Ipswich Bancshares, Inc.


                                      2001

                    FORM 10K - ANNUAL REPORT UNDER SECTION 13
                 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                    FORM 10K - ANNUAL REPORT UNDER SECTION 13
                 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X]   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 For the fiscal year ended December 31, 2001

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

      For the transition period from                                 to

                        Commission file number (0-26663)

                            IPSWICH BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

                 Massachusetts                             04-3459169
       (State or other jurisdiction of                   (I.R.S. Employer
        incorporation or organization)                  Identification No.)

    23 Market Street Ipswich, Massachusetts                    01938
   (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code: (978) 356-7777 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:

           Title of each class:                Name of each exchange on which
                                                         registered:
      Common Stock, $0.10 par value               NASDAQ National Market

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 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 [  ].

The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of March 19, 2002, was $30,735,768. Although directors and
executive officers of the registrant and its subsidiaries were assumed to be
"affiliates" of the registrant for the purposes of this calculation, this
classification is not to be interpreted as an admission of such status.

The number of shares outstanding of the Company's common stock, as of March 19,
2002, was 1,934,474.

                       DOCUMENTS INCORPORATED BY REFERENCE

Information called for by Part III (Items 10, 11, 12 and 13) of this Form is
incorporated by reference from the Company's definitive proxy statement (the
"Proxy Statement") relating to the Annual Meeting of Stockholders of the Company
to be held on May 22, 2002.

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FORWARD-LOOKING STATEMENTS

This Financial Release contains certain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Although Ipswich Bancshares, Inc. believes that its expectations are based upon
reasonable assumptions within the bounds of its knowledge of its business
operations, there can be no assurance that actual results will not differ
materially from those projected in the forward-looking statements. Certain
factors that might cause such difference include, but are not limited to, the
factors set forth in the Corporation's filings with the Securities and Exchange
Commission, which include, among other factors, changes in general economic
conditions, credit risk management, changes in interest rates, regulatory issues
and changes in the assumptions used in making such forward-looking statements.

Certain factors that may cause such differences include, but are not limited to
the following: interest rates may increase, unemployment in the Company's market
area may increase, property values may decline, and general economic and market
conditions in the Company's market area may decline, all of which could
adversely affect the ability of borrowers to re-pay loans; general economic and
market conditions in the Company's market area may decline, the value of real
estate securing payment of loans may decline and the Company's ability to make
profitable loans may be impacted; adverse legislation or regulatory requirements
may be adopted; and competitive pressure among depository institutions may
increase. Any of the above may also result in lower interest income, increased
loan losses, additional charge-offs and write-downs and higher operating
expenses. The Company disclaims any intent or obligation to update publicly any
of the forward looking statements herein, whether in response to new
information, future events or otherwise.

PART I
------

ITEM 1        BUSINESS

GENERAL

Ipswich Bancshares, Inc. (the Company) is a Massachusetts corporation whose
primary business is serving as the holding company for Ipswich Savings Bank (the
Bank). On July 1, 1999, in connection with the formation of the Company as the
holding company for the Bank, each share of the Bank's common stock previously
outstanding was converted automatically into one share of common stock of the
Company, and the Bank became a wholly owned subsidiary of the Company. The
reorganization had no impact on the consolidated financial statements.

On February 26, 2002 the Board of Directors of the Company approved an Agreement
and Plan of Merger between Banknorth Group, Inc. (Banknorth) and Ipswich
Bancshares, Inc. whereby Banknorth will acquire the Company for $41.1 million,
or $20.50 per share of Company stock, payable in cash or in equivalent shares of
Banknorth stock, at the option of each stockholder, subject to limitations
intended to ensure that 51% of the outstanding common stock of the Company will
be converted into the right to receive Banknorth common stock and 49% of the
outstanding common stock of the Company will be converted into the right to
receive cash.

The transaction is subject to the approval of the Company's shareholders and
various state and federal regulatory bodies. If approved, it is anticipated the
transaction will be finalized in July 2002.

The Company operates out of its main office located at 23 Market Street,
Ipswich, Essex County, Massachusetts, and its seven full-service retail branch
offices, located in Beverly, Essex, Marblehead, North Andover, Rowley, Reading
and Salem, Massachusetts. The Company operates automatic teller machines at its
main office and each of its full-service retail branch offices. As a bank
holding company, the Company is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve (FRB) and the Bank
is subject to regulation, supervision and examination by the Federal Deposit
Insurance Corporation (the FDIC) and the Massachusetts Commissioner of Banks
(the Commissioner).


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The Company's principal business is attracting deposits from the general public
and using such deposits to fund its residential mortgage banking and commercial
banking functions. The Company also performs residential mortgage loan
servicing. The Bank is a member of the FDIC and deposits are insured by the Bank
Insurance Fund to the fullest extent authorized by law (generally $100,000 per
depositor). All deposits in excess of FDIC limits are insured by the
Massachusetts Depositors Insurance Fund. At December 31, 2001, the Company had
total assets of approximately $321 million, gross loans of $204 million, total
deposits of $250 million, stockholders' equity of $15 million and a regulatory
Tier 1 leverage capital ratio of 5.76%. Net income for 2001 was $2.8 million or
$1.37 per fully diluted share. In 2001, the Company repurchased 150,900 shares
at a weighted average price of $11.46 per share through the Company's stock
repurchase plan. Shares outstanding at December 31, 2001 were 1,925,628. Since
commencement of the Company's initial Share Repurchase Plan on March 16, 2000
the Company has repurchased 604,900 shares, or approximately 23.9% of the then
outstanding shares at a cost of $5.8 million or $9.56 per share.

LENDING ACTIVITIES

General. At December 31, 2001, the Company's loan portfolio, including net
deferred costs and unearned discounts, totaled $203.7 million, representing
63.4% of its total assets. The Company's loan portfolio increased by $0.6
million, or 0.3%, primarily from originations of commercial real estate loans.

The principal categories of loans in the Company's portfolio are residential
real estate loans secured by 1-4 family residences; residential owner-occupied
construction loans; home equity loans; commercial real estate loans, which are
primarily secured by multi-family residential, retail, office and industrial
properties; and consumer loans. Substantially all of the mortgage loans in the
Company's loan portfolio are secured by properties located in areas north and
west of Boston, Massachusetts. See "Item 8 - Note 5 of Notes to Consolidated
Financial Statements".

Residential Mortgage Loans. Residential mortgage loans totaled $158.9 million,
representing 78.0% of the loan portfolio at December 31, 2001, a decrease of
$3.8 million or 2.3% from 2000. The Company originates both long term fixed-rate
and adjustable-rate residential real estate loans, secured by 1-4 family
residences, through its mortgage lending function. The Company's mortgage
operations are designed to provide consistent and ongoing earnings. These loans
are offered on both a fixed and adjustable-rate basis, depending largely on the
level of interest rates and consumer demand. In 2001, the Company originated
approximately $108.5 million in residential mortgage loans. The Company sold
approximately $44.0 million in fixed-rate loans in the secondary market. The
mortgage division underwrites and originates loans for its own portfolio as well
as for sale in the secondary market to the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and institutional
secondary market investors.

The Company also originates "B" and "C" rated loans which may not be saleable in
the secondary market due to the borrower's inability to meet certain
underwriting criteria. The Company has established guidelines on the amount
loaned to a single borrower and the percentage of the loan portfolio that these
loans may comprise. The maximum loan-to-value is typically 80%. At December 31,
2001, the Company held $1.9 million of B and C rated loans.

Residential Owner-Occupied Construction Loans. Residential owner-occupied
construction loans totaled $2.0 million or 1% of total loans at December 31,
2001. The Company makes construction loans to prospective owner-occupants of
single family homes. These loans require interest-only payments until completion
of construction or the disbursement of the maximum allowed under the terms of
the loan, whichever occurs first, at which time the loan automatically converts
to a permanent, fully-amortizing, adjustable-rate loan that has a fixed-rate
conversion feature. The Company's standard underwriting guidelines are used to
evaluate loans that are made for amounts not exceeding 90% of the lesser of the
projected appraised value of the property upon completion of construction or the
cost of construction (including the purchase price of the land). Private
mortgage insurance is required for all loans that exceed 80% of the lower of
cost or appraised value. The Company requires borrowers to submit plans and
specifications for the home, along with an executed contract with a licensed
contractor. Scheduled progress payments are made only after inspections and
periodic title updates are completed.

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Home Equity Loans. At December 31, 2001 home equity loans totaled $31.7 million
or 15.6% of total loans. This was an increase of $500,000 or 1.7% in 2001. A
home equity loan may be made as a term loan or as a revolving line of credit and
is typically secured by a second mortgage on the borrower's home. The Company
will typically originate home equity loans in an amount up to 90% of the
appraised value of the home, less any loans outstanding that are secured by the
home.

Commercial/Commercial Real Estate Loans. Commercial and commercial real estate
loans totaled $9.6 million at December 31, 2001 or 4.7% of total loans. The
Company offers commercial banking services to small businesses in its immediate
market area. The Company has targeted small businesses with working capital
needs and commercial real estate loans under $600,000 as potential customers.
The Company has established underwriting criteria to limit its exposure to risk
from one particular industry or borrower concentration. The current portfolio of
commercial and commercial real estate loans are primarily secured by mixed-use
commercial properties, multi-family residential properties, commercial and
industrial buildings, land and several churches. The Company has a small
portfolio of commercial lines of credit. These loans traditionally carry higher
credit risk than residential loans. As a result, the Company assigns a higher
allocation percentage of the allowance for loan losses to commercial real estate
and industrial loans than to other types of loans in the portfolio.

Consumer Loans. Consumer loans were $535,000 or 0.3% of the loan portfolio at
December 31, 2001. The Company makes loans for personal or consumer purposes.
The Company's consumer loans consist of passbook, installment and overdraft
protection loans.

Loan and OREO Concentrations. There were no loans or OREO concentrations that
exceeded 5% of capital, or $755,900, at December 31, 2001.

Origination and Sale of Loans. Applications for residential mortgage loans are
obtained through loan originators employed by the Company who solicit
residential mortgage loan applications. There were seven loan originators
employed by the Company at December 31, 2001. These representatives, who are
compensated primarily by commission, provide origination services during banking
and non-banking hours at the Company or applicant's location. Residential
mortgage loan applications come from referrals from real estate brokers and
builders, existing customers, walk-in customers, and advertising. Commercial
loans are obtained through solicitation made by three commercial officers
employed by the Bank. Consumer loan applications are primarily obtained from
existing and walk-in customers who have been made aware of the Company's
programs by advertising and other means. All mortgage loans must be approved by
an Officer Credit Committee. Exceptions to policy and commercial loans must also
be approved by the Executive Committee of the Board of Directors.

The Company's residential mortgage loans are generally originated on terms,
conditions and documentation that permit their sale to the FHLMC, FNMA or other
institutional investors in the secondary market. Loan sales in the secondary
market provide additional funds for new residential lending.

The Company's strategy involves originating both fixed and adjustable-rate
residential mortgage loans. The decision to retain loans in portfolio or to sell
them in the secondary market is dependent upon the Company's liquidity and
market factors.


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Loan Fee Income. In addition to interest earned on loans, the Company receives
income from fees in connection with late payments, prepayments or modifications
and miscellaneous services related to its loans. Income from these activities
varies from period to period with the volume and types of loans made, size of
servicing portfolio, amounts of prepayments in the servicing portfolio and other
factors. The Company recognizes on its balance sheet the estimated value of the
rights to service mortgages it originates and sells in the secondary market on a
servicing retained basis. The asset created is amortized on a level yield method
over the estimated life of the underlying loans under which the asset was
created. On a quarterly basis, the Company estimates the fair value of the
unamortized asset and adjusts the recorded amount to the lower of unamortized
cost or fair value through a valuation allowance charged to loan servicing fee
income. The servicing rights recognized in 2001 and 2000 were $78,000 and
$229,000, respectively. The Company's mortgage servicing rights at December 31,
2001 and December 31, 2000 were $219,000 and $225,000, respectively, for which
the Company determined that a valuation allowance of $58,000 was necessary at
December 31, 2001. No allowance was deemed necessary at December 31, 2000. The
Company realizes the value of the servicing as a component of the sales of
mortgage loans. In 2001, the Company recognized a charge of $58,000 against
servicing income as a result of the decline in the value of its servicing
rights. The decrease in the value of its servicing rights in 2001 was due to the
decline in interest rates during the year, which precipitated higher than normal
prepayments. The value of servicing decreases as market interest rates decline
which necessitates the Company recording the decline in value through a charge
to the income statement and the establishment of a reserve.

Loan Servicing. Typically, the Company originates loans for sale in the
secondary market, for which it may retain the servicing. Under its loan
servicing agreements, the Company generally continues to collect payments on
loans, to make certain insurance and tax payments on behalf of borrowers, and to
provide other services related to the loans. The principal balance of the loans
serviced by the Company for secondary market investors amounted to $13.2
million, and $11.1 million at December 31, 2001 and 2000, respectively.

Allowance for Loan Losses. The allowance for loan losses is established by
management to absorb future charge-offs of loans deemed uncollectible. This
allowance is increased by provisions charged to operating expense and by
recoveries on loans previously charged off. The Company recorded provisions for
loan losses of $100,000 in 2001, $60,000 in 2000 and $100,000 in 1999.

In evaluating current information and events regarding borrowers' ability to
repay their obligations, management considers commercial loans over $200,000 to
be impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the note agreement; other
loans are evaluated collectively for impairment. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the fair value of collateral if the loan is collateral dependent. Impairment
losses are included in the allowance for loan losses through a charge to the
provision for loan losses.

The Company sets the level of its allowance for loan losses based on a number of
factors. Management uses available information (such as current economic
conditions, levels of nonperforming loans, delinquency trends and collateral
values) to assess the adequacy of the allowance and to determine future
additions to the allowance. The process involves substantial uncertainties;
ultimate losses may vary from current estimates. Management believes that the
allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on judgments different from those of management. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Provision for Loan Losses," and "Item 8 - Note 6 of Notes to
Consolidated Financial Statements".


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The Company sets the level of its allowance for loan losses based on a number of
factors. An individual analysis of all delinquent loans, as well as internally
classified loans, is conducted and specific allowances are allocated for those
loans that are determined to have certain weaknesses that make ultimate
collectibility of both principal and interest questionable. In conjunction with
its review, management considers external factors that may affect the adequacy
of the allowance for loan losses. Such factors may include, but are not limited
to, present real estate trends and regional economic conditions, past estimates
of loan losses as compared to actual losses, potential problems with larger
loans, loan concentrations and historical losses on loans. Management and the
Executive Committee of the Board of Directors assess the amount of the allowance
for loan losses monthly. The Board of Directors reviews a detailed assessment on
at least a quarterly basis.

INVESTMENT SECURITIES

The Company invests in debt and equity securities, subject to restrictions
imposed by federal and state law. The Company's securities portfolio is managed
in accordance with a written investment policy adopted by the Board of
Directors. The investment portfolio is a source of earnings in the form of
interest and dividends; provides for diversification; and is a source of
liquidity. Investments may be made by the President of the Company within
specified limits and types. Transactions exceeding these limits must be approved
in advance by the Executive Committee. All securities transactions are approved
by the Board of Directors after execution of the transaction.

At December 31, 2001, the Company maintained an investment portfolio comprised
of adjustable-rate (ARM) and fixed-rate mortgage-backed securities (MBS), a
collateralized mortgage obligation (CMO), U.S. Government Agency callable
debentures, trust preferred securities and mutual funds totaling $85.7 million
or 26.7% of assets. The Company has managed its investment portfolio with the
intent of maintaining adequate liquidity and maximizing yields. The Company has
categorized $23.1 million of MBS's, $4.6 million of U.S. Government Agency
debentures and $7.6 million of trust preferred securities as held to maturity,
carried at amortized cost, and $41 million of MBS's, a $2 million Washington
Mutual CMO (with a book value of $2.0 million) and $6.8 million of mutual funds
as available for sale, carried at market value. As of December 31, 2001, the
Company has a net unrealized appreciation, net of taxes, on its available for
sale securities, of $338,000. This amount is reported as accumulated other
comprehensive income within stockholders' equity.

The aggregate market value of the investment portfolio at December 31, 2001 was
$86.3 million. At December 31, 2001, the Company's portfolio of mortgage-backed
securities was comprised of one-year adjustable-rate instruments and fixed rate
mortgage-backed securities scheduled to mature after 2014. Due to amortization
and prepayments of the underlying loans, the actual maturities of the ARM and
fixed-rate mortgage-backed securities are typically less than the scheduled
maturities.

The $2 million CMO has a call date of October 2006 and a maturity date of
January 2032. The portfolio of U.S. Government Agency callable debentures
totaled $4.6 million with call dates in November 2002 and maturity dates of
November 2006. The portfolio of trust preferred debentures totaled $7.6 million
with call dates between 2006 and 2016 and maturity dates scheduled after 2025.

At December 31, 2001 and 2000, except for the Washington Mutual CMO, investments
in the securities of any one issuer (excluding investments in securities of the
U.S. government and federal agencies and stock in the Federal Home Loan Bank of
Boston (the FHLB) did not exceed more than ten percent of the Company's
stockholders' equity. See "Item 8 - Notes 1 and 3 of Notes to Consolidated
Financial Statements".

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SOURCES OF FUNDS

Deposits. Deposits obtained through retail banking offices have been the
principal source of the Company's funds for use in lending and for other general
business purposes. The Company's deposit products include passbook savings and
club accounts, personal and commercial demand accounts, NOW accounts, money
market deposit accounts and certificates of deposit ranging in term from three
to 60 months. The Company also offers Individual Retirement Account deposits
among these products. Total deposits amounted to $249.5 million at December 31,
2001.

The Company's deposits are obtained primarily from residents of and businesses
located in Ipswich, Rowley, North Andover, Beverly, Salem, Marblehead, Reading
and Essex, Massachusetts. The Company attracts deposit accounts primarily by
offering a wide variety of services and accounts, competitive interest rates,
and convenient office locations and service hours. The Company prices its
products competitively within its market area. The Company has no brokered
deposits.

In recent years, the Company has focused on providing customers with deposit
products that meet their liquidity preferences. As a result, the Company has
promoted certain deposit products, such as its checking account and money market
account, which resulted in an increase in total deposits of $12.3 million or
5.2% during 2001. Total demand deposits, NOW accounts, money market deposit
accounts and savings deposits totaled $190 million or 76.2% of total deposits at
December 31, 2001, which represented a $26.7 million or 16.3% increase from 2000
levels of $163.3 million or 68.9% of total deposits.

The ability of the Company to attract and retain deposits and the cost to the
Company of these deposits have been, and will continue to be, significantly
affected by economic and competitive conditions. See "Item 8 - Note 11 of Notes
to Consolidated Financial Statements".

Borrowings. The Company is a member of the FHLB of Boston, one of 12 regional
Federal Home Loan Banks in the Federal Home Loan Bank System. The Federal Home
Loan Banks provide a central credit facility primarily for member institutions.
A member of the FHLB of Boston is required to hold shares of common stock in the
FHLB of Boston. At December 31, 2001, the Company held $3.0 million of FHLB of
Boston stock.

At December 31, 2001, there were $47.9 million in borrowings outstanding at the
FHLB of Boston and $32.1 million at December 31, 2000. The Company has a total
borrowing capacity with the FHLB of Boston of $88.8 million at December 31,
2001, which would require the purchase of additional FHLB of Boston stock, if
fully utilized. See "Item 8 - Note 12 of Notes to Consolidated Financial
Statements".

NON-DEPOSIT INVESTMENT SALES

The Company has a contract with Linsco Private Ledger Financial Services (LPL)
to offer non-deposit investment products. Through this arrangement, LPL and the
Company employ an investment consultant to offer investment products to
customers. LPL provides marketing support and retains compliance supervision of
the program.

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COMPETITION

The Company's deposit gathering activities are concentrated in Ipswich, Rowley,
North Andover, Beverly, Salem, Marblehead, Reading and Essex, Massachusetts. The
Company's residential loan origination activities are concentrated in Essex and
Middlesex Counties in Massachusetts and Southern New Hampshire.

The Company faces strong competition for deposits from other savings banks,
savings and loan associations, cooperative banks, credit unions and commercial
banks located in its market area. The Company also competes for deposits with
mutual funds and corporate and government securities. The Company competes for
deposits principally by offering depositors a wide variety of deposit programs,
automated teller machines, tax-deferred retirement programs and other services.
It does not rely upon any individual, group or entity for a material portion of
its deposits.

Competition for residential real estate loans is strong and comes primarily from
savings banks, mortgage banking companies, commercial banks, savings and loan
associations, and other institutional lenders. The Company competes for loan
originations primarily based on the interest rates and loan fees that it charges
and the efficiency and quality of the services it provides. Competition for
loans varies from time to time depending on general and local economic
conditions, interest rate levels, and conditions in the mortgage market, among
other factors.

SUBSIDIARIES AND INVESTMENTS IN REAL ESTATE

At December 31, 2001, Ipswich Bancshares, Inc. had two wholly-owned
subsidiaries, Ipswich Savings Bank and Ipswich Statutory Trust I, a Connecticut
statutory trust. At December 31, 2001, the Bank had three subsidiaries; Ipswich
Preferred Capital Corporation, Ipswich Securities Corporation, and North Shore
Financial Services, Inc., all of which are Massachusetts corporations.

Ipswich Preferred Capital Corporation (IPCC) was formed in 1999 as a
Massachusetts business corporation which has elected to be taxed as a real
estate investment trust for federal and Massachusetts tax purposes. IPCC is 99%
owned by Ipswich Savings Bank. IPCC holds mortgage loans which were previously
originated by the Bank.

Ipswich Securities Corporation (ISC) was formed in 1995 to engage exclusively in
the buying, selling and holding of securities on its own behalf as a subsidiary
of the Bank. At December 31, 2001, ISC held a portfolio of fixed-rate and
adjustable-rate mortgage-backed securities, a collateralized mortgage obligation
and trust preferred debentures with total amortized cost of $14.7 million and an
aggregate market value of $15.1 million.

ISC also holds the title to a limited partnership interest in a mixed-income
housing complex in Dorchester, Massachusetts. The book value of the partnership
is $1. The investment qualifies for low income housing tax credits under the
Internal Revenue Code.

North Shore Financial Services, Inc. (NSFSI) (formerly known as North Shore
Mortgage Company, Inc.) was formed in 1987 for the purpose of holding title to
foreclosed properties. At December 31, 2001, NSFSI held title to two OREO
properties with a carrying value totaling $2.

The Company formed Ipswich Statutory Trust I in February 2001 for the exclusive
purpose of issuing and selling Common Securities to the Company and Preferred
Securities to the public. The proceeds were used to acquire 10.20% Junior
Subordinated Deferrable Interest Debentures issued by the Company. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources".

The Company believes that its investments in the subsidiaries described above,
and the activities and investments of those subsidiaries are permitted under
applicable law.

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EMPLOYEES

At December 31, 2001, the Company had 69 full-time employees and 40 part-time
employees. The Company believes its employee relations are good.

