employee contributions on the first 4% of compensation
deposited as elective contributions. The 401(k) matching expense was $13,744,
$15,714 and $12,680 for the years ended December 31, 1996, 1995 and 1994,
respectively.


                                      F-16
<PAGE>


NOTE 12 - FINANCIAL INSTRUMENTS

The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.

The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.

Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income-producing properties.

Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Of the total standby letters of
credit outstanding as of December 31, 1996, $33,000 are secured by deposit
accounts held by the Bank.

The provisions of Statement of Financial Accounting Standards No. 107 
"Disclosures about Fair Value of Financial Instruments," as amended by SFAS
No. 119, became effective for the Company as of December 31, 1995.

The disclosures are the estimated fair values of the Company's financial
instruments, all of which are held or issued for purposes other than trading,
which are as follows as of December 31:
<TABLE>
<CAPTION>
<S>                                                 <C>               <C>               <C>               <C>      

                                                               1996                               1995
                                                  ------------------------------     ------------------------------
                                                    Carrying           Fair             Carrying           Fair
                                                    Amount             Value            Amount             Value
                                                  ------------      ------------     ------------      ------------
Financial assets:
   Cash and cash equivalents                      $  4,979,633      $  4,979,633     $  8,218,670      $  8,218,670
   Available-for-sale securities                    18,456,658        18,456,658        8,113,477         8,113,477
   Held-to-maturity securities                      11,975,136        11,879,497       14,999,810        14,926,264
   Federal Reserve Bank stock                           80,250            80,250           80,250            80,250
   Federal Home Loan Bank stock                        739,600           739,600          739,600           739,600
   Loans                                            87,095,923        86,753,000       80,087,042        80,678,000
   Accrued interest receivable                         863,612           863,612          855,135           855,135

Financial liabilities:
   Deposits                                        105,685,368       105,984,000       96,416,217        96,672,000
   Advances from FHLB                                8,702,525         8,717,000        7,491,525         7,504,000
</TABLE>

The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.

                                      F-17

<PAGE>


Notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of December 31:

                                                         1996           1995
                                                      ----------     ----------
Commitments to originate loans                        $1,768,044     $1,152,100
Standby letters of credit                                211,114        141,656
Unadvanced portions of commercial real estate loans       45,000         47,526
Unadvanced portions of home equity loans               1,019,889        405,661
Unadvanced portions of commercial lines of credit      3,072,335      5,771,961
                                                      ----------     ----------
                                                      $6,116,382     $7,518,904
                                                      ==========     ==========

There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.

The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119 "Disclosure About Derivative  Financial  Instruments and Fair Value
of Financial Instruments."

NOTE 13 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

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

NOTE 14 - EARNINGS PER SHARE

Earnings per share for 1996, 1995 and 1994 were calculated using the weighted
average number of shares outstanding during those periods. For 1996, 1995 and
1994 earnings per share calculations, the weighted average number of shares
outstanding were 690,401, 691,188 and 751,020, respectively.

NOTE 15 - REGULATORY MATTERS

The Bank, as a National Bank is subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Bank may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as defined) plus the
retained earnings (as defined) from the prior two years. The dividends, as of
December 31, 1996 that the Bank could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $2,407,449.

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.


                                      F-18
<PAGE>


As of December 31,  1996,  the most recent  notification  from the Office of the
Comptroller of the Currency  categorized the Bank as well capitalized  under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized the Bank must maintain minimum total  risk-based,  Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management  believes have changed the Bank's
category.

The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
<S>                                                <C>        <C>          <C>           <C>              

                                                                                                  To Be Well
                                                                                                  Capitalized Under
                                                                          For Capital             Prompt Corrective
                                                        Actual           Adequacy Purposes:       Action Provisions:
                                                  -----------------      ------------------       ------------------
                                                  Amount      Ratio      Amount        Ratio        Amount     Ratio
                                                  ------      -----      ------        -----        ------     -----
                                                                                    Greater than            Greater than
As of December 31, 1996:                                                            or equal to:            or equal to:
     Total Capital (to Risk Weighted Assets):                                       ------------            ------------
         Consolidated                              $13,013    17.41%       $5,978        8%           N/A
                                                                                         