STOCKHOLDERS' EQUITY AND REGULATORY MATTERS

General. The Company and the Bank are heavily regulated. As a bank holding
company, Ipswich Bancshares, Inc. is supervised by the Board of Governors of the
Federal Reserve Board System (the Federal Reserve Board) and it is also subject
to the jurisdiction of the Massachusetts Board of Bank Incorporation. The
activities of bank holding companies, such as the Company, that do not become
financial holding companies under the Gramm-Leach-Bliley Act (as discussed
below) are limited to the business of banking and activities closely related or
incidental to banking. Provided that it does not become a financial holding
company, the Company may not directly or indirectly acquire the ownership or
control of more than 5 percent of any class of voting shares or substantially
all of the assets of any company that is not engaged in activities determined by
the Federal Reserve Board prior to November 12, 1999 by order or regulation to
be closely related to banking, and also generally must provide notice to or
obtain the approval of the Federal Reserve Board in connection with any such
acquisition. As a Massachusetts-chartered savings bank, the Bank is subject to
regulation, examination and supervision by the FDIC and the Massachusetts
Commissioner of Banks (the Commissioner). The Bank is also subject to certain
requirements established by the Federal Reserve Board.

Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit
accounts up to a $100,000 maximum per separately insured account. The Bank is
subject to reporting requirements of the FDIC. The FDIC has adopted requirements
setting minimum standards for capital adequacy and imposing minimum leverage
capital ratios. The Bank exceeded all applicable requirements at December 31,
2001. Furthermore, under the capital standards established pursuant to the FDIC
Improvement Act of 1991, the Bank is currently well-capitalized. International
bank supervisory organizations, principally the Basel Committee on Banking
Supervision, currently are considering changes to the risk-based capital
adequacy framework, which ultimately could affect the FDIC's guidelines
regarding capital adequacy. For additional information on regulatory capital
ratios, See "Note 15 to the Consolidated Financial Statements" and "Item 7 -
Management's Discussion and Analysis - Financial Condition - Capital Resources".

Massachusetts Commissioner of Banks and Board of Bank Incorporation.
Massachusetts statutes and regulations govern, among other things, investment
powers, lending powers, deposit activities, maintenance of surplus and reserve
accounts, the distribution of earnings, the payment of dividends, issuance of
capital stock, branching, acquisitions and mergers and consolidations. Any
Massachusetts bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner may be subject to sanctions for
noncompliance. The Commissioner may, under certain circumstances, suspend or
remove officers or directors who have violated the law, conducted the Bank's
business in a manner which is unsafe, unsound or contrary to the depositors'
interest, or been negligent in their performance of their duties. In response to
Massachusetts laws enacted in 1996, 1997 and 2000, the Commissioner adopted
rules that generally give Massachusetts banks, and their subsidiaries, many
powers equivalent to those of national banks. The Commissioner also has adopted
regulations and procedures expediting the approval process for well-capitalized
banks to establish branches or to engage in certain activities.

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Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Riegle-Neal Act), certain interstate transactions and activities are permitted.
Interstate transactions and activities permitted under the law include: (i) bank
holding company acquisitions of separately held banks in a state other than a
bank holding company's home state; (ii) mergers between banks with different
home states, including consolidations of affiliated banks; (iii) establishment
of interstate branches either de novo or by branch acquisition; and (iv)
affiliate banks acting as agents for one another for certain banking functions
without being considered a "branch". In general, subject to limitations,
nationwide interstate acquisitions are now permissible, irrespective of related
state law limitations other than limitations subject to deposit concentrations
and bank age requirements. Interstate mergers are generally also permissible,
and affiliated banks may act as agents for one another. Each of the transactions
and activities must be approved by the appropriate federal bank regulator, with
separate and specific criteria established for each category.

In 1996, Massachusetts enacted interstate banking laws in response to the
Riegle-Neal Act. The laws permit, subject to certain deposit and other
limitations, interstate acquisitions, mergers and branching on a reciprocal
basis. The Riegle-Neal Act has made it easier for out-of-state institutions to
attempt to purchase or otherwise acquire a Massachusetts bank, or to compete
with the Bank in Massachusetts, and similarly has made it easier for the Bank to
compete outside the state.

Gramm-Leach-Bliley Act of 1999. The general effect of the new law is to
establish a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms, and other financial service
providers by revising and expanding the Bank Holding Company Act framework to
permit a holding company, such as Ipswich Bancshares, Inc., to engage in a full
range of financial activities through a new entity known as a "financial holding
company." "Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. Generally, the Gramm-Leach-Bliley Act does the following: (i) repeals
historical restrictions on, and eliminates many federal and state law barriers
to, affiliations among banks, securities firms, insurance companies, and other
financial service providers; (ii) provides a uniform framework for the
functional regulation of the activities of banks, savings institutions, and
their holding companies; (iii) broadens the activities that may be conducted by
national banks (and derivatively, state banks), banking subsidiaries of bank
holding companies, and their financial subsidiaries; (iv) provides an enhanced
framework for protecting the privacy of consumer information; (v) adopts a
number of provisions related to the capitalization, membership, corporate
governance, and other measures designed to modernize the Federal Home Loan Bank
system; (vi) modifies the laws governing the implementation of the Community
Reinvestment Act of 1977; and (vii) addresses a variety of other legal and
regulatory issues affecting both day-to-day operations and long-term activities
of financial institutions. In order to engage in the new activities, a bank
holding company, such as the Company, must meet certain tests and elect to
become a financial holding company. Specifically, all of a bank holding
company's banking subsidiaries must be well-capitalized and well-managed, as
measured by regulatory guidelines, and all of the bank holding company's banks
must have been rated "satisfactory" or better in their most recent CRA
evaluation. Furthermore, a bank holding company that elects to be treated as a
financial holding company may face significant consequences if its banks fail to
maintain the required capital and management ratings, including entering into an
agreement with the Federal Reserve Board that imposes limitations on its
operations, and may even require divestitures. Such possible ramifications may
limit the ability of a bank subsidiary to significantly expand or acquire less
than well-capitalized and well-managed institutions. At this time, the Company
has not determined whether it will become a financial holding company.

                                       10
<PAGE>



Further, the Gramm-Leach-Bliley Act includes a new section of the Federal
Deposit Insurance Act governing subsidiaries of state banks that engage in
"activities as principal that would only be permissible" for a national bank to
conduct in the financial subsidiary. The provision will permit state banks, to
the extent permitted under state law, to engage in certain new activities which
are permissible for subsidiaries of a financial holding company. Further, it
expressly preserves the ability of a state bank to retain all existing
subsidiaries. Massachusetts permits Massachusetts-chartered banks to engage in
activities which are permissible for national banks and that are approved by the
Commissioner. Thus, the Bank would only be permitted to engage in the activities
authorized by the Gramm-Leach-Bliley Act that are also approved by the
Commissioner or otherwise authorized by Massachusetts law. In order to form a
financial subsidiary, a state bank must be well-capitalized, and the state bank
would be subject to certain capital deduction, risk management and affiliate
transaction rules which are applicable to national banks.

ITEM 2   PROPERTIES

At December 31, 2001, the Company conducted its business from its headquarters
and main office at 21-25 Market Street, Ipswich, Massachusetts and seven branch
offices. The Company owns its main office facilities on Market Street, and its
branch office in Essex, Massachusetts, and leases branch office space in Rowley,
North Andover, Salem, Marblehead, Reading and Beverly, Massachusetts. The Rowley
lease runs through the year 2005, with two five-year renewal options thereafter.
The Salem lease runs through the year 2005, with three five-year renewal options
thereafter. The North Andover lease runs through the year 2004, with two
five-year renewal options thereafter. The Beverly lease runs through the year
2006, with four five-year renewal options thereafter. The Marblehead lease runs
through the Year 2003 with three five-year renewal options thereafter. The
Reading lease runs through the Year 2003 with three five-year renewal options
thereafter. The Company's properties that are not leased are owned free and
clear of any mortgages.

ITEM 3        LEGAL PROCEEDINGS

The Company is not involved in any material legal proceedings other than
ordinary routine litigation incidental to its business, none of which is
material.

ITEM 4        SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None.

PART II
-------

ITEM 5        MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS

Ipswich Bancshares, Inc. Common Stock is traded in the over-the-counter market
and quoted on the NASDAQ National Market under the symbol "IPSW". On March 15,
2002, there were approximately 245 holders of record of the 1,934,474 shares of
the Ipswich Bancshares, Inc. Common Stock outstanding.

                                       11
<PAGE>



The following table presents the quarterly high and low sales prices for the
Company's Common Stock during the periods in 2001, and 2000, as reported by
NASDAQ. The quotations represent high and low sales prices for the stock as
reported by NASDAQ.

                                             SALES PRICE
                                         --------------------        DIVIDENDS
           Quarter-ending                 HIGH             LOW         DECLARED
           --------------                 ----             ---         --------

           December 31, 2001            $13.04         $11.75           $.17
           September 30, 2001            13.50          11.30            .11
           June 30, 2001                 12.09           9.25            .11
           March 31, 2001                10.63          9.125            .11

           December 31, 2000             9.625           8.00            .11
           September 30, 2000            9.875           7.75            .10
           June 30, 2000                 10.00           7.50            .10
           March 31, 2000                10.00           5.875           .10

Future dividends, if any, will be at the discretion of the Board of Directors
based upon a variety of factors including earnings, financial condition, capital
adequacy, general economic conditions and regulatory and legal restrictions.


                                       12
<PAGE>


ITEM 6        SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                             IPSWICH BANCSHARES, INC. AND SUBSIDIARY



                                                                             At or for the Year Ended December 31,
                                                        --------------------------------------------------------------------------
                                                           2001            2000            1999           1998             1997
                                                        ----------      ----------      ----------      ----------      ----------
                                                                   (Dollars in thousands except for per share data)
<S>                                                     <C>             <C>             <C>             <C>             <C>
Balance Sheet Data:
-------------------
Total assets                                            $  321,115      $  287,834      $  276,298      $  271,328      $  227,244
Loans                                                      203,710         203,137         193,327         188,991         165,453
Deposits                                                   249,513         237,237         210,082         199,757         171,241
Mandatorily redeemable capital securities                    3,500            --              --              --              --
Stockholders' equity                                        15,119          15,119          16,975          14,223          11,833

Income Statement Data:
----------------------
Net interest income                                     $    9,784      $    8,935      $    8,698      $    7,461      $    6,435
Provision for loan losses                                      100              60             100             180             120
                                                        ----------      ----------      ----------      ----------      ----------
 Net interest income after provision for
   loan losses                                               9,684           8,875           8,598           7,281           6,315
Total non-interest income                                    2,955           1,736           2,925           2,437           1,700
Total non-interest expenses                                  8,320           6,819           6,910           5,596           4,476
                                                        ----------      ----------      ----------      ----------      ----------
 Pretax income                                               4,319           3,792           4,613           4,122           3,539
Income tax expense                                           1,511           1,137           1,324           1,484           1,327
                                                        ----------      ----------      ----------      ----------      ----------

Net income                                              $    2,808      $    2,655      $    3,289      $    2,638      $    2,212
                                                        ==========      ==========      ==========      ==========      ==========

Per Share Data:
---------------
Book value per share (1)                                $     7.85      $     7.30      $     6.72      $     5.95      $     4.96
Basic earnings per share (1)                                  1.40            1.12            1.33            1.10             .93
Diluted earnings per share (1)                                1.37            1.10            1.29            1.03             .88
Dividends per share (1)                                        .50             .41             .25             .17            .125

Selected Operating Ratios:
--------------------------
Return on average stockholders' equity                       18.38%          15.79%          21.04%          20.09%          20.38%
Return on average assets                                       .94             .93            1.22            1.09            1.18
Gross interest margin                                         3.40            3.24            3.36            3.23            3.60
Operating expense to average assets                           2.78            2.38            2.56            2.32            2.39
Dividends/net income                                         35.33           35.97           19.12           15.43           13.43
Shares outstanding                                       1,925,628       2,071,552       2,525,427       2,392,286       2,385,076

Capital Ratios:
------
Average equity to average assets(2)                           5.95%           5.99%           5.74%           5.37%          5.71%
Total risk-based capital ratio                               11.56           11.53           14.38           11.70          10.81

Other Data:
------
Non-performing assets                                   $      181      $      229      $      142      $    1,186      $    2,164
Non-performing assets as a percent of total assets             .06%            .08%            .05%            .44%           .95%
Number of checking accounts                                 15,726          16,314          13,959          12,622          10.599
Number of employees                                            109              98              95              96              80
</TABLE>

(1)  Adjusted for 2 for 1 stock split effective August 27, 1997
(2)  For 2001 includes $3,500 in capital securities as equity

                                       13
<PAGE>



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

GENERAL

The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in Item 8 of this Report. Certain Guide 3
information is included in Item 1 of this Report.

FINANCIAL CONDITION

General. Total assets at December 31, 2001 amounted to $321.1 million, an
increase of $33.3 million, or 11.6%, from $287.8 million at December 31, 2000,
resulting primarily from increases in total investment securities of $21.2
million and loans held for sale of $9.9 million.

Cash and Cash Equivalents. Cash and cash equivalents increased by $2.1 million
to $10.9 million at December 31, 2001, from the year-end 2000 balance of $8.8
million. This was primarily a result of increased required reserve balances
maintained at the Federal Reserve Bank of Boston and cash reserves held at the
branches.

Investment Securities. Total investment securities increased by $21.2 million or
32.9% during 2001, primarily from the purchase of $22.7 million of
mortgage-backed securities, $6.8 million of mutual funds and $4.4 million of
trust preferred securities, offset by calls and maturities of $13.8 million of
U.S. Government Agency Obligations.

At December 31, 2001, the Company had identified $41.6 million in
mortgage-backed securities as available for sale. The Company has also
identified $6.8 million of ARM mutual funds and a $2 million collateralized
mortgage obligation as available for sale. The Company included net unrealized
gains on investment securities available for sale, net of taxes, of $338,000 in
accumulated other comprehensive income within stockholders' equity at December
31, 2001.

The Company's portfolio of held to maturity securities consisted of $23.1
million of fixed-rate mortgage-backed securities, $4.6 million of U.S.
Government Agency Obligations and $7.6 million of trust preferred securities.
See "Item 8 - Note 3 of Notes to Consolidated Financial Statements".

The maturity distribution and weighted average coupon of investments in debt
obligations at December 31, 2001 follows:

<TABLE>
<CAPTION>
                                                                          One          Five          Over
                                                          Within        to Five       to Ten          Ten
                                                         One Year        Years         Years         Years        Total
                                                         --------       -------        -----         -----        -----
                                                                         (Dollars in Thousands)
<S>                                                      <C>           <C>            <C>         <C>         <C>
Available for Sale (at market value)
------------------------------------
 Mortgage-backed securities:
     FNMA participation certificates                     $  -          $  -           $  5,390    $  22,397   $  27,787
     FHLMC participation certificates                       -             -               -          13,798      13,798
Collateralized mortgage obligations                         -             -               -           2,006       2,006
ARM mutual funds                                            -             -               -           6,814       6,814
                                                          ------        ------         -------     --------    --------

                                                         $  -          $  -           $  5,390    $  45,015   $  50,405
                                                          ======        ======         =======     ========    ========

Weighted average coupon                                      -   %         -   %          5.98%        5.99%       5.99%

</TABLE>
                                       14
<PAGE>
<TABLE>
<CAPTION>


                                                                          One          Five          Over
                                                          Within        to Five       to Ten          Ten
                                                         One Year        Years         Years         Years        Total
                                                         --------       -------        -----         -----        -----
                                                                         (Dollars in Thousands)
<S>                                                      <C>           <C>            <C>         <C>         <C>
Held to Maturity (at amortized cost)
Mortgage-backed securities:
     FNMA participation certificates                      $ -          $  -           $    -       $  12,295  $  12,295
     FHLMC participation certificates                       -             -                -           8,149      8,149
     GNMA participation certificates                        -             -                -           2,683      2,683
U.S. Government Agency obligations                          -            4,621             -            -         4,621
Trust preferred securities                                  -             -                -           7,595      7,595
                                                          -----        ------         --------     --------   --------

                                                          $ -          $ 4,621        $    -       $  30,722  $  35,343
                                                          =====        =======        ========      ========   ========

Weighted average coupon                                     -  %          7.16%         -   %         6.73%       6.79%
</TABLE>

The carrying value of investments in debt and equity obligations at December 31,
follows:

<TABLE>
<CAPTION>
                                                           2001          2000        1999
                                                          --------     --------    --------
                                                                (Dollars in Thousands)
<S>                                                      <C>           <C>            <C>
Available for Sale (at market value)
Mortgage-backed securities:
     FNMA participation certificates                     $  27,787    $  27,804   $  25,631
     FHLMC participation certificates                       13,798        3,603       5,112
U.S. Treasury bills                                           -            -          4,865
U.S. Government Agency obligations                            -           1,999       3,894
Marketable equity securities                                  -             822        -
ARM mutual funds                                             6,814         -           -
Collateralized mortgage obligation                           2,006         -           -
                                                          --------     --------    --------

                                                         $  50,405    $  34,228   $  39,502
                                                          ========     ========    ========

Held to Maturity (at amortized cost)
Mortgage-backed securities:
     FNMA participation certificates                     $  12,295    $   2,940   $   3,077
     FHLMC participation certificates                        8,149        4,377       4,868
     GNMA participation certificates                         2,683        3,393       3,731
U.S. Government Agency obligations                           4,621       16,381      16,393
Trust preferred securities                                   7,595        3,191        -
                                                          --------     --------    --------

                                                         $  35,343    $  30,282   $  28,069
                                                         =========    =========   =========
</TABLE>

Loans. Total gross loans increased by $600,000, or 0.3%, to $203.7 million at
December 31, 2001. The growth was principally in commercial and commercial real
estate loans. Total residential real estate loans, which represent the largest
component of the loan portfolio, decreased by $3.8 million in 2001. The decrease
in residential real estate loans is primarily due to declining interest rates
which increased prepayments. The low interest rate environment also created
favorable market conditions for borrowers to obtain fixed rate loans.
Origination of such loans for sale in the secondary market increased from $30
million in 2000 to $54 million in 2001. In addition to originating loans for
sale in the secondary market the Company's focus in 2001 was on originating
commercial and commercial real estate loans. As a result, outstanding commercial
and commercial real estate loan balances increased by $4.0 million, or 69.3%, in
2001.

                                       15
<PAGE>



Loan Portfolio and Maturity. The following table sets forth information
concerning the Company's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>

                                                                           At December 31,
                                        2001                2000                1999              1998               1997
                                   ----------------    ---------------    ----------------   ----------------  -----------------
                                   Amount   Percent    Amount  Percent    Amount   Percent   Amount   Percent   Amount  Percent
                                   ------   -------    ------  -------    ------   -------   ------   -------   ------  -------
                                                                       (Dollars in Thousands)
<S>                               <C>          <C>   <C>         <C>     <C>         <C>    <C>         <C>    <C>         <C>
Mortgage Loans:
   Residential                    $158,898     78.3% $ 162,680   80.5%   $ 162,633   84.4%  $160,153    84.9%  $ 136,345   82.6%
   Residential owner-
     occupied construction           1,991      1.0      1,353    0.7          890    0.5      1,412     0.7       2,638    1.6
   Home equity                      31,733     15.6     31,212   15.4       23,385   12.1     19,772    10.5      18,035   10.9
                                   -------     ----   --------   ----     --------  -----    -------    ----      ------ ------

       Subtotal                    192,622     94.9    195,245   96.6      186,908   97.0    181,337    96.1     157,018   95.1

Commercial/commercial
   real estate                       9,648      4.8      5,698    2.8        4,873    2.5      6,191     3.3       6,717    4.1
                                   -------     ----   --------   ----     --------   ----    -------  ------    -------- ------

     Commercial/mortgage
       loans, gross                202,270     99.7    200,943   99.4      191,781   99.5    187,528    99.4     163,735   99.2

Consumer loans                         535     .3        1,302    0.6        1,060    0.5      1,188     0.6       1,255    0.8
                                   -------    ---     --------   ----     --------   ----    -------  ------    ---------------

     Gross loans                   202,805    100.0%   202,245  100.0%     192,841  100.0%   188,716   100.0%    164,990  100.0%
                                              =====             =====               =====              =====              =====

Plus deferred loan origination
     costs                             905                 987                 586               378                 606
Less unearned discount                -                    (95)               (100)             (103)               (143)
                                   -------            --------            --------           -------            --------

Loans, net of deferred cost
   and unearned discount           203,710             203,137             193,327           188,991             165,453

Less allowance for loan losses      (2,121)             (1,803)             (1,798)           (1,742)             (1,673)
                                   -------            --------            --------           -------            --------

Loans, net                        $201,589            $201,334            $191,529          $187,249            $163,780
                                 = =======            ========            ========          ========            ========

</TABLE>

The following table sets forth residential owner-occupied construction and
commercial and commercial real estate loans by maturity date as of December 31,
2001:
<TABLE>
<CAPTION>

                               Residential Owner-Occupied                     Commercial/
                                   Construction Loans                Commercial Real Estate Loans
                                   ------------------                ----------------------------
                                    Amount Percentage                    Amount       Percentage
                                    -----------------                    ------       ----------
                                                     (Dollars in Thousands)
<S>                                <C>         <C>                      <C>                <C>
Within one year                    $1,991      100%                     $  1,295           13.42%
One to five years                    -                                     1,549           16.06
Over five years                      -                                     6,804           70.52
                                    -----         -                      -------         -------

Total                              $1,991     100.0%                    $  9,648          100.00%
                                   ======     =====                     ========         =======

</TABLE>
                                       16
<PAGE>


Commercial real estate loans with maturity dates over one year:

                                                           Amount
                                                           ------
                                                   (Dollars in Thousands)

     Fixed interest rate                                  $  4,062
     Adjustable interest rate                                4,291
                                                           -------

     Total                                                $  8,353
                                                           =======

The following table sets forth information concerning mortgage and commercial
loans originated, sold, repaid, charged-off and transferred during the periods
indicated.
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                 ------------------------------------------
                                                                     2001           2000             1999
                                                                     ----           ----             ----
                                                                           (Dollars in Thousands)

<S>                                                               <C>            <C>            <C>
Beginning balance                                                 $ 200,943      $  191,781     $  187,528
Mortgage and commercial loan originations:
     Residential                                                    108,554          54,450         94,954
     Residential owner-occupied construction                            762             772          1,394
     Commercial                                                       5,379           1,526           -
     Home equity                                                     15,379          18,086         15,339
                                                                   --------       ---------      ---------

     Total mortgage and commercial loan originations                130,074          74,834        111,687

Loans held for sale at January 1                                      5,003            -            24,000

Conventional loan sales:
     Servicing retained                                               5,030           9,787         67,101
     Servicing released                                              38,939          15,477         16,444
Amortization, payoffs, charge-offs, unadvanced funds                 74,836          34,821         38,831
Securitized and transferred to investment portfolio                    -                584          8,996
Transfers to OREO                                                      -               -                62
Transfers to loans held for sale                                     14,945           5,003           -
                                                                   --------       ---------      ---------
     Total loan sales, amortization, payoffs, charge-offs,
       transfers, and unadvanced funds                              133,750          65,672        131,434
                                                                   --------       ---------      ---------

Ending balance                                                    $ 202,270      $  200,943     $  191,781
                                                                   ========       =========      =========
</TABLE>

Residential loan originations totaled $109.3 million in 2001, $55.2 million in
2000 and $96.3 million in 1999. These originations are not fully reflected in
loan balances outstanding due to the securitization, regular amortization and
prepayments of residential real estate loans as well as refinancings and the
sale of a portion of new loan production. The originations of residential loans
are sensitive to market interest rates and in 2001 the Bank experienced
extremely high levels of refinancings.