         Pemigewasset National Bank                 12,964    17.35         5,978        8          $7,473     10%
                                                                                                               
                                                                                                                
     Tier 1 Capital (to Risk Weighted Assets):                                                                  
         Consolidated                               12,074    16.08         3,004        4            N/A      
                                                                                                               
         Pemigewasset National Bank                 12,025    16.01         3,004        4          4,506       6
                                                                                                              
                                                                                                                
     Tier 1 Capital (to Average Assets):                                                                        
         Consolidated                               12,074     9.50         5,083        4            N/A      
                                                                                                             
         Pemigewasset National Bank                 12,025     9.46         5,083        4          6,354       5
                                                                                                              
                                                                                                                
As of December 31, 1995:                                                                                        
     Total Capital (to Risk Weighted Assets):                                                                   
         Consolidated                               12,274    17.82         5,509        8            N/A      
                                                                                                            
         Pemigewasset National Bank                 12,225    17.75         5,509        8          6,886      10
                                                                                                               
                                                                                                                
     Tier 1 Capital (to Risk Weighted Assets):                                                                  
         Consolidated                               11,407    16.45         2,774        4            N/A      
                                                                                                               
         Pemigewasset National Bank                 11,358    16.38         2,774        4          4,161       6
                                                                                                            
                                                                                                                
     Tier 1 Capital (to Average Assets):                                                                        
         Consolidated                               11,407     9.91         4,606        4            N/A      
                                                                                                               
         Pemigewasset National Bank                 11,358     9.86         4,606        4          5,758      5
                                                                                      
</TABLE>

NOTE 16 - RECLASSIFICATION

Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.

NOTE 17 - PARENT COMPANY ONLY FINANCIAL STATEMENTS

The following financial statements are for Pemi Bancorp, Inc. (Parent Company
Only) and should be read in conjunction with the consolidated financial
statements of Pemi Bancorp, Inc. and Subsidiary.

                                      F-19
<PAGE>


                                                PEMI BANCORP, INC.
                                               (Parent Company Only)

                                                  BALANCE SHEETS

                                            DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
<S>                                                                                    <C>               <C>       

ASSETS                                                                                     1996             1995
------                                                                                 ----------        ----------
Cash                                                                                  $   394,360       $   302,345
Investment in subsidiary, The Pemigewasset National Bank                               12,164,750        11,344,568
Other assets                                                                                                  2,593
                                                                                      -----------       -----------
                                                                                      $12,559,110       $11,649,506
                                                                                      ===========       ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities                                                                     $   345,201       $   255,448
                                                                                      -----------       -----------
Stockholders' equity:
   Common stock, par value $1.00 per share; authorized 2,000,000 shares;
     issued 751,901 shares; outstanding 690,401 shares                                    751,901           751,901
   Paid-in capital                                                                      2,384,329         2,384,329
   Retained earnings                                                                    9,714,379         8,885,889
   Treasury stock, at cost (61,500 shares)                                               (615,000)         (615,000)
   Net unrealized holding loss on available-for-sale securities                           (21,700)          (13,061)
                                                                                      -----------       -----------
           Total stockholders' equity                                                  12,213,909        11,394,058
                                                                                      -----------       -----------
                                                                                      $12,559,110       $11,649,506
                                                                                      ===========       ===========
</TABLE>

                                      F-20
<PAGE>


                                                PEMI BANCORP, INC.
                                               (Parent Company Only)

                                               STATEMENTS OF INCOME

                                   YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
<S>                                                                      <C>              <C>               <C>    

                                                                          1996            1995               1994
                                                                      ----------       ----------        ----------
Dividends from subsidiary                                             $  448,761       $  547,201        $  300,761
Management fee income from subsidiary                                     36,025           20,840            37,492
                                                                      ----------       ----------        ----------
                                                                         484,786          568,041           338,253
                                                                      ----------       ----------        ----------
General and administrative expense                                        36,356           21,154            37,492
                                                                      ----------       ----------        ----------
Income before equity in undistributed net income of subsidiary           448,430          546,887           300,761
Equity in undistributed net income of subsidiary                         828,821          728,407           850,221
                                                                      ----------       ----------        ----------
           Net income                                                 $1,277,251       $1,275,294        $1,150,982
                                                                      ==========       ==========        ==========
</TABLE>

                                      F-21
<PAGE>




                                                PEMI BANCORP, INC.
                                               (Parent Company Only)

                                             STATEMENTS OF CASH FLOWS

                                   YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
<S>                                                                <C>               <C>               <C>       

                                                                       1996             1995               1994
                                                                   -----------        ----------       -----------
Cash flows from operating activities:
   Net income                                                      $1,277,251         $1,275,294        $1,150,982
   Adjustments to reconcile net income to net cash provided by
     operating activities:
       (Increase) decrease in accrued dividend receivable               2,594            238,015           (90,228)
       Undistributed net income of subsidiary                        (828,821)          (728,407)         (850,221)
                                                                   ----------         ----------        ----------

   Net cash provided by operating activities                          451,024            784,902           210,533
                                                                   ----------         ----------        ----------

Cash flows from financing activities:
   Purchases of treasury stock                                                         (317,000)         (298,000)
   Dividends paid                                                    (359,009)         (330,360)         (210,533)
                                                                   ----------        ----------         ---------

   Net cash used in financing activities                             (359,009)         (647,360)         (508,533)
                                                                   ----------        ----------         ---------

Net increase (decrease) in cash and cash equivalents                   92,015           137,542          (298,000)
Cash and cash equivalents at beginning of year                        302,345           164,803           462,803
                                                                   ----------       -----------        ----------
Cash and cash equivalents at end of year                           $  394,360        $  302,345        $  164,803
                                                                   ==========        ==========        ==========
</TABLE>




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

                                      F-22

<PAGE>

                                      -33-

                   ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH
               ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         The Company had no  disagreements  with its independent  accountants on
accounting and financial disclosure matters.

                                    PART III

          ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  directors  and  executive  officers  of the  Company  (or where so
indicated, the Bank) are as follows: 


                                                     Position(s) with 
Name                                    Age          the Company
----                                    ---          -----------
Fletcher W. Adams                        60          President, Treasurer and
                                                     Chief Executive Officer
                                                     of the Company; President
                                                     and Chief Executive
                                                     Officer of the Bank;
                                                     Director

Frederick C. Anderson                    45          Director of the Bank

Charles H. Clifford, Jr.                 61          Director

James E. Currie                          73          Vice President and
                                                     Secretary of the Company;
                                                     Director of the Company

Andrew L. Morse                          54          Director

John H. Noyes                            50          Director

Milton E. Pettengill                     70          Chairman of the Board;
                                                     Director

Keith L. Philbrick                       48          Chief Financial Officer

Ann M. Reever                            52          Director

Robert R. Sargeant                       45          Vice President and Senior
                                                     Loan Officer of the Bank

Dean H. Yeaton                           59          Director
---------------------
         With the exception of Mr.  Anderson,  a director of the Bank, (who is a
director  of Whole  Village  Family  Resource  Center,  Northeast  Public  Power
Association,  Northeast  Association  of Electric  Cooperatives)  no director or
executive officer holds a directorship in any company with a class of securities

<PAGE>

                                      -34-

registered  pursuant  to Section 12 of the  Securities  Exchange  Act of 1934 or
subject  to the  requirements  of  Section  15(d)  of  such  Act or any  company
registered as an investment company under the Investment Company Act of 1940.

         Fletcher  W.  Adams has been a  director  of the  Company  since it was
organized  in 1985.  From 1985 until  1990,  Mr.  Adams was the  Executive  Vice
President of the Company. In January, 1990, Mr. Adams became President and Chief
Executive  Officer  of the  Company.  Mr.  Adams  is also the  President,  Chief
Executive  Officer  and a director  of the Bank.  Mr.  Adams  joined the Bank as
Executive Vice  President in June of 1984.  Prior to joining the Bank, Mr. Adams
was  the  President  of  Adams  Supermarket,  Inc.,  a  company  which  owned  a
supermarket. Mr. Adams has been a director of the Bank since 1973.