The majority of the Company's residential loans are underwritten to be eligible
for sale in the secondary market. The Company sells most of the eligible 30-year
fixed rate loans it originates. A loan which the Company intends to sell may be
sold directly or converted into mortgage-backed securities and sold in that
form. Residential loans sold on a servicing released basis amounted to $38.9
million in 2001, $15.5 million in 2000 and $16.4 million in 1999. Those sold on
a servicing retained basis totaled $5.0 million, $9.8 million and $67.1 million,
respectively, in 2001, 2000 and 1999. The portfolio of residential mortgage
loans serviced for others totaled $13.2 million at December 31, 2001, compared
to $11.1 million at December 31, 2000 and $0 at December 31, 1999.

                                       17
<PAGE>



Allowance for Loan Losses. The following table summarizes changes in the
allowance for loan losses and certain ratios for the periods indicated.

<TABLE>
<CAPTION>
                                                                            At December 31,
                                                      ------------------------------------------------------
                                                         2001        2000        1999       1998       1997
                                                      ---------   ---------    ---------  --------   ---------
                                                                         (Dollars in Thousands)
<S>                                                  <C>         <C>          <C>        <C>        <C>
Average loans (1)                                    $  211,374  $  201,011   $  200,265 $ 190,072  $  142,512
                                                      =========   =========    =========  ========   =========

Period-end loans (2)                                 $  203,710  $  203,137   $  193,327 $ 188,991  $  165,453
                                                      =========   =========    =========  ========   =========

Allowance for loan losses at
    beginning of period                              $    1,803  $    1,798   $    1,742 $   1,673  $    1,548

Loans charged-off:
    Commercial                                             -           -            -         -           -
    Residential real estate                                -           -               4        42           7
    Home equity and other consumer                          113          86           77        89          24
                                                      ---------   ---------    ---------  --------   ---------

                                                            113          86           81       131          31

Loan recoveries:
    Commercial                                              149        -            -         -           -
    Residential real estate                                 147        -               3         3          33
    Home equity and other consumer                           35          31           34        17           3
                                                      ---------   ---------    ---------  --------   ---------

                                                            331          31           37        20          36
                                                      ---------   ---------    ---------  --------   ---------

    Net charge-offs/(recoveries)                           (218)         55           44       111          (5)

Provision charged to operations                             100          60          100       180         120
                                                      ---------   ---------    ---------  --------   ---------

Allowance for loan losses at end of period           $    2,121  $    1,803   $    1,798 $   1,742  $    1,673
                                                      =========   =========    =========  ========   =========

Selected Ratios:
---------------

Allowance for loan losses to period-end loans,            1.04%       0.89%        0.93%      0.92%      1.01%
    net

Net charge-offs/(recoveries) to average loans            (.10)%       0.03%        0.02%      0.06%      -   %

Net charge-offs/(recoveries) to allowance for
    loan losses                                        (10.28)%       3.05%        2.45%      6.37%    (0.30)%

Allowance as a percentage of non-performing loans      1,171.8%      787.3%     5,800.0%     372.2%     176.1%

</TABLE>

(1)   Includes loans held for sale
(2)   Represents net loans, excluding loans held for sale

                                       18
<PAGE>



The allowance for loan losses as a percentage of total loans increased slightly
to 1.04% at December 31, 2001, up marginally from .89% at December 31, 2000 and
..93% at December 31, 1999. Recoveries increased substantially in 2001,
principally due to the payoff of loans which were partially charged-off by the
Bank in prior years. In establishing the level of the allowance at December 31,
2001, management gave consideration to the declining economy, the increase in
loans three or more payments past due from $170,000 at December 31, 2000 to
$650,000 at December 31, 2001 and the growth of the commercial loan portfolio.
Management analyzes the adequacy of the allowance for loan losses on a quarterly
basis. See "Item 7 - Results of Operations - Provision for Loan Losses".
Management measures the adequacy of its allowance for loan losses by assigning
loans into risk categories based on a loan classification system modeled after
the bank regulatory classification system. While management believes that its
allowance for loan losses is adequate to cover possible losses, there are
uncertainties regarding future events. Deterioration in the real estate market
or economy may result in additions to nonaccruing loans, charge-offs or
provisions for loan losses to maintain an adequate allowance. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to provide additions to the allowance based on their
judgments about information available to them at the time of their examination.
Allocation of the allowance for loan losses to the various categories of the
portfolio is also made periodically, based on management's judgment in weighing
various factors, including the quality of specified loans, the level of
nonaccruing loans in the various categories, current economic conditions, trends
in delinquencies and prior charge-offs, and the collateral value of the
underlying security. Because the allowance for loan losses is based on various
estimates, including loan collectibility and real estate values, and includes a
high degree of judgment, subsequent changes in the general economic prospects of
the borrowers may require changes in those estimates.

Allocation of the Allowance for Loan Losses. The allocation of the allowance for
loan losses at December 31, and the percent of loans in each category to total
loans, follows:

<TABLE>
<CAPTION>
                                                                      At December 31,
                                    2001                2000               1999               1998               1997
                             ---------------    -----------------    ----------------   ----------------   ---------------
                             Amount   Percent    Amount    Percent   Amount    Percent   Amount  Percent   Amount   Percent
                             ------   -------    -----     -------   ------    -------   ------  -------   ------   -------
                                                                  (Dollars in Thousands)
<S>                          <C>        <C>      <C>        <C>      <C>         <C>    <C>        <C>     <C>         <C>
Commercial/commercial
   real estate               $   183    4.7%     $  158     2.8%     $  151      2.5%   $   215    3.3%    $   217     4.1%
Residential real estate        1,203   79.5         976    81.2       1,065     84.9      1,030   85.6       1,014    84.2
Home equity and other
   consumer                      735   15.8         669    16.0         582     12.6        497   11.1         442    11.7
                              ------  -----       -----   -----       -----    -----     ------ ------      ------  ------

                             $ 2,121  100.0%     $1,803   100.0%     $1,798    100.0%   $ 1,742  100.0%    $ 1,673   100.0%
                              ======  =====       =====   =====       =====    =====     ======  =====      ======   =====
</TABLE>

Notwithstanding the foregoing allocations, the entire allowance for loan losses
is available to absorb charge-offs in any category of loans.

Deposits. Deposits ended the year at $249.5 million, an increase of $12.3
million or 5.2% over the year-end 2000 balance of $237.2 million. The increase
was most pronounced in money market deposit accounts which increased by $13.7
million in 2001. In addition, demand deposits increased by $4.0 million and
savings accounts increased by $6.4 million offset by a decrease in certificates
of deposit of $14.4 million. The increase in money market deposit account
balances resulted from transfers out of maturing certificates of deposit and an
increase in commercial customers. The growth in savings accounts resulted from
customers transitioning funds from stock investments. Management attributes the
decline in certificates of deposit to the generally low level of interest rates.

                                       19
<PAGE>



The following table shows the distribution of the Company's deposits at December
31,

<TABLE>
<CAPTION>
                                        2001                              2000                              1999
                          ------------------------------    ------------------------------    -------------------------------
                                               Weighted                          Weighted                          Weighted
                                       % of     Average                  % of     Average                  % of     Average
                           Amounts   Deposits    Rate        Amounts   Deposits    Rate        Amounts   Deposits    Rate
                           -------   --------   ------       -------   --------   ------       -------   --------   ------
                                                              (Dollars in Thousands)
<S>                       <C>          <C>        <C>      <C>            <C>       <C>      <C>            <C>       <C>
Demand deposits           $  26,850    10.7%      .00%     $ 22,855       9.6%      .00%     $ 15,209       7.2%      .00%
Savings:
   Savings                   45,902    18.4      1.31        39,531      16.7      2.26        37,704      17.9      2.31
   NOW accounts              37,474    15.0       .51        34,871      14.7       .83        27,481      13.1       .76
   Money markets             79,806    32.0      2.72        66,083      27.9      5.04        62,859      30.0      4.49
                           --------   -----                 -------      ----                 -------      ----
     Total demand
       and savings          190,032    76.1      1.14       163,340      68.9      2.76       143,253      68.2      2.75
   Certificates of
   deposit                   59,481    23.9      4.55        73,897      31.1      5.93        66,829      31.8      5.09
                           --------    ----                 -------     -----                 -------     -----

     Total deposits       $ 249,513   100.0%     1.95%     $237,237     100.0%     3.75%     $210,082     100.0%     3.40%
                           ========   =====      ====       =======     =====      ====       =======     =====      ====
</TABLE>

Deposits of $100,000 or more totaled approximately $87.8 and $77.6 million at
December 31, 2001 and 2000, respectively.

The following table presents, by various rate categories, the amount of
certificate of deposit accounts and the periods to maturity of the certificate
accounts outstanding at the dates indicated:
<TABLE>
<CAPTION>

                                           At December 31, 2001                               At December 31,
                               -----------------------------------------         ----------------------------------------
                                  Maturing       Maturing     Maturing                 2001          2000         1999
                                Within 1 Year    1-3 Years   Thereafter                Total         Total        Total
                                -------------    ---------   ----------                -----         -----        -----
                                                                (Dollars In Thousands)
<S>                               <C>             <C>          <C>                    <C>         <C>            <C>
Certificate accounts:
2.00% to 2.99%                    $ 9,119         $   53       $  -                   $  9,172    $   -          $  -
3.00% to 3.99%                      9,139          2,233          -                     11,372        -             -
4.00% to 4.99%                     11,312          2,728            42                  14,082       2,496        26,993
5.00% to 5.99%                     10,328          2,355           440                  13,123      35,189        30,677
6.00% to 6.99%                      6,737            632           369                   7,738      24,687         8,178
7.00% to 7.99%                      2,315          1,344           335                   3,994      11,525           981
                                   ------          -----        ------                 -------     -------        ------

Total                             $48,950         $9,345       $ 1,186                $ 59,481    $ 73,897       $66,829
                                   ======          =====        ======                 =======     =======        ======
</TABLE>

Certificates at or over $100,000 totaled $12.9 million in 94 certificates at
December 31, 2001 and $16.9 million in 108 certificates at December 31, 2000.

The maturity distribution of certificates of deposit in amounts of $100,000 or
more at December 31, 2001 follows:
                                                               Amount
                                                               ------
                                                       (Dollars in Thousands)
                  Within 3 months                              $  3,303
                  3 to 6 months                                   3,693
                  6 to 12 months                                  3,896
                  After one year                                  1,979
                                                                -------

                                                               $ 12,871
                                                               ========

                                       20
<PAGE>



Borrowings. The Company borrows from the FHLB of Boston to support liquidity and
manage its asset/liability position. Borrowings increased to $47.9 million, an
increase of $15.8 million in 2001 from the year-end 2000 balance of $32.1
million. The Company relies on borrowed funds as an alternative funding source
in order to support earning assets. The weighted average rate on borrowings was
4.5% at December 31, 2001 versus 6.60% at December 31, 2000. The weighted
average maturity of the borrowings at December 31, 2001 was 25 months versus
twenty months at December 31, 2000. As of December 31, 2001, $8.9 million of the
borrowings were short-term borrowings with a weighted-average rate of 2.0% and a
weighted average maturity of 27 days. Short term market interest rates increased
substantially in 2000 which significantly impacted the Company's borrowings. In
response, the Company paid off a portion of its borrowings and extended the
maturities on its remaining funding. This resulted in an increase of 85 basis
points in the cost of its borrowed funds in 2000.

<TABLE>
<CAPTION>
                                                   Short-Term FHLB Advances (Dollars in thousands)
                                                            For Years Ended December 31,
                              --------------------------------------------------------------------------------------
                                         2001                           2000                           1999
                              -----------------------           ----------------------     -------------------------
                                             Weighted                         Weighted                   Weighted
                               Balance         Rate             Balance         Rate        Balance        Rate
                               -------        ------            -------        ------       -------       ------
<S>                          <C>             <C>               <C>            <C>         <C>               <C>
Balance at year end          $  10,859       2.11%             $     108      6.77%       $  37,000         5.80%

Average outstanding
   during year               $   3,241       4.13%             $   4,583      6.21%       $   6,086         5.10%

Maximum outstanding
   at any month end          $  15,000       3.22%             $  40,000      5.94%       $  42,677         4.96%
</TABLE>

As of December 31, 2001 and 2000, the Company also had $5.0 million and $18.0
million of borrowings maturing within one year that had original maturities of
greater than one year.

NON-PERFORMING ASSETS

General. Non-performing assets stood at $181,000 at December 31, 2001 and
$229,000 at the end of 2000.

Non-performing Loans. When a loan is originated, interest on the loan is accrued
(i.e., recognized as income) on a regular periodic basis even if the loan
payment has not yet been received. The recording of interest income on problem
loan accounts generally ceases when the loans become 90 days past due and the
loans are not in the process of collection.

It is also the policy of the Company to classify as non-accrual, loans less than
90 days delinquent and loans performing in accordance with their terms, if in
management's judgment such loans are likely to present future principal or
interest repayment problems and could ultimately be classified as
non-performing.

There were no loans on non-performing status at December 31, 2001 and 2000 that
were considered troubled debt restructurings.


                                       21
<PAGE>


The following table sets forth information regarding delinquent loans and other
non-performing assets held by the Company at the dates indicated. The Company
had $650,000 in loans greater than 90 days past due and still accruing at
December 31, 2001. These loans were not classified as non-performing loans.

<TABLE>
<CAPTION>
                                                                                         At December 31,
                                                                     -----------------------------------------------------
                                                                      2001        2000        1999       1998      1997
                                                                      ----        ----        ----       ----      ----
                                                                                     (Dollars in Thousands)
<S>                                                                  <C>          <C>       <C>        <C>        <C>
Delinquent loans 30-89 days past due (not included in
    non-performing loans)                                            $  536       $ 575     $   250    $   194    $ 1,218
Delinquent loans 90+ days past due (not included in
    non-performing loans)                                               650         170         650        442          3
                                                                      -----        ----      ------     ------     ------

                                                                     $1,186       $ 745     $   900    $   636    $ 1,221
                                                                      =====        ====      ======     ======     ======

Delinquent loans as a percent of gross loans                            .58%        .37%        .47%       .34%       .74%
                                                                      =====       =====      ======     ======     ======

<CAPTION>

                                                                                         At December 31,
                                                                     -----------------------------------------------------
                                                                      2001        2000        1999       1998      1997
                                                                      ----        ----        ----       ----      ----
                                                                                     (Dollars in Thousands)
<S>                                                                  <C>          <C>       <C>        <C>        <C>
Non-performing loans:
    Loans accounted for on a non-accrual basis                       $  181       $ 229     $    31    $   468    $   358
    Restructured loans                                                   -         -            -         -           592
                                                                      -----        ----      ------     ------     ------

       Total non-performing loans                                       181         229          31        468        950

OREO, net of allowance for OREO losses                                   -         -            111        718      1,214
                                                                      -----        ----      ------     ------     ------

       Total non-performing assets                                   $  181       $ 229     $   142    $ 1,186    $ 2,164
                                                                      =====        ====      ======     ======     ======

Non-performing assets as a percent of total assets                      .06%         .08%       .05%       .44%       .95%
                                                                      =====        =====     ======     ======     ======
</TABLE>

See "Item 8 - Notes 1 and 5 of Notes to Consolidated Financial Statements".

Potential Non-performing Loans. In addition to non-performing loans, at December
31, 2001, the Company had classified an additional $741,324 of performing loans
as "substandard" based on an internal rating system used by the Company. These
substandard loans evidence one or more weaknesses or potential weaknesses
related to repayment history, the borrower's financial condition, adequacy of
collateral, or other factors. Depending on the local economy and other factors,
these loans, as well as other performing loans not so classified, may become
non-performing in the future. These loans were commercial loans.


                                       22
<PAGE>


OREO. The following table sets forth the types of properties which comprised the
Company's OREO portfolio at the dates shown. The Company held two properties on
December 31, 2001 located in Essex County, Massachusetts currently carried at $1
each.


                                                 At December 31,
                                        ---------------------------------
                                         2001         2000          1999
                                         ----         ----          ----
                                            (Dollars in Thousands)

Commercial                              $  -         $   -          $  49
Residential 1-4 family                     -             -             62
                                         ----         -----          ----

OREO                                    $  -         $   -          $  111
                                        =====        ======         ======

RESULTS OF OPERATIONS

General. The Company's results of operations depend primarily on its net
interest income and the efficiency of the Company's operations. The Company's
net income is affected by its costs of operations, including non-interest
expenses such as salaries and employee benefits, occupancy costs, non-performing
loans and other classified assets. For the year ended December 31, 2001, the
Company reported net income of $2.8 million, or $1.37 per fully diluted share
($1.40 basic), compared to $2.7 million or $1.10 per fully diluted share ($1.12
basic) for 2000 and $3.3 million or $1.29 per fully diluted share ($1.33 basic)
for 1999.

The Company's return on average stockholders' equity increased from 15.79% in
2000 to 18.38% in 2001. The Company's financial performance in 2001 benefited
from decreases in market interest rates and the overall cost of funds which
positively impacted the Company's net interest margin and revenues from mortgage
banking. The Company's financial performance in 2000 was significantly impacted
by the rise in market interest rates; both net interest margins and mortgage
banking revenues were negatively impacted. The Company's financial performance
in 1999 was positively impacted by favorable interest rates and mortgage
originations which translates into mortgage banking revenues.

Net Interest and Dividend Income. Net interest and dividend income was $9.7
million in 2001, $8.9 million in 2000 and $8.7 million in 1999. Net interest
income increased $849,000 in 2001 primarily due to lower average costs of funds.
Net interest income increased $237,000 in 2000 and $1.2 million during 1999,
primarily due to higher average earning asset volumes in each of the years.
Market interest rates have been fairly volatile over the past several years.
During 2001, market interest rates decreased throughout the year. The Company
was positively impacted by the lower rates paid on deposits and borrowings
during 2001, the effect of which increased the interest rate spread to 2.95% and
the gross interest margin to 3.40% in 2001.

Average earning assets increased 4.5% in 2001 to $288.0 million and increased
6.6% during 2000 to $275.7 million over the previous year, respectively. The
increase was primarily due to higher loan portfolio growth and higher investment
portfolio growth in 2001 and 2000, respectively.

The volatility in the interest rates has also impacted the yields earned on the
investment portfolio. The yields earned on investment securities decreased 35
basis points in 2001 to 6.40% as compared to 6.75% in 2000 and 6.24% in 1999.

Total average loans increased $10.4 million during 2001 primarily due to
increased originations and increased by $746,000 in 2000 principally from home
equity loan originations. The yield on loans decreased 46 basis points in 2001
to 6.95% and decreased 26 basis points during 2000 to 7.41%. The largest
component of the yield on loans was residential loans.

The rate paid on interest-bearing deposits decreased 59 basis points in 2001 to
3.45% and increased 42 basis points during 2000 to 4.04%. Core deposits, which
include NOW, savings and money market accounts, typically have rates lower than
those paid on certificates of deposit. To grow the core deposit balances, the
Company has offered promotional rates on certain products. The balances
maintained in NOW and money market deposit accounts have increased in both 2001
and 2000. Certificate of deposit average balances decreased $1.9 million during
2001 and increased $5.8 million during 2000.

                                       23
<PAGE>


In 2001, the average balance of borrowed funds decreased $10.7 million while the
rate paid increased 9 basis points. The Company has decreased its reliance on
borrowed funds as an alternative source of funds to deposits. During 2000, the
average balance of borrowed funds declined $3.6 million while the rate paid
increased 95 basis points.

The combination of the factors mentioned above contributed to an 18 basis point
increase to 2.95% in the interest rate spread in 2001 and a 19 basis point
decrease in the interest rate spread to 2.77% during 2000. The gross interest
margin on earnings assets was 3.40% for the year ended December 31, 2001 and
3.24% and 3.36%, respectively, for 2000 and 1999.

Interest Income and Interest Expense. The following table sets forth, for the
periods indicated, information based on average monthly balances during the
periods indicated regarding (i) the total dollar amount of interest income from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest income; (iv) interest rate spread; and (v)
gross interest margin. Non-accrual loan balances have been included in the
appropriate category; however, only interest actually paid on such loans has
been included in interest income.

                                       24
<PAGE>
<TABLE>
<CAPTION>


                                                              Year Ended December 31,
                           -------------------------------------------------------------------------------------------------------
                                         2001                               2000                                  1999
                            --------------------------------    --------------------------------      ----------------
                                       Interest                             Interest                           Interest
                            Average     Earned/     Average     Average     Earned/      Average     Average    Earned/    Average
                            Balance       Paid       Yield      Balance       Paid        Yield      Balance       Paid      Yield
                            -------     --------   ---------    -------    --------     ---------    -------     -------   -------
                                                                  (Dollars in Thousands)
<S>                        <C>        <C>             <C>      <C>         <C>             <C>      <C>         <C>           <C>
Interest-earning assets:
Loans:
   Residential (1)         $ 171,519  $   11,891      6.93%    $ 168,804   $  12,036       7.13%    $ 172,407   $  12,170     7.06%
   Commercial                  6,788         548      8.07         5,106         444       8.70         5,490         477     8.69
   Home equity                32,016       2,145      6.70        26,098       2,299       8.81        21,251       1,561     7.35
   Consumer                    1,051         112     10.66         1,003         109      10.87         1,117         105     9.40
                            --------    --------                --------    --------                 --------    --------

     Total loans             211,374      14,696      6.95       201,011      14,888       7.41       200,265      14,313     7.15
Investments (2)               76,648       4,908      6.40        74,710       5,041       6.75        58,397       3,642     6.24
                            --------    --------                --------    --------                 --------    --------

     Total interest-
       Earning assets        288,022      19,604      6.81       275,721      19,929       7.23       258,662      17,955     6.94

Cash and due from
   banks                       7,711                               6,483                                6,247
Other assets                   3,023                               2,963                                4,248
                            --------                            --------                             --------

     Total assets          $ 298,756                           $ 285,167                            $ 269,157
                            ========                            ========                             ========

Interest-bearing
liabilities:
   Savings deposits        $  43,142         891      2.07%    $  37,936         879       2.32%    $  35,987         868     2.41%
   NOW accounts               34,310         237       .69        28,399         233        .82        23,787         176      .74
   Money market
     deposit accounts         72,743       2,793      3.84        63,477       3,055       4.81        58,115       2,441     4.20
   Certificates of            67,495       3,585      5.31        69,436       3,885       5.60        63,608       3,091     4.86
                            --------    --------                --------    --------                 --------    --------
deposit

     Total interest-
       bearing deposits      217,690       7,506      3.45       199,248       8,052       4.04       181,497       6,576     3.62
   Borrowed funds             36,758       2,314      6.30        47,413       2,942       6.21        50,995       2,681     5.26
                            --------    --------                --------    --------                 --------    --------

     Total interest-
       bearing               254,448       9,820      3.86       246,661      10,994       4.46       232,492       9,257     3.98
liabilities

Demand deposits               23,856                              18,624                               18,048
Other liabilities              2,672                               2,808                                3,154
                            --------                            --------                             --------

     Total liabilities       280,976                             268,093                              253,694

Company obligated
Mandatory redeemable
capital securities             2,962
Stockholders'  equity         14,818                              17,074                               15,463
                            --------                            --------                             --------

     Total liabilities
        and
       Stockholders'
       equity              $ 298,756                           $ 285,167                            $ 269,157
                            ========    --------                ========    --------                 ========

Net interest income                    $   9,784                           $   8,935                            $   8,698
                                        ========                            ========                             ========
Interest rate spread                                  2.95%                                2.77%                              2.96%
Gross interest margin                                 3.40%                                3.24%                              3.36%
</TABLE>

(1)  Residential loans include portfolio loans and loans held for sale.
(2)  Includes Federal funds sold.