         Frederick C.  Anderson has been a director of the Bank since January of
1997. Mr. Anderson has served as the General Manager and Chief Executive Officer
of New Hampshire Electric Cooperative, Inc. since August 1992. Prior to that, he
served as the Assistant General Manager of New Hampshire  Electric  Cooperative,
Inc.

         Charles H.  Clifford,  Jr. has been a director of the Company  since it
was organized in 1985. Mr.  Clifford has been a director of the Bank since 1980.
Mr. Clifford is a partner in the business firm of Clifford-Nicol Printing and is
that firm's President.

         James  E.  Currie  has  been a  director  of the  Company  since it was
organized  in 1985.  Prior to  retiring  in July of 1986,  Mr.  Currie  was Vice
President  and Senior  Loan  Officer of the Bank.  Mr.  Currie  also served as a
director of the Bank.

         Mr.  Morse has been a director of the Bank since  January of 1996 and a
director  of the  Company  since  May of 1996.  Mr.  Morse has been the owner of
Waynes Market since 1991 and Woodstock Cheese Shoppe since 1995.

         John H. Noyes has been a  director  of the  Company  and the Bank since
1994. Mr. Noyes is the Treasurer of Noyes Insurance Agency,  Inc. and since 1991
has served as President of Central Square Insurance, Inc.

         Milton E. Pettengill has been the President,  Chief  Executive  Officer
and a director  of the Company  since it was  organized  in 1985.  In January of
1990, he became Chairman of the Company.  Mr.  Pettengill has been with the Bank
since  1951.  He has been an  executive  officer of the Bank since  1974,  and a
director of the Bank since 1973.  Retiring in January of 1990,  he now serves as
Chairman of the Board.

<PAGE>
                                      -35-

         Keith L.  Philbrick  has been the Chief  Financial  Officer of the Bank
since November  1994.  From October 1980 through  November  1994, Mr.  Philbrick
served as the Bank's senior mortgage  officer.  Mr.  Philbrick has been with the
Bank since 1970.

         Ann M.  Reever has been a director  of the  Company  since  1993.  Mrs.
Reever, a self-employed  business  manager,  has been a member of the Pemi-Baker
Regional  School  Board  since 1989 and a Director of the Swift Water Girl Scout
Council since 1991.

         Robert R.  Sargeant  has been the Senior Loan Officer of the Bank since
1987. From 1980 to 1987, Mr. Sargeant served as the Commercial and Consumer Loan
Officer of the Bank. Mr. Sargeant has been with the Bank since 1974.

         Dean H.  Yeaton has been a director  of the  Company  since  1986.  Mr.
Yeaton has been a director of the Bank since 1986.  Mr.  Yeaton is the President
of Dean H. Yeaton, Inc., and the President of Yeaton Oil Company.

                        ITEM 11 - EXECUTIVE COMPENSATION

         The following  table sets forth for the fiscal years ended December 31,
1996, 1995 and 1994,  respectively,  the remuneration received by the President,
Treasurer and Chief Executive Officer of the Company and Bank, respectively.  No
individual  employed  by the Bank or  Company  received  more than  $100,000  in
compensation during fiscal years 1996, 1995 and 1994, respectively.

                           SUMMARY COMPENSATION TABLE
Name and
Principal Position                   Year        Salary             Bonus
------------------                   ----        ------             -----
Fletcher W. Adams                    1996        $97,000 (1)        $1,965 (2)
President, Treasurer and             1995        $93,600 (1)        $1,830 (3)
Chief Executive Officer of           1994        $87,100 (1)        $1,715 (4)
the Company and the Bank

------------------
(1)  Includes  salary  and  monthly  fee  received  for  attendance  at Board of
     Directors Meetings of the Bank and Company.

(2)  This amount  includes a bonus of $1,865 equal to one week of salary.  Every
     full time employee of the Bank with  seniority of one year or more received
     a year  end  bonus  equivalent  to one week of  salary.  This  amount  also
     includes a $100 Christmas bonus received by each full-time  employee of the
     Bank with seniority of one year or more.