                                       25
<PAGE>


The following table presents the changes in interest and dividend income and the
changes in interest expense attributable to changes in interest rates or changes
in the volume of interest-earning assets and interest-bearing liabilities for
the periods indicated. Changes which are attributable to both rate and volume
have been allocated to changes due to volume.
<TABLE>
<CAPTION>

                                                           2001 vs. 2000                       2000 vs. 1999
                                                          Changes Due to                      Changes Due to
                                                       Increased (Decreased)               Increased (Decreased)
                                                ------------------------------       ------------------------------
                                                 Rate      Volume       Total         Rate      Volume        Total
                                                -------    ------      --------      -------    -------     -------
                                                                        (Dollars in Thousands)
<S>                                            <C>          <C>         <C>           <C>        <C>         <C>
Interest income:
    Loans                                      $   (912)    $   720     $    (192)    $    520   $     55    $    575
    Mortgage-backed securities                     (226)        424           198          263        463         726
    Short-term investments                          (91)        (25)         (116)           8        134         142
    Investment securities                            99        (314)         (215)          27        504         531
                                                -------      ------      --------      -------    -------     -------

       Total                                     (1,130)        805          (325)         818      1,156       1,974

Interest expense:
    Deposits                                     (1,182)        636          (546)         759        717       1,476
    Borrowed funds                                   43        (671)         (628)         483       (222)        261
                                                -------      ------      --------      -------    -------     -------

       Total                                     (1,139)        (35)       (1,174)       1,242        495       1,737
                                                -------      ------      --------      -------    -------     -------

Net interest and dividend income               $      9     $   840     $     849     $   (424)  $    661    $    237
                                                =======      ======      ========      =======    =======     =======
</TABLE>

Provision for Loan Losses. The provision for loan losses in 2001 was $100,000,
an increase of $40,000 or 66.7% from 2000, principally as a result of an
increase in commercial loans. The provision for loan losses in 2000 was $60,000,
a decrease of $40,000 or 40.0% from 1999 as growth of the loan portfolio slowed.
See "Item 7 - Financial Condition - Allowance for Loan Losses".

The amount of provision for loan losses that the Company records is predicated
on several factors including asset quality, growth in the loan portfolio and
market and economic conditions. The level of provisions recorded in 1999 through
2001 reflect the fact that the composition of the portfolio is primarily
residential mortgages which carry a lower risk than commercial and commercial
real estate. Levels of non-performing loans have also decreased. Future
provisions will be dictated by the ongoing quality of the portfolio and economic
conditions that may impact the loan portfolio. Loan loss provisions may be
substantially increased if conditions dictate.

Non-interest Income. The company recorded income from non-interest sources of
$3.0 million in 2001, $1.7 million in 2000 and $2.9 million in 1999. The
increase of $1.2 million in 2001 resulted from an increase of $546,000 in
mortgage banking gains due to favorable secondary market conditions and $443,000
in deposit account fees attributable to an increase in deposits. The decrease of
$1.2 million in 2000 resulted from a decline of $1.2 million in mortgage banking
gains.

Deposit account fees totaled $2.1 million, $1.7 million and $1.5 million in
2001, 2000 and 1999, respectively, and was derived primarily from customer
service charges and fees. Loan late charges and other fees increased during 2001
by $56,000 to $183,000, while decreasing by $90,000 in 2000 to $127,000. The
majority of the increase in deposit fee income is due to increased debit card
income, ATM usage income and overdraft income. As customers increasingly use
debit cards or non-customers use the Company's multiple ATM's, overall fee
income has increased.


                                       26
<PAGE>


Non-interest Expense. Non-interest expenses increased $1.5 million, or 22.0%, to
$8.3 million in 2001 while decreasing $91,000, or 1.3%, to $6.8 million in 2000.
The increase in 2001 was primarily due to the increases in salaries and
benefits, costs associated with the distribution of the securities of subsidiary
trust and the write-down of leasehold improvements in a branch that will be
relocated. The decrease in 2000 was primarily due to the decline in professional
fees.

Salaries and employee benefits, the largest component of non-interest expense,
increased $451,000 to $3.7 million in 2001 and decreased $20,000 in 2000 to $3.2
million. The increase in 2001 was primarily due to increased staffing for
operations.

Office occupancy and equipment increased $138,000 to $1.1 million in 2001 and
decreased $2,000 in 2000 to $914,000. The increase in 2001 was primarily due to
increased rent and maintenance costs.

Data processing expenses totaled $1.1 million in 2001, $924,000 in 2000 and
$798,000 in 1999. Data processing expenses increased $132,000 in 2001 and
$126,000 in 2000 due to a higher loan and deposit base, as well as the addition
of internet banking.

Professional fees, including corporate legal and accounting and auditing
expenses, totaled $364,000 in 2001, $337,000 in 2000 and $778,000 in 1999.
Professional fees decreased $441,000 in 2000 due to the one time expense in 1999
to form the holding company and REIT.

The Company incurred costs of $310,000 in 2001 resulting from payments on its
mandatorily redeemable capital securities of $3.5 million, which were issued in
2001. The capital securities bear interest at 10.2%.

Other operating expenses totaled $1.1 million in 2001, $859,000 in 2000 and
$921,000 in 1999. The increase in 2001 was primarily due to the increase in
postage, employee education and supplies. Some of the cost savings in 2000
result from the continued focus on cost containment. The Company has experienced
some savings in the area of corporate insurance.

Federal and State Income Tax Expense. The Company recorded tax expenses of $1.5
million, $1.1 million and $1.3 million in 2001, 2000 and 1999, respectively, and
realized effective tax rates of 35%, 30% and 28.7%, respectively. The lower
effective tax rates in 2000 and 1999 resulted from reductions in the valuation
allowance of $190,000 in 2000 and $121,000 in 1999.

ASSET AND LIABILITY MANAGEMENT

The Company does not use static GAP analysis to manage its interest rate risk.
It believes that simulation modeling more accurately encompasses the impact of
changes in interest rates on the earnings of the Company over time. However, the
Company prepares a GAP schedule to measure its static position.

Our assumption is that NOW and DDA accounts, which generally are subject to
immediate withdrawal, have effective maturities over five years. Premium savings
accounts are assumed to have maturities of six to twelve months, while base rate
savings accounts are assumed to have maturities over five years. Savings
accounts are generally subject to immediate withdrawal. Money market accounts
have an effective maturity up to five years. At December 31, 2001, the Company's
cumulative gap with respect to assets and liabilities maturing or repricing
within one year was a negative $13.9 million or 4.33% of total assets.

During a period of rising interest rates, a negative gap would tend to adversely
affect income while a positive gap would tend to result in an increase in
income. During a period of falling interest rates, a negative gap would tend to
result in an increase in net income while a positive gap would tend to adversely
affect income. A principal focus has been the origination of prime interest
rate-based home equity loans and the sale in the secondary market of the
majority of fixed-rate loans originated. The home equity loans reprice to market
rates as the prime rate, as published by the Wall Street Journal, fluctuates.
These loans mature or reprice more quickly and are, therefore, more interest
rate sensitive than long-term, fixed-rate, single family residential loans. The
Company also maintains a significant portfolio of adjustable-rate
mortgage-backed securities in its investment portfolio.

                                       27
<PAGE>


The following table summarizes the contractual maturities or assumed repricing
of the Company's assets, liabilities and equity at December 31, 2001:
<TABLE>
<CAPTION>

                                                     Assets/Liabilities Maturing or Repricing at December 31, 2001 in:
                                                     -----------------------------------------------------------------
                                                     0-6        6-12           1-2          3-5         Over 5
                                                   Months      Months         Years        Years         Years       Total
                                                   ------      ------         -----        -----         -----       -----
                                                                          (Dollars in Thousands)
<S>                                                <C>        <C>          <C>          <C>           <C>          <C>
Assets:
    Residential ARM loans                          $  13,789  $   15,393   $   25,500   $   32,718    $    -       $   87,400
    Residential fixed rate mortgage loans              5,328       5,100        9,200       21,172       33,594        74,394
    Loans held for sale                               14,945        -            -            -            -           14,945
    Home equity loans                                 31,508           6           10           53          156        31,733
    Commercial loans                                   1,918         879          740        3,629        2,482         9,648
    Consumer loans                                       405          85           17           28         -              535
    Fixed MBS held-to-maturity                         1,700       1,672        3,140        7,251        9,364        23,127
    Callable debentures held-to-maturity                -          4,621         -            -            -            4,621
    Corporate debt securities held-to-maturity          -           -            -            -           7,595         7,595
    Fixed MBS available-for-sale                       2,295       2,195        4,031        9,246       10,946        28,713
    ARM MBS available-for-sale                         7,173       5,699         -            -            -           12,872
    ARM mutual funds                                   6,814        -            -            -            -            6,814
    CMO                                                  228         228          456        1,094         -            2,006
    Equity securities                                  3,000        -            -            -             253         3,253
    Cash and due from banks                                1        -            -            -          10,936        10,937
    Non-earnings assets                                 -           -            -            -           2,522         2,522
                                                    --------   ---------    ---------    ---------     --------     ---------

    Total                                             89,104      35,878       43,094       75,191       77,848       321,115

Liabilities and equity capital:
    Interest bearing NOW accounts                       -           -            -            -          37,474        37,474
    Demand deposits                                     -           -            -            -          26,850        26,850
    Savings accounts                                    -         10,220         -            -          35,682        45,902
    Money market accounts                             47,883      15,960        7,981        7,982         -           79,806
    Certificates of deposit                           30,735      18,218        7,218        3,310         -           59,481
    Borrowings                                         8,859       7,000       14,250       15,750        3,148        49,007
    Other liabilities                                   -           -            -            -           3,976         3,976
    Capital securities                                  -           -            -            -           3,500         3,500
    Equity capital                                      -           -            -            -          15,119        15,119
                                                    --------   ---------    ---------    ---------     --------     ---------

    Total                                             87,477      51,398       29,449       27,042      125,749       321,115
                                                    --------   ---------    ---------    ---------     --------     ---------

Excess (deficiency) of assets over
    liabilities and equity capital                 $   1,627  $  (15,520)  $   13,645   $   48,149    $ (47,901)   $     -
                                                   =========  ==========   ==========   ==========    =========    ==========

Cumulative Gap                                     $   1,627  $  (13,893)  $     (248)  $   47,901    $    -       $     -

Cumulative assets as a % of cumulative
    liabilities and equity capital                       .51%     (4.83)%        4.25%       14.99%      (14.92)%

Cumulative excess (deficiency) of assets
    over liabilities and equity capital as a
    % of total assets                                    .51%     (4.33)%      (0.08)%       14.92%         0.00%

</TABLE>
                                       28
<PAGE>


LIQUIDITY

The primary sources of funds for the Company are deposits, borrowings from the
FHLB of Boston, the sale of loans, loan amortization, prepayments and
maturities, and the sale of investments and mortgage-backed securities available
for sale. Total deposits and FHLB borrowings increased by $28.0 million, or
10.4%, during 2001, and increased by $14.3 million, or 5.6%, during 2000.

During 2001 and 2000, the Company used its sources of funds primarily to meet
commitments to pay maturing certificates of deposit and savings withdrawals, to
fund loan commitments and to purchase investment securities. At December 31,
2001 and 2000, approved loan commitments outstanding amounted to $13.6 million
and $3.4 million, respectively. At the same dates, commitments of the Company to
borrowers under unused lines of credit and home equity credit lines amounted to
$36.6 million and $36.9 million, respectively, and the unadvanced portions of
residential owner-occupied construction loans amounted to $671,000 and $484,000,
respectively.

The Company monitors its liquidity in accordance with guidelines established by
its Asset/Liability and Investment Policies. Management believes that the
Company currently has adequate liquidity available to meet operating needs. To
meet unexpected demands, the Company has borrowing capabilities with the FHLB of
Boston. At December 31, 2001, the total borrowing capacity was $88.8 million.
See "Item 1 - Business - Source of Funds - Borrowings".

CAPITAL RESOURCES

The following table summarizes the Company's and Bank's required and actual
regulatory capital ratios and amounts at December 31, 2001. The required ratios
included in the table are the capital minimums for December 31, 2001, as
required by FRB and FDIC regulations:
<TABLE>
<CAPTION>

                                              Required                     Actual                            Excess
                                      -----------------------      -----------------------          -------------------------
                                       Amount        Percent         Amount        Percent            Amount         Percent
                                       ------        -------         ------        -------            ------         -------
                                                                      (Dollars in Thousands)
<S>                                  <C>              <C>           <C>            <C>   <C>        <C>               <C>
Regulatory Tier 1
   leverage capital ratio
     Company                         $ 12,680         4.0%          $ 18,259       5.76% (1)        $   5,579         1.76%
     Bank                              12,505         4.0             17,357       5.55  (1)            4,852         1.55

Risk-based:
   Tier 1
     Company                         $  7,054         4.0%          $ 18,259      10.35% (2)        $  11,205         6.35%
     Bank                               7,049         4.0             17,357       9.85  (2)           10,308         5.85
   Total risk-based
     Company                         $ 14,109         8.0%          $ 20,380      11.56% (2)        $   6,271         3.56%
     Bank                              14,097         8.0             19,478      11.05  (2)            5,381         3.05
</TABLE>

(1)  Regulatory Tier 1 leverage capital differs from the ratio of stockholders'
     equity to total assets calculated in accordance with accounting principles
     generally accepted in the United States of America. Additionally, the
     Regulatory Tier 1 leverage capital calculation utilizes average assets for
     the fourth quarter of 2001, which were $312,863 and $312,638 for the
     Company and Bank, respectively.

(2)  Based upon total risk-based assets of $176,360 and $176,216 for the Company
     and Bank, respectively.

The Company, pursuant to stock repurchase plans, repurchased 454,000 shares in
2000 at a weighted average price of $8.93 per share and 150,900 shares in 2001
at a weighted average price of $11.46 per share. The stock repurchase plan was
implemented in order to enhance shareholder value.

                                       29
<PAGE>



Ipswich Statutory Trust I (the Trust), a Connecticut statutory trust, was
created in February 2001. The Trust exists for the exclusive purpose of (i)
issuing and selling Common Securities to the Company and Preferred Securities to
the public (together the "Trust Securities"), (ii) using the proceeds of the
sale of Trust Securities to acquire 10.20% Junior Subordinated Deferrable
Interest Debentures ("Junior Subordinated Debentures") issued by the Company,
and (iii) engaging only in those other activities necessary, convenient or
incidental thereto (such as registering the transfer of the Trust Securities).
Accordingly, the Junior Subordinated Debentures will be the sole assets of the
Trust. The preferred securities accrue and pay distributions semi-annually at an
annual rate of 10.20% of the stated liquidation amount of $1,000 per preferred
security. The Company has fully and unconditionally guaranteed all of the
obligations of the Trust. The guaranty covers the semi-annual distributions and
payments on liquidation or redemption of the trust preferred securities, but
only to the extent of funds held by the Trust. In the first quarter of fiscal
2001, the Trust sold $3.5 million of its trust preferred securities to the
public and $109,000 of its common securities to the Company. The trust preferred
securities are mandatory redeemable upon the maturity of the Junior Subordinated
Debentures on February 22, 2031 or upon earlier redemption as provided in the
Indenture. The Company has the right to redeem the Junior Subordinated
Debentures, in whole or in part on or after February 22, 2011 at a redemption
price specified in the Indenture plus any accrued but unpaid interest to the
redemption date. The Company owns all of the common securities of the Trust, the
only voting security, and as a result, the Trust is a subsidiary of the Company.

For further information regarding the Company's capital resources, see "Item 1 -
Business - Stockholders' Equity and Regulatory Matters".

DIVIDENDS

The Company declared dividends of $992,000, $955,000 and $629,000 or $.50, $.41
and $.25 per share in 2001, 2000 and 1999, respectively. The declaration of
future cash dividends will be subject to operating results, financial
conditions, regulatory, tax considerations and other factors. The number of
shares outstanding at December 31, 2001 and 2000 was approximately 1.9 million
and 2.1 million, respectively.

In accordance with the terms of the Agreement and Plan of Merger between
Banknorth Group, Inc. and the Company, the Company may continue to pay its
regular quarterly dividend at a rate not to exceed $.12 per quarter.

IMPACT OF INFLATION AND CHANGING PRICES

The Consolidated Financial Statements and related notes thereto presented in
Item 8 of this Report have been prepared in accordance with accounting
principles generally accepted in the United States of America which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike many industrial companies, most of the assets
and virtually all of the liabilities of the Company are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction or in the same
magnitude as the price of goods and services.

                                       30
<PAGE>


RECENT ACCOUNTING DEVELOPMENTS

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement 125. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. This Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001.

In August of 2001 the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
For long-lived assets to be held and used this Statement retains the
requirements of Statement 121 to (a) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and (b) measure an impairment loss as the difference between the
carrying amount and fair value of the asset. For long-lived assets to be
disposed of other than by sale this Statement requires that a long-lived asset
to be abandoned, exchanged for a similar productive asset, or distributed to
owners in a spinoff be considered held and used until it is disposed of. This
Statement requires that the depreciable life of a long-lived asset to be
abandoned be revised in accordance with APB Opinion No. 20, Accounting Changes
and amends APB Opinion No. 29, Accounting for Nonmonetary Transactions, to
require that an impairment loss be recognized at the date a long-lived asset is
exchanged for a similar productive asset or distributed to owners in a spinoff
if the carrying amount of the asset exceeds its fair value. The accounting model
for long-lived assets to be disposed of by sale is used for all long-lived
assets, whether previously held and used or newly acquired. That accounting
model retains the requirement of Statement 121 to measure a long-lived asset
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell and to cease depreciation (amortization). Therefore,
discontinued operations are no longer measured on a net realizable value basis,
and future operating losses are no longer recognized before they occur. The
provisions of this Statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. The provisions of this
Statement generally are to be applied prospectively. The adoption of this
Statement will not have a significant effect on the Company's financial
condition , liquidity or results of operations.

In June of 2001 the FASB Issued Statement No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.

This statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company has not determined the impact of
adoption of this statement.

In June 2001 the FASB Issued Statement No. 141, Business Combinations and
Statement No. 142, Goodwill and Other Intangible Assets. These statements
address the accounting for business combination and accounting and reporting for
acquired goodwill and other intangible assets. These statements are not expected
to impact the Company.


                                       31
<PAGE>


ITEM 7A       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's success is dependent upon its ability to manage interest rate
risk. Interest rate risk can be defined as the exposure of the Company's net
interest income to adverse movements in interest rates. Although the Company
manages other risks, such as credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Company's financial condition and results of operations. Because the Company
does not maintain a trading portfolio it is not exposed to significant market
risk from trading activities.

The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO). ALCO establishes policies that
monitor and coordinate the Company's sources, uses and pricing of funds. The
committee is also involved in formulating the economic projections for the
Company's budget and strategic plan.

The Company continues to reduce the volatility of its net interest income by
managing the relationship of interest-rate sensitive assets to interest-rate
sensitive liabilities. In recent years, the focus has been to originate
adjustable-rate residential loans for portfolio, which reprice or mature more
quickly than fixed-rate residential loans. The Company's adjustable-rate loans
are primarily tied to published indices, such as the one- year Constant Maturity
Treasury (CMT).

The Company utilizes a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both a rise or fall in interest rates (rate shock) over
a twelve and twenty-four month period. The model is based on the actual maturity
and repricing characteristics of interest-rate sensitive assets and liabilities.
The model incorporates assumptions regarding the impact of changing interest
rates on the prepayment rate of certain assets and liabilities. The assumptions
are based on nationally published prepayment speeds on assets and liabilities
when interest rates increase or decrease by 200 basis points or greater. The
model factors in projections for anticipated activity levels by product lines
offered by the Company. The simulation model also takes into account the
Company's increased ability to control the rates on deposit products more so
than adjustable-rate loans tied to published indices.

Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change the interest income and expense streams
associated with the Company's financial instruments also change, thereby
impacting net interest income (NII), the primary component of the Company's
earnings. ALCO utilizes the results of the simulation model and static GAP
reports to quantify the estimated exposure of NII to sustained interest rate
changes.

The following reflects the Company's NII sensitivity analysis as of December 31:

                                                       Estimated
                 Rate Change                        NII Sensitivity
                 -----------                        ---------------

                                                  2001           2000
                                                  ----           ----

                     +200bp                       (1.38)%      (3.10)%
                     -200bp                       (0.93)%      (0.24)%

The preceding sensitivity analysis does not represent the Company's forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cash flows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change.

                                       32
<PAGE>


Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to: prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable-rate assets, the potential effect of changing debt service
levels on customers with adjustable-rate loans, depositor early withdrawals and
product preference changes, and other internal/external variables. Furthermore,
the sensitivity analysis does not reflect actions that ALCO might take in
responding to or anticipating changes in interest rates.

                                       33
<PAGE>


ITEM 8        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                                                                    Page


Independent Auditors' Report                                         35


Consolidated Balance Sheets                                          36


Consolidated Statements of Income                                    38


Consolidated Statements of Changes in Stockholders' Equity           40


Consolidated Statements of Cash Flows                                42


Notes to Consolidated Financial Statements                           45

                                       34
<PAGE>
















                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Ipswich Bancshares, Inc.


We have audited the accompanying consolidated balance sheets of Ipswich
Bancshares, Inc. and Subsidiaries (the Company) as of December 31, 2001 and
2000, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ipswich
Bancshares, Inc. and Subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.





Portland, Maine                                        Limited Liability Company
January 25, 2002 (except note 22, as to
   which the date is February 26, 2002)

                                       35
<PAGE>
<TABLE>
<CAPTION>
                      IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                             CONSOLIDATED BALANCE SHEETS

                             December 31, 2001 and 2000
                    (Dollars in Thousands Except Per Share Data)


                                       ASSETS
                                       ------

                                                                             2001         2000
                                                                         ---------      ---------
<S>                                                                      <C>           <C>
Cash and due from banks (note 2)                                         $  10,937      $   8,836

Investment securities available for sale, at market value; amortized
    cost of $49,843 and $33,452 (notes 3 and 12)                            50,405         34,228

Investment securities held to maturity, at cost; market value
    of $35,930 and $30,374 (notes 3 and 12)                                 35,343         30,282

Loans held for sale (note 4)                                                14,945          5,003

Loans (notes 5 and 12)                                                     203,710        203,137
Allowance for loan losses (note 6)                                          (2,121)        (1,803)
                                                                         ---------      ---------

       Net loans                                                           201,589        201,334

Stock in Savings Bank Life Insurance Company                                   253            253

Stock in FHLB of Boston (notes 9 and 12)                                     3,000          3,000

Banking premises and equipment, net (note 7)                                 2,824          2,983

Accrued interest receivable                                                  1,251          1,435

Mortgage servicing rights, net (note 10)                                       219            225

Other assets                                                                   349            255
                                                                         ---------      ---------

       Total assets                                                      $ 321,115      $ 287,834
                                                                         =========      =========

</TABLE>
                                       36
<PAGE>
<TABLE>
<CAPTION>

                              LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                                   2001         2000
                                                                               ---------      ---------
<S>                                                                            <C>            <C>
Liabilities:
    Deposits (note 11)                                                         $ 249,513      $ 237,237
    Borrowed funds (note 12)                                                      47,859         32,108
    Mortgagors' escrow accounts                                                    1,148            972
    Accrued expenses and other liabilities                                         3,302          1,726
    Deferred income tax liability (note 14)                                          674            672
                                                                               ---------      ---------

       Total liabilities                                                         302,496        272,715

Commitments and contingencies (notes 4, 7, 15 and 18)

Company obligated, mandatorily redeemable capital securities (note 13)             3,500           --

Stockholders' equity (notes 15 and 16):
    Serial preferred stock, $.10 par value per share; 1,000,000 shares
       authorized, none issued                                                      --             --
    Common stock, $0.10 par value per share; 12,000,000 shares authorized,
       2,530,528 and 2,525,552 shares issued                                         253            253
    Additional paid-in capital                                                     2,345          2,297
    Retained earnings                                                             17,966         16,150
    Treasury stock at cost (604,900 and 454,000 shares
       in 2001 and 2000)                                                          (5,783)        (4,054)
    Accumulated other comprehensive income (note 3)                                  338            473
                                                                               ---------      ---------

       Total stockholders' equity                                                 15,119         15,119





       Total liabilities and stockholders' equity                              $ 321,115      $ 287,834
                                                                               =========      =========
</TABLE>


See accompanying notes.


                                       37

<PAGE>
<TABLE>
<CAPTION>


                                  IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF INCOME

                                Years Ended December 31, 2001, 2000 and 1999
                                (Dollars in Thousands, Except Per Share Data)


                                                                         2001           2000        1999
                                                                       --------      --------      --------
<S>                                                                    <C>           <C>           <C>
Interest and dividend income:
    Loans                                                              $ 14,696      $ 14,888      $ 14,313
    Federal funds sold and interest bearing deposits                        214           328           187
    Investment securities available for sale                              2,607         2,822         2,233
    Investment securities held to maturity                                2,087         1,891         1,222
                                                                       --------      --------      --------

       Total interest and dividend income                                19,604        19,929        17,955

Interest expense:
    Deposits (note 11)                                                    7,506         8,052         6,576
    Borrowed funds                                                        2,314         2,942         2,681
                                                                       --------      --------      --------

       Total interest expense                                             9,820        10,994         9,257
                                                                       --------      --------      --------

       Net interest and dividend income                                   9,784         8,935         8,698

Provision for loan losses (note 6)                                          100            60           100
                                                                       --------      --------      --------

       Net interest and dividend income after provision
          for loan losses                                                 9,684         8,875         8,598

Non-interest income:
    Net mortgage banking gains (losses) (note 4)                            443          (147)        1,030
    Net gain (loss) on sale of mortgage servicing rights (note 10)         --              15            63
    Loan servicing (expenses) income, net (note 10)                         (46)           (2)           21
    Deposit account fees                                                  2,144         1,701         1,504
    Other loan fees                                                         183           127           217
    Gains on sales of securities available for sale, net (note 3)           182            33            78
    Other                                                                    49             9            12
                                                                       --------      --------      --------

       Total non-interest income                                          2,955         1,736         2,925
                                                                       --------      --------      --------

       Net interest, dividend and non-interest income                    12,639        10,611        11,523

</TABLE>


                                       38
<PAGE>
<TABLE>
<CAPTION>


                             IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF INCOME
                                            (CONTINUED)

                           Years Ended December 31, 2001, 2000 and 1999
                           (Dollars in Thousands, Except Per Share Data)


                                                                  2001         2000        1999
                                                                 -------     -------      -------
<S>                                                              <C>         <C>          <C>
Non-interest expenses:
    Salaries and employee benefits (note 16)                     $ 3,663     $ 3,212      $ 3,232
    Occupancy and equipment expenses (note 7)                      1,052         914          916
    Data processing expenses                                       1,056         924          798
    Professional fees                                                364         337          778
    Advertising and marketing expenses                               498         524          537
    FDIC and DIF deposit insurance                                    55          52           36
    OREO expense (income), net (note 8)                                5          (3)        (308)
    Distribution on securities of subsidiary trust (note 13)         310        --           --
    Loss on banking premises and equipment (note 7)                  234        --           --
    Other                                                          1,083         859          921
                                                                 -------     -------      -------

       Total non-interest expenses                                 8,320       6,819        6,910
                                                                 -------     -------      -------

       Income before income taxes                                  4,319       3,792        4,613

Income tax expense (note 14)                                       1,511       1,137        1,324
                                                                 -------     -------      -------

       Net income                                                $ 2,808     $ 2,655      $ 3,289
                                                                 =======     =======      =======

Basic earnings per share (notes 1 and 17)                        $  1.40     $  1.12      $  1.33
Diluted earnings per share (notes 1 and 17)                         1.37        1.10         1.29

Dividends per share                                                  .50         .41          .25

</TABLE>


See accompanying notes.

                                                39
<PAGE>
<TABLE>
<CAPTION>


                                         IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                        Years Ended December 31, 2001, 2000 and 1999
                                        (Dollars in Thousands Except Per Share Data)

                                                                                                      Accumulated
                                                                                                         Other       Total
                                                                   Additional                           Compre-     Stock-
                                            Shares       Common      Paid-in    Retained    Treasury   hensive     holders'
                                            Issued        Stock      Capital    Earnings      Stock     Income      Equity
                                            ------        -----      -------    --------     -------    ------      ------
<S>                                        <C>           <C>        <C>         <C>          <C>        <C>       <C>
Balance at December 31, 1998               2,392,286     $ 239      $ 2,009     $ 11,790     $-         $ 185     $ 14,223

Stock options exercised (note 6)             133,141        14          226         -         -          -             240
Issuance of stock rights                        -         -              27         -         -          -              27
Cash dividends                                  -         -            -            (629)     -          -            (629)

Comprehensive income:
   Net income                                   -         -            -           3,289      -          -           3,289
   Other comprehensive income:
     Unrealized holding losses on
       securities, net of taxes of $150         -         -            -            -         -          -            (223)
     Reclassification adjustment
       for amounts included in net
       income, net of taxes of $33              -         -            -            -         -          -              48
                                                                                                                   -------

   Other comprehensive income (loss)            -         -            -            -         -          (175)        (175)
                                                                                                                   -------

Total comprehensive income                      -         -            -            -         -          -           3,114
                                         -----------      ----       ------      -------      ----       ----      -------

Balance at December 31, 1999               2,525,427       253        2,262       14,450      -            10       16,975

Stock options exercised                          125      -               1         -          -         -               1
Issuance of stock rights (note 6)                         -              34         -          -         -              34
Cash dividends                                            -            -            (955)      -         -            (955)
Treasury stock purchased
   (454,000 shares at an average
   price of $8.93)                              -         -            -            -        (4,054)     -          (4,054)

Comprehensive income:
   Net income                                             -            -           2,655       -         -           2,655
   Other comprehensive income:
     Unrealized holding gains on
       securities, net of taxes of $286                   -            -            -          -         -             446
     Reclassification adjustment
       for amounts included in net
       income, net of taxes of $10                        -            -            -          -         -              17
                                                                                                                   -------

   Other comprehensive income                             -            -            -          -          463          463
                                                                                                                   -------

Total comprehensive income                                -            -            -          -         -           3,118
                                         -----------      ----       ------      -------     ------      ----      -------

Balance at December 31, 2000               2,525,552       253        2,297       16,150     (4,054)      473       15,119

</TABLE>


                                       40
<PAGE>
<TABLE>
<CAPTION>


                                         IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                        (CONTINUED)

                                        Years Ended December 31, 2001, 2000 and 1999
                                        (Dollars in Thousands Except Per Share Data)


                                                                                                      Accumulated
                                                                                                         Other       Total
                                                                   Additional                           Compre-     Stock-
                                            Shares       Common      Paid-in    Retained    Treasury   hensive     holders'
                                            Issued        Stock      Capital    Earnings      Stock     Income      Equity
                                            ------        -----      -------    --------     -------    ------      ------
<S>                                        <C>           <C>        <C>         <C>         <C>         <C>       <C>
Balance at December 31, 2000               2,525,552     $ 253      $ 2,297     $ 16,150    $(4,054)    $ 473     $ 15,119

Stock options exercised (note 6)               4,976      -              31         -          -         -              31
Issuance of stock rights                        -         -              17         -          -         -              17
Cash dividends                                  -         -            -            (992)      -         -            (992)
Treasury stock purchased (150,900
   shares at an average price of
    $11.46)                                     -         -            -            -        (1,729)     -          (1,729)

Comprehensive income:
   Net income                                   -         -            -           2,808       -         -           2,808
   Other comprehensive income:
     Unrealized holding gains on
       securities, net of taxes of $50          -         -            -            -          -         -             (88)
     Reclassification adjustment
       for amounts included in net
       income, net of taxes of $30              -         -            -            -          -         -             (47)
                                                                                                                   -------

   Other comprehensive income                   -         -            -            -          -         (135)        (135)
                                                                                                                   -------

Total comprehensive income                      -         -            -            -          -         -           2,673
                                         -----------      ----       ------      -------     ------      ----      -------

Balance at December 31, 2001               2,530,528     $ 253      $ 2,345     $ 17,966    $(5,783)    $ 338     $ 15,119
                                         ===========      ====       ======      =======     ======      ====      =======

</TABLE>


See accompanying notes.

                                       41
<PAGE>
<TABLE>
<CAPTION>


                                         IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                       Years Ended December 31, 2001, 2000 and 1999
                                                  (Dollars in Thousands)


                                                                                         2001         2000         1999
                                                                                      ---------    ----------   ---------
<S>                                                                                  <C>          <C>          <C>
Net cash flows from operating activities:
    Net income                                                                       $    2,808   $     2,655  $    3,289
    Adjustments to reconcile net income to net cash provided (used)
      by operating activities:
        Provision for loan losses                                                           100            60         100
        Deferred income tax (benefit) expense                                                82          (141)         88
        Depreciation expense                                                                350           347         337
        Amortization of premiums on investment securities, net                              111            62         148
        (Gains) losses on sale of loans                                                    (443)          147      (1,030)
        Gains on sales of investment securities available for sale                         (182)          (33)        (78)
        Loss (gains) on sale of other real estate owned                                    -                1        (340)
        Loss on banking premises and equipment                                              234          -           -
        Origination of loans held for sale                                              (54,140)      (30,299)    (59,545)
        Proceeds from sale of loans                                                      39,640        15,410      16,620
        Proceeds from sale of securitized loans                                           5,001         9,739      67,955
        Increase in net loan origination costs/discounts                                    (13)         (396)       (211)
        Decrease (increase) in mortgage servicing rights                                      6          (225)        229
        Decrease (increase) in accrued interest receivable                                  184          (187)       (195)
        Decrease (increase) in other assets, net                                            (94)          (73)         65
        Increase (decrease) in accrued expenses and other liabilities                     1,476        (1,005)        (28)
                                                                                      ---------    ----------   ---------

    Net cash (used) provided by operating activities                                     (4,880)       (3,938)     27,404

Net cash flows from investing activities:
    Purchase of investment securities available for sale                                (39,693)      (13,543)    (19,490)
    Principal paydowns on investment securities available for sale                       19,736        10,148      12,722
    Proceeds from the sale of investment securities available for sale                    3,642         9,976       4,963
    Purchase of investment securities held to maturity                                  (19,783)       (3,191)    (20,826)
    Principal paydowns on investment securities held to maturity                         14,716           976       2,964
    Redemption (purchases) of stock in FHLB of Boston                                      -              977      (1,072)
    Net increase in loans                                                                  (342)      (10,044)    (13,216)
    Proceeds from sales of other real estate owned                                         -              110       1,009
    Purchases of equipment, net                                                            (425)         (162)       (207)
                                                                                      ---------    ----------   ---------

    Net cash used in investing activities                                               (22,149)       (4,753)    (33,153)

</TABLE>


                                       42
<PAGE>
<TABLE>
<CAPTION>


                                         IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                        (CONTINUED)

                                       Years Ended December 31, 2001, 2000 and 1999
                                                  (Dollars in Thousands)


                                                                                      2001           2000          1999
                                                                                   ----------    ----------    ----------
<S>                                                                               <C>           <C>           <C>
Cash flows from financing activities:
    Net increase in deposits                                                      $    12,276   $    27,155   $    10,325
    Proceeds from Federal Home Loan Bank advances                                      66,951        66,008       120,000
    Repayment of Federal Home Loan Bank advances                                      (51,200)      (78,900)     (128,000)
    Increase (decrease) in mortgagors' escrow accounts                                    176           (21)          (50)
    Proceeds from the issuance of common stock and stock rights                            48            35           267
    Proceeds from issuance of capital securities                                        3,500          -             -
    Cash dividends                                                                       (892)         (955)         (629)
    Purchase of treasury stock                                                         (1,729)       (4,054)         -
                                                                                   ----------    ----------    ----------

    Net cash provided by financing activities                                          29,130         9,268         1,913
                                                                                   ----------    ----------    ----------

Net increase (decrease) in cash and cash equivalents                                    2,101           577        (3,836)

Cash and cash equivalents at beginning of year                                          8,836         8,259        12,095
                                                                                   ----------    ----------    ----------

Cash and cash equivalents at end of year                                          $    10,937   $     8,836   $     8,259
                                                                                   ==========    ==========    ==========

Supplemental disclosure of cash flow information: Cash paid for:
      Interest on deposit accounts                                                $     7,506   $     8,052   $     6,576
      Interest on borrowed funds                                                        2,328         2,904         2,711
      Income tax                                                                          210         2,534           601

Supplemental schedule of non-cash investing and financing activities:
    Conversion of residential real estate loans to mortgage-
      backed securities                                                           $      -      $       584   $     8,996
    Transfer of loans to other real estate owned                                         -             -               62
    Net (decrease) increase required by Statement of Financial
        Accounting Standards No. 115:
        Investment securities                                                            (215)          759          (292)
        Deferred income tax liability                                                     (80)          296          (117)
        Accumulated other comprehensive income                                           (135)          463          (175)

</TABLE>

See accompanying notes.

                                       43
<PAGE>



















                      (This page intentionally left blank)

                                       44
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


1.    Summary of Significant Accounting Policies

      (a)    Business
             --------

             Ipswich Bancshares, Inc. (the Company) is a Massachusetts
             corporation whose primary business is serving as the holding
             company for Ipswich Savings Bank - d/b/a IpswichBank - (the Bank),
             a state chartered savings bank located in Ipswich, Massachusetts.
             On July 1, 1999, in connection with the formation of the Company as
             the holding company for the Bank, each share of the Bank's common
             stock previously outstanding was converted automatically into one
             share of common stock of the Company, and the Bank became a wholly
             owned subsidiary of the Company. The reorganization had no impact
             on the consolidated financial statements. The Company is subject to
             regulation by the Federal Reserve Board (the FRB).

             The Bank provides a variety of loan and deposit services to its
             customers through eight branch locations. The Bank is subject to
             competition from other financial institutions. The Bank is subject
             to the regulations of, and periodic examination by, the Federal
             Deposit Insurance Corporation (FDIC) and the Massachusetts
             Commissioner of Banks (the Commissioner) and to certain
             requirements established by the FRB. The Bank's deposits are
             insured by the Bank Insurance Fund of the FDIC to the fullest
             extent authorized by law (generally $100 per depositor). All
             deposits in excess of FDIC limits are insured by the Massachusetts
             Depositors Insurance Fund.

      (b)    Basis of Presentation
             ---------------------

             The consolidated financial statements include the accounts of
             Ipswich Bancshares, Inc. and its wholly-owned subsidiaries,
             IpswichBank and Ipswich Statutory Trust I, and the Bank's
             subsidiaries; Ipswich Preferred Capital Corporation, Ipswich
             Securities Corporation, Historic Ipswich, Inc., North Shore
             Financial Services, Inc. and Rowley Investment Corporation
             (collectively hereinafter referred to as the Company). All
             significant intercompany accounts and transactions have been
             eliminated in consolidation.

             Ipswich Statutory Trust I was formed in February 2001 to issue and
             sell common securities to the Company and preferred securities to
             the public. Ipswich Preferred Capital Corporation, 99%-owned by the
             Bank, was formed as a mortgage real estate investment trust to hold
             residential mortgages as a subsidiary of IpswichBank. Ipswich
             Securities Corporation was formed to exclusively transact in
             securities on its own behalf as a subsidiary of IpswichBank.
             Historic Ipswich, Inc. and North Shore Financial Services, Inc.
             were incorporated for the purpose of holding direct investments in
             real estate and foreclosed real estate, respectively. Rowley
             Investment Corporation was incorporated to facilitate the holding
             and permitting of certain bank-owned real estate. During 2000, the
             Company dissolved Historic Ipswich, Inc. and Rowley Investment
             Corporation.

             The consolidated financial statements have been prepared in
             conformity with accounting principles generally accepted in the
             United States of America. In preparing the financial statements,
             management is required to make estimates and assumptions that
             affect the reported amounts of assets and liabilities as of the
             date of the balance sheet and revenues and expenses for the period.
             Actual results could differ significantly from those estimates.

                                       45
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)

1.    Summary of Significant Accounting Policies (Continued)
      ------------------------------------------------------

             Material estimates that are particularly susceptible to significant
             change in the near-term relate to the determination of the
             allowance for loan losses, the valuation of real estate acquired by
             foreclosure and the valuation of mortgage servicing rights.

             A substantial portion of the Company's loans are secured by real
             estate in Essex County in Massachusetts. Accordingly, the ultimate
             collectibility of a substantial portion of the Company's loan
             portfolio is susceptible to changes in market conditions in its
             geographic area.

      (c)    Investments
             -----------

             Debt securities that the Company has the positive intent and
             ability to hold to maturity are classified as held to maturity and
             reported at amortized cost. Debt and equity securities not
             classified as held to maturity are classified as available for sale
             and reported at fair value, with unrealized gains and losses
             excluded from earnings and reported, net of tax, as accumulated
             other comprehensive income within stockholders' equity.

             Premiums and discounts are taken into income by a method the result
             of which approximates that of the level yield method. Realized
             gains or losses are computed using the specific identification
             method. When, in management's judgment, an other than temporary
             decline in the value of a security occurs, the carrying value of
             such security is written down to its fair value and the amount of
             the impairment is charged to earnings.

      (d)    Loans
             -----

             Loan origination fees and certain direct loan origination costs are
             capitalized and recognized over the life of the related loan by use
             of the level yield method or recognized as an adjustment to the
             gain or loss when loans are sold.

      (e)    Loans Held for Sale
             -------------------

             Mortgage loans held for sale are carried at the lower of aggregate
             cost or fair value, based upon commitments from investors to
             purchase such loans and upon prevailing market values. Net deferred
             loan origination fees are included in the fair value determination
             and are included in the determination of gains or losses on sales
             of mortgage loans. Interest income on loans held for sale is
             accrued and classified as interest income on loans. When loans are
             sold, a gain or loss is recognized to the extent that the sale
             proceeds exceed or are less than the carrying value of the loans,
             net of the value of servicing rights retained, using the specific
             identification method.

                                       46
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)

1.    Summary of Significant Accounting Policies (Continued)
      ------------------------------------------------------

      (f)    Allowance for Loan Losses
             -------------------------

             The allowance for loan losses is established by management to
             absorb future charge-offs of loans deemed uncollectible. This
             allowance is increased by provisions charged to operating expense
             and by recoveries on loans previously charged off. Management, in
             evaluating current information and events regarding the borrowers'
             ability to repay their obligations, considers commercial loans over
             $200 to be impaired when it is probable that the Company will be
             unable to collect all amounts due according to the contractual
             terms of the note agreement; other loans are evaluated collectively
             for valuation. When a loan is considered to be impaired, the amount
             of the impairment is measured based on the present value of
             expected future cash flows discounted at the loan's effective
             interest rate or the fair value of collateral if the loan is
             collateral dependent. Impairment losses are included in the
             allowance for loan losses through a charge to the provision for
             loan losses.

             The Company sets the level of its allowance for loan losses based
             on a number of factors. Management uses available information (such
             as current economic conditions, levels of nonperforming loans,
             delinquency trends and collateral values) to assess the adequacy of
             the allowance and to determine future additions to the allowance.
             The process involves substantial uncertainties; ultimate losses may
             vary from current estimates. Management believes that the allowance
             for loan losses is adequate. While management uses available
             information to recognize losses on loans, future additions to the
             allowance may be necessary. In addition, various regulatory
             agencies, as an integral part of their examination process,
             periodically review the Company's allowance for loan losses. Such
             agencies may require the Company to recognize additions to the
             allowance based on judgments different from those of management.

      (g)    Mortgage Loan Servicing
             -----------------------

             Mortgage servicing rights are amortized in proportion to, and over
             the period of, estimated net servicing revenues. Industry average
             prepayment rates are considered when estimating the lives of the
             mortgage servicing rights. Impairment of mortgage servicing rights
             is assessed based on the fair value of those rights. Fair values
             are periodically obtained from an independent servicing portfolio
             valuation. For purposes of measuring impairment, the rights are
             stratified based on the following predominant risk characteristics
             of the underlying loans: maturity term, interest rate and product
             type (fixed-rate, adjustable-rate, etc.). The amount of impairment
             recognized is the amount by which the capitalized mortgage
             servicing rights for a stratum exceed their fair value.

      (h)    Banking Premises and Equipment
             ------------------------------

             Banking premises and equipment are stated at cost less accumulated
             depreciation. Depreciation is computed on the straight-line method
             over the estimated useful lives of the assets or the term of the
             lease, if shorter. Maintenance and repairs are charged to current
             expense as incurred and the cost of major renewals and betterments
             are capitalized.


                                       47
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


1.    Summary of Significant Accounting Policies (Continued)
      ------------------------------------------------------

      (i)    Other Real Estate Owned
             -----------------------

             Other real estate owned includes those properties acquired through
             foreclosure or deed-in-lieu of foreclosure which are carried at the
             lower of fair value minus estimated costs to sell or cost. Costs
             relating to the development and improvement of property are
             capitalized, whereas those relating to holding the property are
             charged to expense. Gains on sales subsequent to foreclosure are
             recognized in operations when realized.

      (j)    Investment in Real Estate Limited Partnerships
             ----------------------------------------------

             Investments in real estate limited partnerships are accounted for
             on the equity method. They are included in other assets.

      (k)    Accrual of Interest Income and Expense
             --------------------------------------

             Interest on loans and investment securities is taken into income
             using methods which relate the income earned to the balances of
             loans and investment securities outstanding. The recording of
             interest income on problem loan accounts generally ceases when the
             loans become 90 days past due and are not in the process of
             collection. Cash receipts on impaired loans are applied to reduce
             the principal amount of such loans until the principal has been
             reduced to an amount deemed collectable. Restructured loans are
             returned to accrual status when the borrower has complied with the
             repayment terms of the loan for a period of six to eighteen months.
             Interest expense on liabilities is derived by applying applicable
             interest rates to principal amounts outstanding.

      (l)    Advertising Costs
             -----------------

             Advertising costs are expensed as they are incurred.

      (m)    Incentive Compensation
             ----------------------

             The Company has a Management Incentive Compensation Plan as a means
             of recognizing achievement on the part of its Senior Management and
             certain other officers of the Company. Incentive awards are
             determined according to a formula based upon the Company's return
             on average stockholders' equity in the calendar year, as compared
             with a group of peer banks, as well as the individual participant's
             performance. Awards are paid as a bonus calculated as a percentage
             of an individual officer's salary within the limitations of the
             plan.

             The Company also has three stock option plans. SFAS No. 123,
             Accounting for Stock-Based Compensation, encourages, but does not
             require, companies to recognize compensation expense for grants of
             common stock, stock options and other equity instruments to
             employees based upon the fair value of the instruments when issued.
             Companies electing not to recognize compensation expense are
             required to disclose what net income and earnings per share would
             have been if the expense were recognized. The Company elected to
             adopt the disclosure option of SFAS No. 123 rather than recognition
             of compensation expense.