<PAGE>

                                      -36-

(3)  This amount  includes a bonus of $1,730 equal to one week of salary.  Every
     full time employee of the Bank with  seniority of one year or more received
     a year  end  bonus  equivalent  to one week of  salary.  This  amount  also
     includes a $100 Christmas bonus received by each full-time  employee of the
     Bank with seniority of one year or more.

(4)  This amount  includes a bonus of $1,615 equal to one week of salary.  Every
     full time employee of the Bank with  seniority of one year or more received
     a year  end  bonus  equivalent  to one week of  salary.  This  amount  also
     includes a $100 Christmas bonus received by each full-time  employee of the
     Bank with seniority of one year or more.

         In  addition to the cash  compensation,  officers  and other  full-time
employees of the Company or the Bank receive group life, health, hospitalization
and  medical  reimbursement  insurance  coverage.  However,  these  plans do not
discriminate in scope, terms, or operation,  in favor of officers of the Company
and the Bank and are available generally to all full-time employees.

Employment Contracts

         There are no employment  agreements  between the Company,  the Bank and
any employees of the Company or Bank.

Pension Plan

         The Bank has a qualified pension plan covering substantially all of its
employees  meeting certain  eligibility  requirements.  Benefits paid under this
plan are based on fifty  percent (50%) of monthly  compensation  reduced by 1/20
for each year of service less than twenty (20) years.

         In March 1997, the Bank filed an application  with the Internal Revenue
Service  (the  "IRS")  to  resolve  certain  ambiguities  and  potential  issues
concerning the  eligibility of its defined  benefit  pension and 401k plans.  As
reflected in footnotes to the Consolidated  Financial  Statements of the Company
for the  year-ended  December 31, 1996,  it is estimated  that the sanction that
would be imposed  by the IRS to resolve  these  issues is  between  $25,000  and
$200,000.

Compensation of Directors

         The  Directors  of the Company and the Bank receive $300 for each Board
of  Directors  meeting  they  attend  except  for the  Chairman  of the Board of
Directors who receives $500 and the Clerk of the Board of Directors who receives
$375 for each Board of Directors  meeting they attend.  In addition,  members of
various  Board of  Director's  Committees  receive  a fee of $175 per  committee
meeting attended.

<PAGE>

                                      -37-

                     ITEM 12 - SECURITY OWNERSHIP OF CERTAIN
                        BENEFICIAL OWNERS AND MANAGEMENT

         The following  table includes  certain  information as of March 1, 1997
regarding the principal  stockholders of the Company.  With the exception of the
stockholders  listed below,  the Company is not aware of any beneficial owner of
five percent (5%) or more of the Company's Common Stock.

Name and Address of                       Amount of Shares            Percent
Beneficial Owner                          Beneficially Owned(1)      of Class
----------------                          ---------------------      --------
American Global Insurance Co.                   43,200                 6.26%
c/o Fiduciary Trust Co. Int.
Two World Trade Center
New York, NY 10048

Fletcher W. Adams                               57,927(2)              8.39%
President, Treasurer and
Chief Executive Officer
of the Company and the Bank; Director

(1) Percentages are based upon the 690,401 shares of Common Stock outstanding as
of March 1, 1997.  The definition of a beneficial  owner of a security  includes
any person who,  directly or  indirectly,  through  any  contract,  arrangement,
understanding,   relationship  or  otherwise  has  or  shares  voting  power  or
investment power with respect to such security.

(2) Includes 44,250 shares owned  individually by Mr. Adams,  4,000 shares owned
jointly with his wife,  1,700 shares owned by his son, 1,700 shares owned by his
daughter and 6,277 shares owned by an estate of which Mr. Adams is Trustee.

<PAGE>

                                      -38-

                                    DIRECTORS

         The following table includes  certain share ownership and  biographical
information as of March 1, 1997 regarding each director of the Company and share
ownership of all directors and executive officers as a group:

                                 Director of
                                 PEMI BANCORP,     Shares of
Name,                            INC. since and    Common Stock
Title and                        (Expiration       Beneficially
(Principal                       Date of           Owned As of       Percentage
Occupation)             Age      Current Term)     March 1, 1997(1)  of Class
-----------             ---      -------------     ----------------  --------
Fletcher W.
Adams                   60           1985;            57,927(2)        8.39%
Director;                           (1998)
(President,
Treasurer, and
Chief Executive
Officer of the
Company)

Charles H.
Clifford, Jr.           61           1985;             2,400(3)         .35%
Director;                           (1998)
(President of
Clifford-Nicol
Printing, Inc.)