                                       48
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


1.    Summary of Significant Accounting Policies (Continued)
      ------------------------------------------------------

      (n)    Derivatives
             -----------

             The Company accounts for derivatives in accordance with Statement
             of Financial Accounting Standards (SFAS) No. 133, Accounting for
             Derivative Instruments and Hedging Activities, which requires the
             Company to recognize all derivatives on the balance sheet at fair
             value. Derivatives that are not hedges must be adjusted to fair
             value through income. If the derivative is a hedge, depending on
             the nature of the hedge, changes in the fair value of derivatives
             are either offset against the change in fair value of assets,
             liabilities, or firm commitments through earnings or recognized in
             other comprehensive income until the hedged item is recognized in
             earnings. The ineffective portion of a derivative's change in fair
             value will be immediately recognized in earnings. The Company did
             not participate in derivative instruments during 2001, 2000 and
             1999.

      (o)    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. The
             Company's deferred tax asset is reviewed and adjustments to such
             asset are recognized as deferred income tax expense or benefit
             based upon management's judgment relating to the realizability of
             such asset.

      (p)    Other Comprehensive Income
             --------------------------

             Accumulated other comprehensive income consists solely of
             unrealized appreciation on investment securities available for
             sale, net of taxes.

      (q)    Earnings per Share
             ------------------

             The computation of basic earnings per share is based on the
             weighted average number of shares of common stock outstanding
             during each period. The computation of diluted earnings per share
             is based on the weighted average number of shares of common stock
             outstanding and dilutive potential common stock equivalents
             outstanding during each period. Stock option grants are included
             only in periods when the results are dilutive.

      (r)    Statement of Cash Flows
             -----------------------

             For purposes of the statement of cash flows, cash and cash
             equivalents include cash, due from banks, interest-bearing deposits
             and federal funds sold.

      (s)    Reclassification
             ----------------
             Certain amounts in the 2000 and 1999 financial statements have been
             reclassified to conform to 2001 presentation without effect on
             stockholders' equity or net income.


                                       49
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


2.    Reserve Requirements and Compensating Balance Agreements
      --------------------------------------------------------

      The Federal Reserve Board requires the Company to maintain a reserve
      balance; the amount of this reserve balance at December 31, 2001 was
      $2,649.

      The Company has arrangements with a third party for processing money
      orders and treasurers checks. The arrangement requires the maintenance of
      a compensating balance. At December 31, 2001, the Company was required to
      maintain a compensating balance of $290.


3.    Investment Securities
      ---------------------

      Available for Sale
      ------------------

      The amortized cost and approximate market values of investment securities
      available for sale at December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                       2001
                                                           ------------------------------------------------------------
                                                            Amortized        Unrealized      Unrealized         Market
                                                              Cost              Gains          Losses            Value
                                                           -----------      -----------      -----------      ---------
<S>                                                         <C>                <C>             <C>            <C>
      Mortgage-backed securities                            $  41,043          $ 618           $  (76)        $  41,585
      Collateralized mortgage obligation                        2,000              6             -                2,006
      Mutual funds                                              6,800             14             -                6,814
                                                             --------           ----            -----          --------

                                                            $  49,843          $ 638           $  (76)        $  50,405
                                                             ========           ====            =====          ========
<CAPTION>

                                                                                       2000
                                                           ------------------------------------------------------------
                                                            Amortized        Unrealized      Unrealized         Market
                                                              Cost              Gains          Losses            Value
                                                           -----------      -----------      -----------      ---------
<S>                                                         <C>                <C>             <C>            <C>
      U.S. Government Agency obligations                    $   2,000          $   -           $   (1)        $   1,999
      Mortgage-backed securities                               30,705            702             -               31,407
      Marketable equity securities                                747             75             -                  822
                                                             --------           ----            -----          --------

                                                            $  33,452          $ 777           $   (1)        $  34,228
                                                             ========           ====            =====          ========

</TABLE>
                                       50

<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


3.    Investment Securities (Continued)
      ---------------------------------

      The following table sets forth the maturity distribution of investment
      securities available for sale at December 31. Actual maturities will
      differ from contractual maturities because borrowers may have the right to
      call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>

                                                                         2001                            2000
                                                             --------------------------       ---------------------------
                                                              Amortized         Market         Amortized          Market
                                                                Cost             Value           Cost              Value
                                                             -----------      --------        -----------       ---------
<S>                                                           <C>              <C>             <C>             <C>
      Within one year                                         $    -           $   -           $    -          $    -
      Due after five years through ten years                      5,384           5,390            2,000           1,999
      Maturing after ten years:
         Mortgage-backed securities
             FNMA participation certificates                     21,949          22,397           27,168          27,804
             FHLMC participation certificates                    13,710          13,798            3,537           3,603
         Collateralized mortgage obligation                       2,000           2,006             -               -
      Mutual funds                                                6,800           6,814             -               -
      Marketable equity securities                                 -               -                 747             822
                                                               --------         -------         --------        --------

                                                              $  49,843        $ 50,405        $  33,452       $  34,228
                                                               ========         =======         ========        ========
</TABLE>

      Proceeds from sales of investment securities available for sale during
      2001, 2000 and 1999 amounted to $3,642, $9,976 and $4,963, respectively.
      The realized gains and losses on investment securities available for sale,
      for each of the three years ended December 31, is as follows:
<TABLE>
<CAPTION>

                                                     2001                       2000                     1999
                                            ---------------------      ---------------------    ----------------------
                                             Realized    Realized      Realized    Realized     Realized      Realized
                                               Gains      Losses         Gains      Losses        Gains        Losses
                                            ---------   ---------      ---------   ---------    ---------    ---------

<S>                                         <C>           <C>           <C>         <C>          <C>          <C>
      U.S. Treasury notes                   $   -         $  -          $   -       $  (3)       $   -        $   -
      Mortgage-backed securities                -            -              5          (2)           49           -
      Marketable equity securities             184           (2)           37          (4)           29           -
                                             -----         ----          ----        ----         -----        -----

                                            $  184        $  (2)        $  42       $  (9)       $   78       $   -
                                             =====         ====          ====        ====         =====        =====
</TABLE>

      The Company had $214 of investment securities pledged for Treasury, Tax
      and Loan purposes to the FRB as of December 31, 2001.

                                       51

<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


3.    Investment Securities (Continued)
      ---------------------------------

      The following table summarizes the amounts of unrealized gains and losses
      on investment securities at December 31 which are included in accumulated
      other comprehensive income within stockholders' equity:

                                                                2001      2000

      Net unrealized gain on available for sale securities     $  562   $  776
      Related income tax benefit                                 (224)    (303)
                                                               ------   ------

                                                               $  338   $  473
                                                               ======   ======

      Held to Maturity
      ----------------

      The amortized cost and approximate market values of investment securities
      held to maturity at December 31 are summarized as follows:
<TABLE>
<CAPTION>

                                                                                       2001
                                                            ------------------------------------------------------------
                                                             Amortized       Unrealized      Unrealized          Market
                                                               Cost             Gains          Losses             Value
                                                            -----------     -----------      -----------       ---------
<S>                                                         <C>                <C>            <C>             <C>
      U.S. Government Agency obligations                    $   4,621          $ 181          $    -          $   4,802
      Mortgage-backed securities                               23,127            199               (198)         23,128
      Trust preferred debt securities                           7,595            464                (59)          8,000
                                                             --------           ----           --------        --------

                                                            $  35,343          $ 844          $    (257)      $  35,930
                                                             ========           ====           ========        ========
<CAPTION>

                                                                                       2000
                                                            ------------------------------------------------------------
                                                             Amortized       Unrealized      Unrealized          Market
                                                               Cost             Gains          Losses             Value
                                                            -----------     -----------      -----------       ---------
<S>                                                         <C>                <C>            <C>             <C>
      U.S. Government Agency obligations                    $  16,381          $ 120           $  (94)        $  16,407
      Mortgage-backed securities                               10,710             67              (58)           10,719
      Trust preferred debt securities                           3,191             59               (2)            3,248
                                                             --------           ----            -----          --------

                                                            $  30,282          $ 246           $ (154)        $  30,374
                                                             ========           ====            =====          ========

</TABLE>
                                       52

<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


3.    Investment Securities (Continued)
      ---------------------------------

      The following table sets forth the maturity distribution of investment
      securities held to maturity at December 31. Actual maturities will differ
      from contractual maturities because borrowers may have the right to call
      or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>

                                                                               2001                        2000
                                                                     ------------------------     ------------------------
                                                                      Amortized      Market         Amortized      Market
                                                                        Cost          Value           Cost          Value
                                                                     -----------    ---------     -----------     --------
<S>                                                                   <C>           <C>           <C>            <C>
      After one to five years                                         $  4,621      $   4,802     $   2,000      $  1,993
      After five to ten years                                             -              -           12,383        12,466
      Maturing after ten years:
         Mortgage-backed securities:
             FNMA participation certificates                            12,295         12,158         2,940         2,954
             FHLMC participation certificates                            8,149          8,290         4,377         4,429
             GNMA participation certificates                             2,683          2,680         3,393         3,336
         FHLMC debt obligations                                           -              -            1,998         1,948
         Trust preferred debt obligations                                7,595          8,000         3,191         3,248
                                                                       -------       --------      --------       -------

                                                                      $ 35,343      $  35,930     $  30,282      $ 30,374
                                                                       =======       ========      ========       =======
</TABLE>


4.    Loans Held for Sale and Gains on Sales of Loans
      -----------------------------------------------

      The following table summarizes the amortized cost and estimated market
      value of loans held for sale at December 31:

<TABLE>
<CAPTION>
                                                          2001                                  2000
                                           -------------------------------         --------------------------------
                                                                 Estimated                               Estimated
                                             Amortized            Market            Amortized             Market
                                               Cost                Value              Cost                 Value
                                           -----------         -----------         -----------         ------------

<S>                                         <C>                 <C>                 <C>                  <C>
      Loans held for sale                   $  14,945           $  14,945           $5,003               $5,003

</TABLE>
      The realized gains and losses on mortgage loans sold for each of the three
years ended December 31, is as follows:

<TABLE>
<CAPTION>
                                                                                                       Net
                                                      Realized                Realized                Gains
                                                        Gains                  Losses               (Losses)
                                                     ---------               ---------              --------

<S>                  <C>                             <C>                     <C>                   <C>
                     2001                            $    458                $   (15)              $    443
                     2000                                 163                   (310)                  (147)
                     1999                               1,036                     (6)                 1,030

</TABLE>
                                       53
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


4.    Loans Held for Sale and Gains on Sales of Loans (Continued)
      ----------------------------------------------------------

      Certain loans sold by the Company are subject to repurchase. In the event
      one of these loans becomes 60 days or more delinquent in the first six
      months, beginning with the first payment due the purchaser, the Company
      would be required to repurchase the loan. Total loans sold subject to
      repurchase were approximately $7,401, $918 and $5,096 at December 31,
      2001, 2000 and 1999, respectively.


5.    Loans
      -----

      The Company's lending activities are conducted principally in Essex and
      Middlesex Counties in Massachusetts and Southern New Hampshire. The
      Company grants residential and consumer loans, commercial real estate and
      industrial loans, and loans for the construction of residential
      owner-occupied homes. Substantially all loans granted by the Company are
      secured by real estate collateral. The ability and willingness of
      residential mortgage and consumer loan borrowers to honor their repayment
      commitments is generally dependent on the level of overall economic
      activity within the borrower's geographic areas and real estate values.
      The ability and willingness of commercial real estate and construction
      loan borrowers to honor their repayment commitments is generally dependent
      on the health of the real estate economic sector in the borrower's
      geographic areas and the general economy.

      The Bank is generally prohibited by Massachusetts banking statutes from
      lending to any one borrower amounts in excess of 20% of stockholders'
      equity.

      Loans at December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                                                               2001          2000
                                                                             ---------    ---------
<S>                                                                         <C>          <C>
      Loans:
         Residential                                                        $  158,898   $  162,680
         Residential owner-occupied construction                                 2,662        1,837
         Land                                                                       26           28
         Commercial real estate                                                  9,622        5,670
         Home equity                                                            67,704       64,974
                                                                             ---------    ---------

                                                                               238,912      235,189
         Less:
             Unadvanced funds on home equity loans                             (35,971)     (33,762)
             Unadvanced funds on owner-occupied construction loans                (671)        (484)
             Deferred loan origination costs, net                                  905          987
             Unearned discount                                                    -             (95)
                                                                             ---------    ---------

                Loans, net                                                     203,175      201,835

      Other loans, net                                                             535        1,302
                                                                             ---------    ---------

                Total loans                                                 $  203,710   $  203,137
                                                                             =========    =========

</TABLE>
                                       54
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


5.    Loans (Continued)
      -----------------

      In the ordinary course of business, the Company has granted loans to
      officers, directors and employees on substantially the same terms and
      conditions, including interest rates and collateral, as those prevailing
      at the same time for comparable transactions with unrelated borrowers.
      These loans do not, in the opinion of management, involve more than normal
      credit risk or present other unfavorable features. There were no material
      related party loans as of December 31, 2001 and 2000.

      The recorded investment in loans for which an impairment has been
      recognized at December 31, 2001 and 2000 was $14 and $229, respectively.
      The related allowance for loan losses at December 31, 2001 and 2000 was $7
      and $11, respectively. The average recorded investment in impaired loans
      during 2001 and 2000 was $19 and $45, respectively. Interest income
      recognized on impaired loans during 2001, 2000 and 1999 was $2, $2 and
      $71, respectively, all of which was recorded on a cash basis.

      The Company has no material outstanding commitments to lend additional
      funds to customers whose loans have been placed on non-accrual status or
      the terms of which have been modified.


6.    Allowance for Loan Losses
      -------------------------

      An analysis of the allowance for loan losses for the years ended December
      31, is as follows:

<TABLE>
<CAPTION>
                                                                 2001       2000       1999
                                                              --------   --------   --------

<S>                                                           <C>        <C>        <C>
      Balance at beginning of year                            $  1,803   $  1,798   $  1,742
      Provision charged to operations                              100         60        100

      Less loans charged-off                                      (113)       (86)       (81)
      Recoveries on loans previously charged-off                   331         31         37
                                                              --------   --------   --------

      Net recoveries (charge-offs)                                 218        (55)       (44)
                                                              --------   --------   --------

      Balance at end of year                                  $  2,121   $  1,803   $  1,798
                                                              ========   ========   ========
</TABLE>
                                       55


<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


6.    Allowance for Loan Losses (Continued)
      -------------------------------------

      The allowance for loan losses is allocated as follows:

                                                            2001       2000
                                                          -------    -------
      Commercial real estate                             $    183   $    158
      Residential real estate                               1,183        962
      Home equity and other consumer                          735        669
      Residential owner-occupied construction                  20         14
                                                         --------   --------

      Total allowance                                    $  2,121   $  1,803
                                                         ========   ========

7.    Banking Premises and Equipment

      A summary of banking premises and equipment at December 31 is as follows:

                                                2001        2000
                                              -------      -------
            Land                              $   207      $   207
            Building                            2,101        2,179
            Equipment                           2,245        2,804
            Leasehold improvements                570          793
                                              -------      -------

                                                5,123        5,983
            Less accumulated depreciation      (2,299)      (3,000)
                                              -------      -------

                                              $ 2,824      $ 2,983
                                              =======      =======

      The Company recorded a loss of $234 in 2001 to writedown the unamortized
      costs of branch leasehold improvements. The Company will abandon such
      leasehold improvements in 2002 as it moves the branch to a different
      facility owned by its landlord.

      As of December 31, 2001, the Company was obligated under six
      non-cancelable operating leases for banking premises. Minimum future
      rentals under the non-cancelable operating leases are as follows:

             Year ending
            December 31,                                Amount
            -----------                                 ------

                2002                                    $ 269
                2003                                      216
                2004                                      129
                2005                                       78
                2006                                       13

      Rent expense amounted to $277, $248 and $235 for the years ended December
31, 2001, 2000 and 1999, respectively.

                                       56
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


7.    Banking Premises and Equipment (Continued)
      ------------------------------------------

      The Company leased out part of its facility, located in Ipswich, under a
      non-cancelable lease agreement. Rental income under this lease totaled
      $51, $69 and $50 for the years ended December 31, 2001, 2000 and 1999,
      respectively.


8.    Other Real Estate Owned
      -----------------------

      The Company had no recorded investment in other real estate owned at
      December 31, 2001 and 2000:

      An analysis of activity in other real estate owned for each of the years
      ended December 31, is as follows:

                                                  2001      2000      1999
                                                 -----    ------    -------

      Balance at beginning of year               $  -     $  111    $   718

      Foreclosures                                  -        -           62
      Net sales proceeds                            -       (110)    (1,009)
      Gains (losses) on sales, net                  -         (1)       340
                                                 -----    ------    -------

      Balance at end of year                     $  -     $  -      $   111
                                                 =====    ======    =======

      An analysis of income for other real estate owned for each of the years
      ended December 31, is as follows:

                                                  2001      2000      1999
                                                 -----    ------    -------

      Rental income                              $   1    $    4    $     8
      Gains (losses) on sales                       -         (1)       340
      Permitting costs                              (6)       -         (29)
      Foreclosure (expense reimbursement)           -         -         (11)
                                                 -----    ------    -------

                                                 $  (5)   $    3    $   308
                                                 =====    ======    =======


9.     Stock in Federal Home Loan Bank of Boston
       -----------------------------------------

       As a member of the Federal Home Loan Bank of Boston (FHLB of Boston), the
       Company is required to invest in $100 par value (per share) stock of the
       FHLB of Boston in the amount of 1% of its outstanding loans secured by
       residential housing, or 1% of 30% of total assets, or 5% of its
       outstanding advances from the FHLB of Boston, whichever is higher. As and
       when such stock is redeemed, the Company would receive from the FHLB of
       Boston an amount equal to the par value of the stock. As of December 31,
       2001 and 2000, the Company held the required investment of $3,000.

                                       57
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


10.    Mortgage Servicing Rights
       -------------------------

       Loans serviced for others amounted to approximately $13,243, $11,092 and
       $0 at December 31, 2001, 2000 and 1999, respectively. Net servicing
       (expense) income amounted to approximately $(46), $(2) and $21 for the
       years ended December 31, 2001, 2000 and 1999, respectively.

      The following table summarizes the changes in mortgage servicing rights at
      December 31:

                                                     2001     2000      1999
                                                     ----     ----      ----

       Balance at beginning of year                 $ 225    $-      $    229
       Additions                                       78      229      1,171
       Normal amortization                            (26)      (4)       (86)
       Sale of mortgage servicing rights                -       -      (1,314)
       Write-down of mortgage servicing rights        (58)      -          -
                                                    -----    -----   --------

       Balance at end of year                       $ 219    $ 225   $     -
                                                    =====    =====   ========

       Fair value at end of year                    $ 219    $ 225   $     -
                                                    =====    =====   ========

       During 1999 the Company sold the rights to service approximately $90,000
       in loans and recognized a gain of $15 in 2000 and $63 in 1999 as a result
       of the sale.

      An analysis of the mortgage servicing rights valuation account at December
      31 is as follows:

                                                       2001     2000      1999
                                                       ----     ----      ----

       Balance at beginning of year                   $  -     $  -        $  -
       Write-down of servicing rights through charge
          to servicing income                           (58)      -           -
                                                      -----    -----       -----

       Balance at end of year                         $ (58)   $  -        $  -
                                                      =====    =====       =====

                                       58
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


11.    Deposits
       --------

       Deposits at December 31 are summarized as follows:

                                                           2001          2000
                                                           ----          ----

       Demand deposits (non-interest bearing)           $   26,850   $   22,855
       NOW accounts                                         37,474       34,871
       Savings accounts                                     45,902       39,531
       Money market deposit accounts                        79,806       66,083
       Certificates of deposit                              59,481       73,897
                                                        ----------   ----------

                                                        $  249,513   $  237,237
                                                        ==========   ==========

       Deposits of $100 or more totaled approximately $87,754 and $77,554 at
       December 31, 2001 and 2000, respectively, of which $12,871 and $16,885
       are certificates of deposit in 2001 and 2000, respectively.

      The following table shows the scheduled maturity of certificates of
      deposit accounts at December 31:

<TABLE>
<CAPTION>
                                             2001                                  2000
                                  ----------------------------          -----------------------------
                                    Amount            Percent            Amount             Percent
                                    ------            -------            ------             -------

<S>                               <C>                   <C>            <C>                     <C>
       Within one year            $  48,950             82.3 %         $ 58,616                79.3%
       1-2 years                      7,220             12.1             11,846                16.0
       2-3 years                      2,125              3.6              1,495                 2.0
       3-4 years                        850              1.4              1,233                 1.7
       4-5 years                        336               .6                707                 1.0
                                  ---------           -------          --------             -------

                                  $  59,481            100.0 %         $ 73,897               100.0%
                                  =========           =======          ========             =======
</TABLE>

      Interest on deposits classified by type for the years ended December 31 is
      as follows:

                                                   2001       2000       1999
                                                   ----       ----       ----

       NOW accounts                             $    237   $    233   $    176
       Saving accounts                               891        879        868
       Money market deposit accounts               2,793      3,055      2,441
       Certificates of deposit                     3,585      3,885      3,091
                                                =-------   =-------   =-------

                                                $  7,506   $  8,052   $  6,576
                                                ========   ========   ========

                                       59
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


12.    Borrowed Funds
       --------------

      A summary of Federal Home Loan Bank of Boston advances at December 31,
      follows:

<TABLE>
<CAPTION>
                                                              2001                                   2000
                                                  --------------------------------       ------------------------------
                                                                       Weighted                               Weighted
                                                                        Average                                Average
                                                    Amount               Rate              Amount               Rate
                                                    ------            -----------          ------           -----------
<S>                                               <C>                    <C>            <C>                    <C>
          Maturity in:
              2001                                $    -                 -  %           $  18,108              6.29%
              2002                                   15,859              3.55               7,000              6.70
              2003                                   14,250              4.60               2,000              6.91
              2004                                    5,250              4.35                -                  -
              2005                                    7,000              6.44               5,000              7.45
              2006                                    3,500              4.72                -                  -
              2011                                    2,000              4.57                -                  -
                                                   --------             -----            --------              ---

                                                  $  47,859              4.50%          $  32,108              6.60%
                                                   ========             =====            ========              ====
</TABLE>

       The Company has a total borrowing capacity of $88,800 with the Federal
       Home Loan Bank of Boston at December 31, 2001. Advances from the Federal
       Home Loan Bank of Boston are secured by FHLB of Boston stock, a blanket
       lien on the residential first mortgage loans and investment securities
       owned by Ipswich Savings Bank.

       Included within interest expense on borrowed funds for the year ended
       December 31, 2001 is $256 of prepayment penalties, which includes $152 to
       prepay advances which were scheduled to mature in 2001.


13.    Capital Securities
       ------------------

       In February 2001, the company sponsored the creation of Ipswich Statutory
       Trust I, (the Trust) a Connecticut statutory trust. The Company is the
       owner of all of the common securities of the Trust and therefore the
       Trust is a subsidiary of the Company. On February 22, 2001, the Trust
       issued $3,500 of 10.2% capital securities and $109 of common securities,
       the proceeds of which were used by the Trust to acquire $3,609 of the
       Company's 10.2% Junior Subordinated Deferrable Interest Debentures due
       February 22, 2031, which, with related accrued income, constitute the
       sole assets of the Trust. The Company has the right, subject to certain
       conditions, to redeem the debentures on or after February 22, 2001 at a
       redemption price specified in the indenture.