James E.
Currie                  73           1985;             3,600(4)         .52%
Director;                           (1997)
(Vice President
and Secretary of
the Company)

Andrew L.
Morse                   54           1996;             1,000(5)         .14%
Director;                           (1999)
(Owner of
Waynes
Market and
Woodstock
Cheese Shoppe)
------------------
Footnotes follow table

<PAGE>

                                      -39-

                                 Director of
                                 PEMI BANCORP,     Shares of
Name,                            INC. since and    Common Stock
Title and                        (Expiration       Beneficially
(Principal                       Date of           Owned As of       Percentage
Occupation)             Age      Current Term)     March 1, 1997(1)  of Class
-----------             ---      -------------     ----------------  --------
John H.
Noyes                   50           1994;             11,350(6)       1.64%
Director;                           (1998)
(Treasurer; Noyes
Insurance Agency,
Inc., President;
Central Square
Insurance, Inc.)

Milton E.
Pettengill              70           1985;              8,800(7)       1.28%
Chairman of                         (1997)
the Board of
Directors;
(Retired President
and Chief
Executive Officer
of the Company
and the Bank)

Ann M.                  52           1993;              2,450(8)        .35%
Reever                              (1999)
Director;
(Self-employed
business manager;
Member of Pemi-
Baker Regional
School Board;
Director of
Swift Water
Girl Scout
Council)
-------------------
Footnotes follow table


<PAGE>

                                      -40-

                                 Director of
                                 PEMI BANCORP,     Shares of
Name,                            INC. since and    Common Stock
Title and                        (Expiration       Beneficially
(Principal                       Date of           Owned As of       Percentage
Occupation)             Age      Current Term)     March 1, 1997(1)  of Class
-----------             ---      -------------     ----------------  --------
Dean H.
Yeaton                  59          1986;               5,350(9)       .78%
Director;                          (1999)
(President
Yeaton Oil Co,;
President Dean
H. Yeaton, Inc.)

All Directors (as a group                              92,877         13.45%
eight(8) individuals)                                  ======         ======
--------------------
(1)  Percentages  are based upon the 690,401 shares of Common Stock  outstanding
     as of March 1, 1997. The definition of beneficial owner includes any person
     who,   directly  or   indirectly,   through  any   contract,   arrangement,
     understanding,  relationship  or  otherwise  has or shares  voting power or
     investment power with respect to such security.

(2)  Includes 44,250 shares owned  individually by Mr. Adams, 4,000 shares owned
     jointly with his wife, 1,700 shares owned by his son, 1,700 shares owned by
     his  daughter  and 6,277  shares  owned by an estate of which Mr.  Adams is
     Trustee.

(3)  All shares are owned individually by Mr. Clifford.

(4)  Includes  1,400 shares owned  individually  by Mr.  Currie and 2,200 shares
     owned jointly with his wife.

(5)  All shares are owned individually by Mr. Morse.

(6)  All shares are owned individually by Mr. Noyes.

(7)  Includes 1,000 shares owned individually by Mr. Pettengill and 7,800 shares
     owned jointly with his wife.

(8)  All shares are owned individually by Mrs. Reever.

(9)  Includes 2,000 shares owned individually by Mr. Yeaton,  1,000 shares owned
     by his wife and 2,350 shares owned jointly with his wife.

<PAGE>

                                      -41-

ITEM 13 -  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Some  of the  Directors  and  Executive  Officers  of the  Company  and
companies or  organizations  with which they are  associated,  have had, and may
have in the future, banking transactions with the Bank in the ordinary course of
the Bank's business.  As of December 31, 1996, the Bank had outstanding $370,608
in loans to  Directors  and  Executive  Officers of the Company and the Bank and
immediate  family  members  of such  Executive  Officers  and  Directors,  which
represents 3.03% of capital.