       The company has fully and unconditionally guaranteed all of the
       obligations of the Trust, but only to the extent of funds held in the
       Trust. The capital securities are mandatorily redeemable upon the
       maturity of the Junior Subordinated Debentures. The costs of issuance of
       the trust preferred securities was approximately $150, and is included in
       other assets on the consolidated balance sheet, net of accumulated
       amortization. The costs are being amortized over the life of the
       securities.

                                       60
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


14.    Income Taxes
       ------------

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

                                         2001        2000          1999
                                       -------     -------      -------

       Federal income tax expense:
          Current                      $ 1,386     $ 1,229      $ 1,204
          Deferred                          73          36           91

       State income tax expense:
          Current                           43          50           32
          Deferred                           9          12          118

       Change in valuation reserve        --          (190)        (121)
                                       -------     -------      -------

                                       $ 1,511     $ 1,137      $ 1,324
                                       =======     =======      =======

      A reconciliation of expected tax expense at the statutory federal income
      tax rate to income before income taxes, is as follows:
<TABLE>
<CAPTION>

                                                                2001                   2000                   1999
                                                        -------------------     -------------------    -------------------
                                                                      % of                   % of                   % of
                                                                     Pretax                 Pretax                 Pretax
                                                          Amount     Income      Amount     Income      Amount     Income
                                                          ------     ------      ------     ------      ------     ------
<S>                                                      <C>          <C>       <C>          <C>       <C>          <C>
       Computed expected tax expense at
          statutory rate                                 $ 1,468      34.0 %    $1,289       34.0%     $1,568       34.0 %
       Items affecting the federal income
          tax rate:
              State income taxes, net of
                 federal tax benefit                          34        .8          41        1.1          99        2.1
              Other                                            9        .2          (3)      (0.1)       (222)      (4.8)
              Reduction in valuation reserve                -       -             (190)      (5.0)       (121)      (2.6)
                                                          ------   -------       -----    -------       ------    ------

                                                         $ 1,511      35.0%     $1,137       30.0%     $1,324       28.7%
                                                          ======   =======       =====    =======       =====     ======

</TABLE>
                                       61
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


14.    Income Taxes (Continued)

       The tax effect of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities at
       December 31 are presented below:
<TABLE>
<CAPTION>

                                                             2001         2000
                                                           -------      -------
<S>                                                        <C>          <C>
Deferred tax asset:
   Loan loss reserves                                      $   860      $   720
   Other real estate owned                                       8           17
   Net operating loss carryforward                              92          138
   Alternative minimum tax credit                               40           40
   Business credits carryforward                               425          425
   All other                                                   103           80
                                                           -------      -------

       Total gross deferred tax asset                        1,528        1,420

   Less valuation reserve                                     (235)        (235)
                                                           -------      -------

          Net deferred tax asset                             1,293        1,185

Deferred tax liabilities:
   Difference between book and tax carrying value of
       investment securities                                   224          303
   Banking premises and equipment, due to depreciation
       differences                                             324          324
   Servicing asset and deferred costs                          809          613
   Carrying basis of limited partnerships                      610          617
                                                           -------      -------

       Total gross deferred tax liability                    1,967        1,857
                                                           -------      -------

       Net deferred tax liability                          $  (674)     $  (672)
                                                           =======      =======
</TABLE>


       Management believes the existing net deductible temporary differences
       that give rise to the net deferred income tax asset will reverse in
       periods the Company generates net taxable income. In addition, gross
       deductible temporary differences are expected to reverse in periods
       during which off-setting gross taxable temporary differences are expected
       to reverse. Management believes that it is more likely than not that the
       net deferred income tax asset, including the net operating loss
       carryforward, at December 31, 2001 will be realized through the use of
       the on-going earnings capabilities of the Company.

       It should be noted, however, that factors beyond management's control,
       such as the general state of the economy and real estate values, can
       affect future levels of taxable income and that no assurance can be given
       that sufficient taxable income will be generated to fully absorb gross
       deductible temporary differences.

                                       62
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


14.    Income Taxes (Continued)
       ------------------------

       As of December 31, 2001, the Company had a net operating loss
       carry-forward for federal tax purposes of $271 expiring in 2007. Tax
       credit carry-forwards of approximately $425 expire in years 2003 through
       2007.

       The 1993 Common Stock Offering resulted in a change in control for income
       tax purposes. As a result, the net operating loss and tax credit
       carry-forwards are limited so that only $136 per year can be utilized to
       offset taxable income generated during the years in the carry-forward
       period which expires in 2007.

       The tax effect of pre-1988 bad debt reserves subject to recapture in the
       case of certain excess distributions is approximately $670, none of which
       has been recognized in the financial statements. The use of this amount
       for purposes other than to absorb losses on loans would result in taxable
       income and financial statement tax expense at the then current tax rate.
       These reserves are also subject to recapture should the Company's assets
       exceed $500,000.


15.    Stockholders' Equity
       --------------------

       The Company and 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
       financial statements. Under capital adequacy guidelines and the
       regulatory framework for prompt corrective action, the Company and Bank
       must meet specific capital guidelines that involve quantitative measures
       of the Company's and Bank's assets, liabilities and certain off-balance
       sheet items as calculated under regulatory accounting practices. The
       Company's and Bank's capital amounts and classification are also subject
       to qualitative judgments by the regulators about components, risk
       weightings and other factors.

       Quantitative measures established by regulation to ensure capital
       adequacy require the Company and Bank to maintain minimum amounts and
       ratios (set forth in the table below) of total and Tier 1 capital (as
       defined in the regulations) to risk-weighted assets (as defined) and of
       Tier 1 capital (as defined) to average assets (as defined). Management
       believes, as of December 31, 2001, that the Company and Bank meet all
       capital adequacy requirements to which they are subject.

       The most recent notification from the FDIC categorized the Bank as well
       capitalized under the regulatory framework for prompt corrective action
       as of December 31, 2001 and 2000. To be categorized as well capitalized
       the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier
       1 leverage ratios as set forth in the table. There are no conditions or
       events since that notification that management believes have changed the
       institution's category.

       The Company is also subject to similar capital adequacy requirements and
       the regulatory requirements of federal banking agencies.

                                       63
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


15.    Stockholders' Equity (Continued)
       --------------------------------

       The actual capital amounts and ratios and minimum required amounts and
       ratios for the Company and the Bank as of December 31, 2001 and December
       31, 2000 are presented in the following tables:

<TABLE>
<CAPTION>
                                                                                                              To be
                                                                                                          Well Capital-
                                                                                                           ized Under
                                                                                    For Capital            Prompt Cor-
                                                                                     Adequacy            rective Action
                                                               Actual                Purposes              Provisions
                                                          -----------------      -----------------      -----------------
                                                           Amount     Ratio       Amount     Ratio       Amount     Ratio
                                                           ------     -----       ------     -----       ------     -----
<S>                                                      <C>          <C>       <C>           <C>       <C>         <C>
       As of December 31, 2001
       -----------------------
       Total capital (to risk-weighted assets)
          Company                                        $ 20,380     11.56 %   $ 14,109      8.00%     $ 17,636    10.00%
          Bank                                             19,478     11.05       14,097      8.00        17,621    10.00
       Tier I capital (to risk-weighted assets)
          Company                                        $ 18,259     10.35 %   $  7,054      4.00%     $ 10,581     6.00%
          Bank                                             17,357      9.85        7,049      4.00        10,573     6.00
       Tier I capital (to average assets)
          Company                                        $ 18,259      5.76%    $ 12,680      4.00%     $ 15,850     5.00%
          Bank                                             17,357      5.55       12,505      4.00        15,630     5.00

       As of December 31, 2000
       -----------------------
       Total capital (to risk-weighted assets)
          Company                                        $ 16,398     11.53%    $ 11,377      8.00%     $ 14,221    10.00%
          Bank                                             16,638     11.72       11,358      8.00        14,197    10.00
       Tier I capital (to risk-weighted assets)
          Company                                        $ 14,623     10.28%    $  5,688      4.00%     $  8,533     6.00%
          Bank                                             14,863     10.47        5,679      4.00         8,518     6.00
       Tier I capital (to average assets)
          Company                                        $ 14,623      5.04%    $ 11,614      4.00%     $ 14,518     5.00%
          Bank                                             14,863      5.14       11,560      4.00        14,451     5.00
</TABLE>

       In accordance with Massachusetts banking regulations, the Bank
       established a Liquidation Account, in the amount equal to the
       consolidated net worth of the Bank at December 31, 1991, for the benefit
       of eligible account holders who continue to maintain their accounts in
       the Bank after the Bank's conversion from mutual to stock form. The
       Liquidation Account amounted to approximately $1,000 (unaudited) at
       December 31, 1992. The balance will be reduced in proportion to
       reductions in the balances of eligible account holders as determined on
       each subsequent fiscal year end. Subsequent increases will not restore an
       eligible account holder's interest in his liquidation sub-account. In the
       event of complete liquidation or dissolution of the Bank, eligible
       account holders are entitled to their interest in the Liquidation Account
       in the same proportion of the balance of their qualifying deposit account
       at that date. The existence of the Liquidation Account restricts the use
       or application of net worth.

                                       64
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


16.    Benefit Plans
       -------------

       Management Compensation Plan
       ----------------------------

       The Company has a Management Incentive Compensation Plan as a means of
       recognizing achievement on the part of its Senior Management and certain
       other officers of the Company.

       Incentive awards are determined according to a formula based upon the
       Company's return on average stockholders' equity in the calendar year as
       compared with a group of peer banks, as well as the individual
       participant's performance. Awards are paid as a bonus, calculated as a
       percentage of an individual officer's salary within the limitations of
       the plan. Bonus expense totaled $169, $110 and $150 during years ended
       December 31, 2001, 2000 and 1999, respectively.

       401(k) Plan
       -----------

       The Company has a 401(k) savings plan covering all salaried employees who
       become eligible to participate upon attaining the age of 21 and
       completing ninety days of continuous service. Participants may contribute
       from 1% to 15% of their pretax compensation. The Company matches
       participants' contributions at the rate of 50% of the first 6% of
       compensation contributed by the employee after one year of continuous
       service. Such matching contributions, which are fully vested when made,
       amounted to $51, $52 and $49 during the years ended December 31, 2001,
       2000 and 1999, respectively.

       Split Dollar Agreement and Irrevocable Insurance Trust
       ------------------------------------------------------

       The Company has a split dollar agreement and irrevocable insurance trust
       agreement for the President of the Company whereby the Company may
       contribute to the trust an amount necessary to permit the trust to pay
       the premiums due under the policy. The retirement expense related to this
       contribution totaled $60 for each of the years ended December 31, 2001,
       2000 and 1999.

       Stock Option Plans
       ------------------

       At December 31, 2001, the Company had three stock option plans. Under the
       1992 Stock Option Plan, the Company may grant options to its officers and
       other employees for up to 230,000 shares of common stock. Under the 1996
       Stock Incentive Plan, the Company may grant options to its officers,
       directors and other employees for up to 118,000 shares. Under the 1998
       Stock Incentive Plan, the Company may grant options to its officers,
       directors and other employees for up to 100,000 shares. Both incentive
       stock options and non-qualified stock options may be granted under all
       three plans. The exercise price of each option equals the market price of
       the Company's stock on the date of grant and an option's maximum term is
       10 years under all plans. The vesting of option grants are at the
       discretion of the Compensation Committee of the Board of Directors.

                                       65
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


16.    Benefit Plans (Continued)
       -------------------------

       The Company applies APB Opinion 25, Accounting for Stock Issued to
       Employees and Related Interpretations, in accounting for its plans.
       Accordingly, no compensation cost has been recognized for its stock
       option plans. Had compensation cost for the Company's stock-based
       compensation plans been determined based on the fair value at the grant
       dates for awards under those plans consistent with the method of SFAS No.
       123, Accounting for Stock-Based Compensation, the Company's net income
       and earnings per share would have been reduced to the pro forma amounts
       indicated below:
<TABLE>
<CAPTION>

                                                                       2001       2000       1999
                                                                       ----       ----       ----

<S>                                           <C>                   <C>        <C>        <C>
       Net income                             As reported           $  2,808   $  2,655   $  3,289
                                              Pro forma                2,795      2,627      3,141

       Basic earnings per share               As reported            $  1.40       1.12      $1.33
                                              Pro forma                 1.39       1.10       1.29

       Diluted earnings per share             As reported            $  1.37       1.10      $1.29
                                              Pro forma                 1.36       1.09       1.24
</TABLE>

       The pro forma amounts reflect only stock options granted after June 30,
       1995. Therefore, the full impact of calculating the cost for stock
       options under Statement No. 123 is not reflected in the pro forma amounts
       presented above because the cost for options granted prior to July 1,
       1995 is not considered under the requirements of Statement No. 123.

       The fair value of each option grant is estimated on the date of grant
       using the Black-Scholes option-pricing model with the following
       weighted-average assumptions:

                                              2001       2000        1999
                                              ----       ----        ----

          Dividend yield                      3.4%        1.5%        2.5%
          Expected volatility                17.8%       30.5%       23.0%
          Risk-free interest rates            4.7%        4.7%        6.7%
          Expected lives                  10 years (1)  10 years    10 years

       The weighted average fair values of options granted during 2001, 2000 and
       1999 were $1.81, $3.40 and $2.83, respectively.



      (1) Except for 10,389 options granted during 2001 that have a contractual
      life of five years.

                                       66

<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


16.    Benefit Plans (Continued)
       -------------------------

       A summary of the status of the Company's three stock options plans as of
       December 31 and changes during the years ending on those dates is
       presented below:
<TABLE>
<CAPTION>

                                                        2001                       2000                       1999
                                             -------------------------   ------------------------    ------------------------
                                                            Weighted-                   Weighted-                  Weighted-
                                               Shares        Average       Shares        Average       Shares       Average
                                                Under       Exercise        Under       Exercise        Under      Exercise
                                               Option         Price        Option         Price        Option        Price
                                             ---------     ----------     ---------   -----------    ---------    -----------
 <S>                                          <C>           <C>            <C>       <C>              <C>          <C>
      Outstanding at
          beginning of year                    158,651       $8.69          219,051   $ 9.82           251,442      $ 5.43
          Granted                               65,600       10.02            6,400     8.34           105,750       10.25
          Exercised                             (4,976)       6.21             (125)    6.20          (133,141)       1.80
          Cancelled                               -           -             (61,550)   12.67              -           -
          Forfeited                             (8,250)       9.72           (5,125)    8.94            (5,000)      11.33
                                               -------                      -------                   --------

       Outstanding at end of year              211,025       $9.12          158,651   $ 8.69           219,051      $ 9.82
                                              ========                      =======                   ========

       Options exercisable at year end         192,584       $9.00          140,698   $ 8.55           192,210      $ 9.71
</TABLE>

      The following table summarizes information about stock options outstanding
      at December 31, 2001:

<TABLE>
<CAPTION>
                                                   Options Outstanding                          Options Exercisable
                                     -------------------------------------------------    ------------------------------
                                                           Weighted
                                                            Average          Weighted-                         Weighted-
                                                           Remaining          Average                           Average
           Range of                      Number           Contractual        Exercise         Number           Exercise
        Exercise Prices                Outstanding       Life (Years)          Price        Exercisable          Price
        ---------------                -----------       ------------      -----------      -----------      -----------
<S>                                       <C>               <C>          <C>                  <C>           <C>
       $1.00                                1,500             1.9          $   1.00             1,500         $   1.00
       $5.75                               45,300             5.0              5.75            45,300             5.75
       $8.00                                1,975             8.5              8.00               962             8.00
       $9.3125 to 10.25                   146,661             8.0             10.02           133,134            10.04
       $10.5875                            10,389             4.1             10.5875          10,389          10.5875
       $11.70                                 500             9.5             11.70               125            11.70
       $12.86                               4,700             9.9             12.86             1,174            12.86
                                          -------                                             -------

                                          211,025                                             192,584
                                         ========                                             =======
</TABLE>

       Employment and Severance Agreements
       -----------------------------------

       The Company's President, the clerk of the corporation and five other
       senior officers have entered into agreements with the Company which
       provide for severance and other benefits in the event of a change in
       control of the Company under specific situations.

                                       67
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


16.    Benefit Plans (Continued)
       -------------------------

       Directors' Deferred Compensation Plan
       -------------------------------------

       The Company has a directors' deferred compensation plan whereby the
       directors accrue deferred compensation in the form of common stock units.
       The accumulated deferred compensation, which has been recorded as
       additional paid-in capital, was $106, $89 and $55 at December 31, 2001,
       2000 and 1999 representing 10,228, 8,545 and 4,573 stock units,
       respectively. The stock units have been treated as common stock for the
       purposes of calculating both basic and diluted earnings per share.

       Director Recognition and Retirement Plan
       ----------------------------------------

       The Company has a Director Recognition and Retirement Plan as a means of
       recognizing and retaining the valuable services of its Directors. The
       Plan provides that if a Director should at any time cease to serve as a
       member of the Board of Directors of the Bank for any reason, the Bank
       will immediately pay to the Director in one lump sum an amount equal to
       tow times the highest annual aggregate compensation paid too or for the
       benefit of the Director for his or her service on the Board during the
       them most recently concluded three calendar years. The Plan provides for
       payment of benefits in the event of a change in control of the Company
       under specific situations. The Company accrued $80 in 2001 for payment
       under the plan.


17.    Earnings Per Share (EPS)
       ------------------------

       The following tables represent a reconciliation of the numerators and
       denominators for the basic and diluted per share computation for earnings
       for the years ended December 31, 2001, 2000 and 1999, respectively:
<TABLE>
<CAPTION>

                                                         Shares
                                        Income        (Denominator       Per-Share
                                      (Numerator)     in thousands)       Amount
                                      ----------      ------------       --------
<S>                                    <C>                 <C>             <C>
       2001
       Basic EPS                       $ 2,808             2,006           $1.40
       Effect of stock options            -                   43              -
                                        ------           -------            ----
       Diluted EPS                     $ 2,808             2,049           $1.37
                                        ======           =======            ====

       2000
       Basic EPS                       $ 2,655             2,379           $1.12
       Effect of stock options            -                   25              -
                                        ------           -------            ----
       Diluted EPS                     $ 2,655             2,404           $1.10
                                        ======           =======            ====

       1999
       Basic EPS                       $ 3,289             2,480           $1.33
       Effect of stock options            -                   63              -
                                        ------           -------            ----
       Diluted EPS                     $ 3,289             2,543           $1.29
                                        ======           =======            ====

</TABLE>
                                       68
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


18.    Financial Instruments with Credit Risk and Off-Balance Sheet Risk,
       ------------------------------------------------------------------
       Commitments and Contingencies
       -----------------------------

       Off-Balance Sheet Risk
       ----------------------

       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 unused lines of credit,
       unadvanced portions of construction loans, commitments to originate loans
       and commitments to sell loans. The instruments involve, to varying
       degrees, elements of credit and interest rate risk in excess of the
       amount recognized in the balance sheet. The 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 non-performance by
       the other party to its financial instruments (for unused lines of credit
       and loan commitments) is represented by the contractual amount of those
       instruments. The Company uses the same credit policies in making
       commitments and conditional obligations as it does for on-balance sheet
       instruments. The Company evaluates each customer's credit worthiness 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.

       Financial instruments with off-balance sheet risk at December 31, are as
       follows:
<TABLE>
<CAPTION>
                                                                                                      2001          2000
                                                                                                      ----          ----
<S>                                                                                               <C>          <C>
       Commitments to originate residential loans                                                 $   11,651   $    3,354
       Commitments to originate commercial loans                                                       1,996         -
       Unused lines of credit on home equity loans                                                    35,971       33,762
       Unadvanced portions of residential owner-occupied construction loans                              671          484
       Unused lines of credit on overdraft protection, personal lines of credit
          and credit cards                                                                               586        3,151
       Commitments to sell loans                                                                       6,073        4,156
       Standby letters of credit                                                                          10           10
</TABLE>

       Commitments to originate loans, unused lines of credit and unadvanced
       portions of residential owner-occupied construction 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 may expire without being drawn upon, the
       total commitment amounts do not necessarily represent future cash
       requirements.

       Legal Proceedings
       -----------------

       The Company is involved in various legal proceedings incidental to its
       business. After review with legal counsel, management does not believe
       resolution of any present litigation will have a material adverse effect
       on the financial condition of the Company.

                                       69
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


18.    Financial Instruments with Credit Risk and Off-Balance Sheet Risk,
       ------------------------------------------------------------------
       Commitments and Contingencies Continued)
       ----------------------------------------

       Commitments to Sell Loans
       -------------------------

       Forward commitments to sell loans are contracts which the Company enters
       into for the purpose of reducing interest rate risk and to improve
       liquidity. In order to fulfill a forward commitment, the Company
       typically receives cash in exchange for loans at a future date agreed to
       by both parties. Risk may arise from the possible inability of the
       Company to deliver the loans specified.

       As of December 31, 2001 and 2000, the Company had identified $14,020 and
       $5,003, respectively, of loans to fulfill the outstanding commitments at
       weighted average rates which will satisfy the commitments without loss to
       the Company.


19.    Condensed Parent Information
       ----------------------------

       Condensed financial statements for Ipswich Bancshares, Inc. at December
       31, 2001 and 2000 and for the years ended December 31, 2001 and 2000.

                                                        2001         2000
                                                       -------     -------
     Balance Sheet

     Assets
     Cash (deposited with subsidiary)                  $ 1,298     $    11
     Investment in subsidiaries                         17,699      15,359
     Other assets                                          145        --
                                                       -------     -------

        Total assets                                   $19,142     $15,370
                                                       =======     =======

     Liabilities and Stockholders' Equity
     Accrued expenses and other liabilities            $   414     $   251
     Capital securities                                  3,609        --
     Stockholders' equity                               15,119      15,119
                                                       -------     -------

        Total liabilities and stockholders' equity     $19,142     $15,370
                                                       =======     =======


                                       70

<PAGE>
                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)

19.    Condensed Parent Information (Continued)
       ----------------------------------------
<TABLE>
<CAPTION>

Statement of Income                                                              2001        2000
--------------------                                                           -------      ------
<S>                                                                            <C>          <C>
Income:
   Dividends from banking subsidiary                                           $   576      $ 4,659
   Other                                                                            10            1
                                                                               -------      -------
      Total income                                                                 586        4,660

Expenses:
   Other expenses                                                                  417           27
                                                                               -------      -------
      Total expenses                                                               417           27
                                                                               -------      -------

   Income before income tax (expense) benefit and equity in
      undistributed net income of subsidiary                                       169        4,633
   Income tax (expense) benefit                                                    138          (15)
                                                                               -------      -------

   Income before equity in undistributed net income of subsidiary                  307        4,618
   Equity in undistributed net income of subsidiary                              2,501       (1,963)
                                                                               -------      -------

      Net income                                                               $ 2,808      $ 2,655
                                                                               =======      =======

Statement of Cash Flows Cash flows from operating activities:
   Net income                                                                  $ 2,808      $ 2,655
   Adjustments to reconcile net income to net cash provided by operations:
      Undistributed earnings of subsidiary                                      (2,501)       1,963
      Other                                                                         49           74
                                                                               -------      -------

      Net cash provided by operating activities                                    356        4,692

Cash flows from investing activities:
   Purchase of investment in subsidiary                                           (109)        --

Cash flows from financing activities:
   Proceeds from issuance of common stock and rights                                48           35
   Purchase of treasury stock                                                   (1,729)      (4,054)
   Proceeds from issuance of long-term debt                                      3,609         --
   Dividends paid to stockholders                                                 (888)        (952)
                                                                               -------      -------

      Net cash provided (used) by financing activities                           1,040       (4,971)
                                                                               -------      -------

      Net increase (decrease) in cash                                            1,287         (279)

Cash, beginning of year                                                             11          290
                                                                               -------      -------

Cash, end of year                                                              $ 1,298      $    11
                                                                               =======      =======
</TABLE>
                                       71

<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


20.    Fair Value of Financial Instruments
       -----------------------------------

       SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
       requires that the Company disclose estimated fair values for its
       financial instruments. Fair value estimates, methods and assumptions are
       set forth below for the Company's financial instruments.