         Federal  banking laws and  regulations  limit the  aggregate  amount of
indebtedness of all insiders.  Pursuant to such laws and regulations,  banks may
extend credit to executive officers,  directors,  principal  stockholders or any
related interest of such persons,  if the extension of credit to such persons is
in an amount that, when aggregated with the amount of all outstanding extensions
of credit to such individuals,  does not exceed the banks unimpaired capital and
unimpaired  surplus. As of December 31, 1996, the aggregate amount of extensions
of credit to Bank insiders was well below this limit.

         All  loans  and  commitments  to  loan  to  the  Company's  and  Bank's
Directors, Executive Officers and their associates are made on substantially the
same terms,  including interest rates,  collateral and repayment terms, as those
prevailing at the time for  comparable  transactions  with other persons and, in
the opinion of Management,  do not involve more than a normal risk of collection
or, present other unfavorable features.

<PAGE>
                                      -42-

                                     PART IV

               ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
                             AND REPORTS ON FORM 8-K
(a)

1.   Financial Statements

     The financial statements filed as part of this report  are  listed  in  the
     index appearing at Item 8.

2.   Financial Statement Schedules

     Schedules are omitted because they are not applicable.

3.   Exhibits

     Exhibit No.           Description
     -----------           -----------
     2.1                   Agreement  and Plan of Merger dated March 14, 1997 by
                           and among Pemi Bancorp,  Inc.,  Pemigewasset National
                           Bank,  The Berlin City Bank and  Northway  Financial,
                           Inc. was filed on March 26, 1997 as Exhibit 2 to Pemi
                           Bancorp,  Inc.'s  Current  Report  on Form 8-K and is
                           incorporated by reference.

     3.1-3.2               Restated and Amended  Articles of Organization of the
                           Registrant filed as Exhibits 3.1, to the Registrant's
                           Annual  Report on Form 10-K for the Fiscal Year Ended
                           December 31,  1992,  and are  incorporated  herein by
                           reference.

     21                    List of  Subsidiaries  of the  Company  is  filed  as
                           Exhibit 21 to the Registrant's  Annual Report on Form
                           10-K for the Fiscal Year Ended  December 31, 1994 and
                           is incorporated herein by reference.

     27                    Financial Data Schedule

(b)  Reports on Form 8-K

     No reports on Form 8-K were filed during the fourth quarter of the 1996
     fiscal year.

<PAGE>

                                      -43-

                                   SIGNATURES

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

Date: March 17, 1997                          PEMI BANCORP, INC.



                                              By /s/ Fletcher W. Adams
                                                -------------------------------
                                                Fletcher W. Adams
                                                President, Treasurer and
                                                Chief Executive Officer

Date: March 17, 1997                          By /s/ Keith L. Philbrick
                                                -------------------------------
                                                Keith L. Philbrick
                                                Chief Financial Officer


SUPPLEMENTAL  INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

     The  Company's  Annual  Report and Proxy  Material will be furnished to the
Company's  Stockholders prior to the Annual Meeting and copies will be furnished
to the Commission at that time.

<PAGE>
                                      -44-

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

Name                                  Title                     Date
----                                  -----                     ----

/s/ Fletcher W. Adams                 President, Treasurer      March 17, 1997
----------------------------          Chief Executive
Fletcher W. Adams                     Officer and Director


/s/ Charles H. Clifford, Jr.           Director                  March 17, 1997
----------------------------
Charles H. Clifford, Jr.

                                       Director                  March __, 1997
----------------------------
James E. Currie



/s/ Andrew L. Morse                    Director                  March 17, 1997
----------------------------
Andrew L. Morse



/s/ John H. Noyes                      Director                  March 17, 1997
----------------------------
John H. Noyes


                                       Director                  March __, 1997
----------------------------
Milton E. Pettengill



/s/ Ann M. Reever                      Director                  March 17, 1997
----------------------------
Ann M. Reever



/s/ Dean H. Yeaton                     Director                  March 17, 1997
----------------------------
Dean H. Yeaton