       Cash and Cash Equivalents - The fair value of cash and cash equivalents
       approximates their relative book values at December 31, 2001 and 2000, as
       these financial instruments have short maturities.

       Available for Sale and Held to Maturity Securities - The fair value of
       available for sale and held to maturity securities is estimated based on
       bid prices published in financial newspapers or bid quotations received
       from securities dealers at or near December 31, 2001 and 2000.

       Stock in Other Financial Institutions - This financial instrument does
       not have a market nor is it practical to estimate the fair value without
       incurring excessive costs.

       Loans Held for Sale and Forward Commitments - The fair value of loans
       held for sale approximates its relative book value at December 31, 2001
       and 2000.

       Loans - Fair values are estimated for portfolios of loans with similar
       financial characteristics. The fair values of performing loans are
       calculated by discounting scheduled cash flows through the estimated
       maturity using estimated market discount rates that reflect the credit
       and interest rate risk inherent in the loan. The estimates of maturity
       are based on the Company's historical experience with repayments for each
       loan classification, modified, as required, by an estimate of the effect
       of current economic, lending conditions and the effects of estimated
       prepayments.

       Fair values for significant non-performing loans are based on estimated
       cash flows discounted using a rate commensurate with the risk associated
       with the estimated cash flows. Assumptions regarding credit risk, cash
       flows and discount rates are judgmentally determined using available
       market information and historical information.

       Accrued Interest Receivable - The fair market value of this financial
       instrument approximates the book value as this financial instrument has a
       short maturity. It is the Company's policy to stop accruing interest on
       loans past due by more than ninety days. Therefore this financial
       instrument has been adjusted for estimated credit loss.

       Deposits and Mortgagors' Escrows - The fair value of deposits, with no
       stated maturity, such as non-interest-bearing demand deposits, savings,
       NOW accounts, money market and checking accounts, and mortgagors'
       escrows, is equal to the amount payable on demand as of December 31, 2001
       and 2000. The fair values of certificates of deposit are based on the
       discounted value of contractual cash flows. The discount rate is
       estimated using the rates currently offered for deposits of similar
       remaining maturities.

       Borrowed Funds - The fair value of the Company's borrowings with the FHLB
       is estimated by discounting the cash flows through maturity or the next
       repricing date based on current rates available to the Company for
       borrowings with similar maturities.


                                       72
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


20.    Fair Value of Financial Instruments (Continued)
       -----------------------------------------------

       Commitments to Originate Loans - The fair value of commitments to extend
       credit cannot be reasonably estimated without incurring excessive costs
       as the Company does not charge fees for such commitments and there is no
       ready market for this financial instrument.

       Limitations - Fair value estimates are made at a specific point in time,
       based on relevant market information and information about the financial
       instrument. These values do not reflect any premium or discount that
       could result from offering for sale at one time the Company's entire
       holdings of a particular financial instrument. Because no market exists
       for a significant portion of the Company's financial instruments, fair
       value estimates are based on judgments regarding future expected loss
       experience, current economic conditions, risk characteristics of various
       financial instruments and other factors. These estimates are subjective
       in nature and involve uncertainties and matters of significant judgment
       and therefore cannot be determined with precision. Changes in assumptions
       could significantly affect the estimates.

       Fair value estimates are based on existing on and off-balance sheet
       financial instruments without attempting to estimate the value of
       anticipated future business and the value of assets and liabilities that
       are not considered financial instruments. Other significant assets and
       liabilities that are not considered financial instruments include the
       deferred tax assets, mortgage servicing rights, and bank premises and
       equipment. In addition, the tax ramifications related to the realization
       of the unrealized gains and losses can have a significant effect on fair
       value estimates and have not been considered in any of the estimates.

                                       73
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


20.    Fair Value of Financial Instruments (Continued)
       -----------------------------------------------

       The following table presents the estimated fair value of the Company's
       significant financial instruments at December 31:
<TABLE>
<CAPTION>

                                                                           2001                        2000
                                                               --------------------------    -------------------------
                                                                 Carrying       Estimated     Carrying      Estimated
                                                                   Value       Fair Value       Value      Fair Value
                                                                   -----       ----------       -----      ----------
<S>                                                            <C>             <C>           <C>           <C>
       Financial assets:
          Cash and cash equivalents                            $   10,937      $  10,937     $    8,836    $    8,836
          Available for sale securities                            50,405         50,405         34,228        34,228
          Held to maturity securities                              35,343         35,930         30,282        30,374
          Stock in other financial institutions                     3,253          3,253          3,253         3,253
          Loans held for sale                                      14,945         14,945          5,003         5,003
          Loans, net                                              201,589        202,741        201,334       202,278
          Accrued interest receivable                               1,251          1,251          1,435         1,435

       Financial liabilities:
          Deposits (with no stated maturity)                      190,032        190,032        163,340       163,340
          Time deposits                                            59,481         60,283         73,897        74,192
          Mortgagors' escrow accounts                               1,148          1,148            972           972
          Borrowed funds                                           47,859         48,380         32,108        32,360

</TABLE>

21.    Quarterly Results of Operations (Unaudited)
       -------------------------------------------
<TABLE>
<CAPTION>

                                                             2001 Quarters                           2000 Quarters
                                                 -------------------------------------  ---------------------------------------
                                                  Fourth     Third    Second     First    Fourth     Third   Second     First
                                                  ------     -----    ------     -----    ------     -----   ------     -----
<S>                                              <C>       <C>       <C>       <C>      <C>        <C>       <C>       <C>
       Interest and dividend income              $ 4,889   $ 4,900   $ 4,802   $ 5,013  $   5,171  $  5,114  $  4,969  $  4,675
       Interest expense                            2,198     2,335     2,520     2,767      2,888     2,866     2,763     2,477
                                                  ------    ------    ------    ------   --------   -------   -------   -------

       Net interest and dividend income            2,691     2,565     2,282     2,246      2,283     2,248     2,206     2,198
       Provision for loan losses                     (25)      (25)      (25)      (25)       (15)      (15)      (15)      (15)
       Non-interest income                           817       742       829       567        460       370       478       428
       Non-interest expense                       (2,364)   (2,084)   (2,079)   (1,793)    (1,733)   (1,654)   (1,674)   (1,758)
                                                  ------    ------    ------    ------   --------   -------   -------   -------

       Income before income taxes                  1,119     1,198     1,007       995        995       949       995       853
       Income tax expense                           (391)     (420)     (352)     (348)      (348)     (332)     (351)     (106)
                                                  ------    ------    ------    ------   --------   -------   -------   -------

       Net income                                $   728   $   778   $   655   $   647  $     647  $    617  $    644  $    747
                                                  ======    ======    ======    ======   ========   =======   =======  ========

       Basic earnings per share                  $   .37   $   .39   $   .32   $   .32  $     .30  $    .26  $    .26  $    .30
                                                  ======    ======    ======    ======   ========   =======   =======  ========


       Diluted earnings per share                $   .36   $   .38   $   .32   $   .31  $     .30  $    .26  $    .26  $    .29
                                                  ======    ======    ======    ======   ========   =======   =======  ========

       Cash dividends declared per share         $   .17   $   .11   $   .11   $   .11  $     .11  $    .10  $    .10  $    .10
                                                  ======    ======    ======    ======   ========   =======   =======  ========
</TABLE>


       Quarterly figures may not total to the full year amount due to rounding.

                                       74
<PAGE>


                    IPSWICH BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001, 2000 and 1999
       (All Dollar Amounts Expressed in Thousands, Except Per Share Data)


22.    Subsequent Event
       ----------------

       On February 26, 2002, the Board of Directors of the Company approved an
       Agreement and Plan of Merger between Banknorth Group, Inc. (Banknorth)
       and Ipswich Bancshares, Inc. whereby Banknorth will acquire the Company
       for $41.1 million, or $20.50 per share of Company stock, payable in cash
       or in equivalent shares of Banknorth stock, at the option of each
       stockholder, subject to limitations intended to ensure that 51% of the
       outstanding common stock of the Company will be converted into the right
       to receive Banknorth common stock and 49% of the outstanding common stock
       of the Company will be converted into the right to receive cash.

       The transaction is subject to the approval of the Company's shareholders
       and various state and federal regulatory bodies.


                                       75
<PAGE>



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

              None.

                                    PART III
                                    --------

ITEM 10       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

              Information called for by Item 10 of this report is incorporated
              by reference herein from the Company's Proxy Statement.

ITEM 11       EXECUTIVE COMPENSATION

              Information called for by Item 11 of this report is incorporated
              by reference herein from the Company's Proxy Statement.


ITEM 12       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

              Information called for by Item 12 of this report is incorporated
              by reference herein from the Company's Proxy Statement.


ITEM 13       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

              Information called for by Item 13 of this report is incorporated
              by reference herein from the Company's Proxy Statement.

                                     PART IV
                                     -------

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

(a)    Financial Statements and Schedules

       (1)    Financial Statements for 2001, 2000 and 1999.
              See Item 8 of this Report.

(b)    Reports on Form 8-K

       (1) No Reports on Form 8-K were filed during the last quarter of 2001.

(c)    Exhibits

         2.1      Agreement and Plan of Merger, dated as of February 26, 2002,
                  between Banknorth Group, Inc. and the Company is incorporated
                  by reference from Exhibit 2.1 of Banknorth's Current Report on
                  Form 8-K filed February 28, 2002 (File No. 0-16947).

         2.2      Plan of Reorganization and Acquisition dated as of February
                  17, 1999 between the Company and Ipswich Savings Bank
                  incorporated by reference to the Company's Form 8-K filed on
                  July 9, 1999.

         3.1      Articles of Organization of the Company are incorporated by
                  reference herein from the Company's June 30, 1999 Form 10-Q.

                                       76
<PAGE>


         3.2      By-laws of the Company is incorporated by reference herein
                  from the Company's June 30, 1999 Form 10-Q.

         4.1      Specimen stock certificate for the Company's Common Stock is
                  incorporated by reference herein from the Company's June 30,
                  1999 Form 10-Q.

         10.1     Lease dated September 15, 2000 for premises located at Route
                  133 and Route 1, Rowley, Massachusetts is incorporated by
                  reference herein from the Company's September 30, 2000 Form
                  10-Q.

         10.2     Lease dated April 25, 1994 for premises located at 451 Andover
                  Street, North Andover, Massachusetts is incorporated by
                  reference herein from the Company's June 30, 1999 Form 10-Q.

         10.3     Lease dated March 4, 1996 for premises located at 588 Cabot
                  Street, Beverly, Massachusetts is incorporated by reference
                  herein from the Company's June 30, 1999 Form 10-Q.

         10.4     Lease dated July 27, 1997 for premises located at 600 Loring
                  Avenue, Salem, Massachusetts is incorporated by reference
                  herein from the Company's June 30, 1999 Form 10-Q.

         10.5     Lease dated February 27, 1998 for premises located at 89
                  Pleasant Street, Marblehead, Massachusetts is incorporated by
                  reference herein from the Company's June 30, 1999 Form 10-Q.

         10.6     Lease dated June 12, 1998 for premises located at 470 Main
                  Street, Reading, Massachusetts is incorporated by reference
                  herein from the Company's June 30, 1999 Form 10-Q.

        *10.7     Incentive Compensation Plan for Senior Management and certain
                  other officers dated September 15, 1995 is incorporated by
                  reference herein from the Company's June 30, 1999 Form 10-Q.

        *10.8     Director Recognition and Retirement Plan adopted as of May 18,
                  1999 is incorporated by reference herein from the Company's
                  June 30, 1999 Form 10-Q.

        *10.9     Merger and Severance Benefits Program dated February 18, 1998
                  is incorporated by reference herein from the Company's June
                  30, 1999 Form 10-Q.

        *10.10    Amended and Restated Employment and Severance Agreement dated
                  May 18, 1999 between Ipswich Savings Bank and David L. Grey is
                  incorporated by reference herein from the Company's June 30,
                  1999 Form 10-Q.

        *10.11    Amended and Restated Employment and Severance Agreement dated
                  May 18, 1999 between Ipswich Savings Bank and Francis Kenney
                  is incorporated by reference herein from the Company's June
                  30, 1999 Form 10-Q.

        *10.12    Severance Agreement dated August 8, 2000 between Ipswich
                  Savings Bank and Mark E. Foley is incorporated by reference
                  herein from the Company's September 30, 2000 Form 10-Q.


                                       77
<PAGE>


*10.13(a) Amended and Restated Split Dollar Agreement dated May 18, 1999 among
    Ipswich Savings Bank, Eastern Bank and David L. Grey is incorporated by
    reference herein from the Company's June 30, 1999 Form 10-Q.

        *10.13(b) Amended and Restated Ipswich Irrevocable Insurance Trust
                  dated as of May 18, 1999 by and between Ipswich Savings Bank
                  and Eastern Bank is incorporated by reference herein from the
                  Company's June 30, 1999 form 10-Q.

         10.14    Contract with Bank's data processor dated August 31, 2001 is
                  incorporated by reference herein from the Company's September
                  30, 2001 Form 10-Q.

        *10.15    1992 Incentive and Non-Qualified Stock Option Plan
                  incorporated by reference to the Company's Registration
                  Statement on Form S-8 filed on July 22, 1999.

        *10.16    1996 Stock Incentive Plan incorporated by reference to the
                  Company's Registration Statement on Form S-8 filed on July 22,
                  1999.

        *10.17    1998 Stock Incentive Plan incorporated by reference to the
                  Company's Registration Statement on Form S-8 filed on July 22,
                  1999.

        *10.18    Deferred Compensation Plan for Directors incorporated by
                  reference to the Company's Form S-8 filed on July 22, 1999.

         10.19    Form of Stock Option Agreement between Banknorth Group, Inc.
                  (as grantee) and the Company (as issuer) is incorporated by
                  reference from Exhibit 10.1 of Banknorth's Current Report on
                  Form 8-K filed February 28, 2002 (File No. 0-16947).

         10.20    Form of Shareholder Agreement between each director of the
                  Company and Banknorth Group, Inc. is incorporated by reference
                  from Exhibit 10.2 of Banknorth's Current Report on Form 8-K
                  filed February 28, 2002 (File No. 0-16947).

        *10.21    Form of Termination Agreement by and among Banknorth, the
                  Company, Ipswich Savings Bank, Eastern Bank, as Trustee, and
                  David L. Grey is incorporated by reference from Exhibit 10.3
                  of Banknorth's Current Report on Form 8-K filed February 28,
                  2002 (File No. 0-16947).

        *10.22    Form of Employment and Noncompetition Agreement between
                  Banknorth Group, Inc. and David L. Grey is incorporated by
                  reference from Exhibit 10.4 of Banknorth's Current Report on
                  Form 8-K filed February 28, 2002 (File No. 0-16947).

        *10.23    Severance Agreement dated November 6, 2001 between Ipswich
                  Savings Bank and Philip Bryan.

        *10.24    Severance Agreement dated November 8, 2001 between Ipswich
                  Savings Bank and Kevin Dean.

         10.25    Contract dated April 6, 2000 with U.S. Bancorp for ATM
                  processing services is incorporated by reference to the
                  Company's March 31, 2000 Form 10-Q.

        *10.26    Split Dollar Agreement and Collateral Assignment dated July
                  20, 2000 and March 30, 2001, respectively, between Ipswich
                  Savings Bank and Francis Kenney is incorporated by reference
                  herein from the Company's March 31, 2001 Form 10-Q.

         (11)     A statement regarding the computation of earnings per share is
                  included in the notes to consolidated financial statements.

                                       78
<PAGE>

         (12)     Not applicable.

         (21)     Subsidiaries - Ipswich Savings Bank, Ipswich Statutory Trust
                  I.

         (23)     Consent of Baker Newman & Noyes, LLC.

     * Denotes management contract or compensation plan.

                                       79
<PAGE>


                                   SIGNATURES
                                   ----------

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

                                          IPSWICH BANCSHARES, INC.

DATE: March 27, 2002                      By:  /s/ David L. Grey
                                               -----------------
                                               David L. Grey,
                                               President and
                                               Chief Executive Officer

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 Company and in
the capacities and on the dates indicated:

        SIGNATURE                          TITLE                      DATE
        ---------                          -----                      ----

By: /s/    David L. Grey        President, Chief Executive       March 27, 2002
    --------------------        Officer, and Director
           David L. Grey        (Principal Executive Officer)


By: /s/    Francis Kenney       Senior Vice President,
    ---------------------       Treasurer, and Chief Financial   March 27, 2002
           Francis Kenney       Officer (Principal Financial
                                Officer, Principal
                                Accounting Officer)


By: /s/ William M.Craft         Director                         March 27, 2002
    -------------------
        William M. Craft


By: /s/ Thomas A. Ellsworth     Director                         March 27, 2002
    -----------------------
        Thomas A. Ellsworth


By:                             Director
    --------------------
        William E. George


By: /s/ John H. Morrow          Director                         March 27, 2002
    ------------------
        John H. Morrow


By: /s/ Lawrence J. Pszenny     Director                         March 27, 2002
    -----------------------
        Lawrence J. Pszenny


By: /s/ William J. Tinti        Director                         March 27, 2002
    --------------------
        William J. Tinti



                                       80

<PAGE>

<TABLE>
<CAPTION>

                                                             INDEX TO EXHIBITS

         ITEM                                                                                                   PAGE
         ----                                                                                                   ----

<S>      <C>      <C>                                                                                           <C>
         2.1      Agreement and Plan of Merger, dated as of February 26, 2002,
                  between Banknorth Group, Inc. and the Company is incorporated
                  by reference from Exhibit 2.1 of Banknorth's Current Report on
                  Form 8-K filed February 28, 2002 (File No. 0-16947).                                             *

         2.2      Plan of Reorganization and Acquisition dated as of February 17, 1999
                  between the Company and Ipswich Savings Bank incorporated by
                  reference to the Company's Form 8-K filed on July 9, 1999.                                       *

         3.1      Articles of Organization of the Company dated February 12, 1999 is
                  incorporated by reference herein from the Company's June 30, 1999
                  Form 10-Q.                                                                                       *

         3.2      By-laws of the Company is incorporated by reference herein from
                  the Company's June 30, 1999 Form 10-Q.                                                           *

         4.1      Specimen stock certificate for the Company's Common Stock is incorporated
                  by reference herein from the Company's June 30, 1999 Form 10-Q.                                  *

        10.1      Lease dated September 15, 2000 for premises located at Route 133 and Route 1,
                  Rowley, Massachusetts is incorporated by reference herein from the Company's
                  September 30, 2000 Form 10-Q.                                                                    *

        10.2      Lease dated April 25, 1994 for premises located at 451 Andover
                  Street, North Andover, Massachusetts is incorporated by
                  reference herein from
                  the Company's June 30, 1999 Form 10-Q.                                                           *

        10.3      Lease dated March 4, 1996 for premises located at 588 Cabot Street,
                  Beverly, Massachusetts is incorporated by reference herein from the Company's
                  June 30, 1999 Form 10-Q.                                                                         *

        10.4      Lease dated July 27, 1997 for premises located at 600 Loring Avenue, Salem,
                  Massachusetts is incorporated by reference herein from the Company's June 30,
                  1999 Form 10-Q.                                                                                  *

        10.5      Lease dated February 27, 1998 for premises located at 89 Pleasant Street,
                  Marblehead, Massachusetts is incorporated by reference herein from the
                  Company's June 30, 1999 Form 10-Q.                                                               *

        10.6      Lease dated June 12, 1998 for premises located at 470 Main Street, Reading,
                  Massachusetts is incorporated by reference herein from the Company's June 30,
                  1999 Form 10-Q.                                                                                  *

       *10.7      Incentive Compensation Plan for Senior Management and certain
                  other officers dated September 15, 1995 is incorporated by
                  reference herein from the Company's June 30, 1999 Form 10-Q.                                     *

       *10.8      Director Recognition and Retirement Plan adopted as of May 18, 1999 is
                  incorporated by reference herein from the Company's June 30, 1999 Form 10-Q.                     *

</TABLE>
                                       81
<PAGE>
<TABLE>
<CAPTION>

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

       *10.9      Merger and Severance Benefits Program dated February 18, 1998 is
                  incorporated by reference herein from the Company's June 30, 1999 Form 10-Q.                     *

       *10.10     Amended and Restated Employment and Severance Agreement dated May 18,
                  1999 between Ipswich Savings Bank and David L. Grey is incorporated by
                  reference herein from the Company's June 30, 1999 Form 10-Q.                                     *

       *10.11     Amended and Restated Employment and Severance Agreement dated May 18,
                  1999 between Ipswich Savings Bank and Francis Kenney is incorporated by
                  reference herein from the Company's June 30, 1999 Form 10-Q.                                     *

       *10.12     Severance Agreement dated August 8, 2000 between Ipswich Savings Bank
                  and Mark E. Foley is incorporated by reference herein from the Company's
                  September 30, 2000 Form 10-Q.                                                                    *

       *10.13(a)  Amended and Restated Split Dollar Agreement dated May 18, 1999 among
                  Ipswich Savings Bank, Eastern Bank and David L. Grey is incorporated by
                  reference herein from the Company's June 30, 1999 Form 10-Q.                                     *

       *10.13(b)  Amended and Restated Ipswich Irrevocable Insurance Trust dated
                  as of May 18, 1999 by and between Ipswich Savings Bank and
                  Eastern Bank is incorporated by reference herein from the
                  Company's June 30, 1999 form 10-Q.                                                               *

        10.14     Contract with Bank's data processor dated August 31, 2001 is incorporated by
                  reference herein from the Company's September 31, 2001 Form 10-Q.                                *

       *10.15     1992 Incentive and Non-Qualified Stock Option Plan incorporated by reference
                  to the Company's Registration Statement on Form S-8 filed on July 22, 1999.                      *

       *10.16     1996 Stock Incentive Plan incorporated by reference to the Company's
                  6Registration Statement on Form S-8 filed on July 22, 1999.                                      *

       *10.17     1998 Stock Incentive Plan incorporated by reference to the Company's
                  Registration Statement on Form S-8 filed on July 22, 1999.                                       *

       *10.18     Deferred Compensation Plan for Directors incorporated by reference to the
                  Company's Form S-8 filed on July 22, 1999.                                                       *

        10.19     Form of Stock Option Agreement between Banknorth Group, Inc. (as grantee)
                  and the Company (as issuer) is incorporated by reference from Exhibit 10.1
                  of Banknorth's Current Report on Form 8-K filed February 28, 2002
                  (File No. 0-16947).                                                                              *

        10.20     Form of Shareholder Agreement between each director of the Company
                  and Banknorth Group, Inc. is incorporated by reference from Exhibit 10.2 of
                  Banknorth's Current Report on Form 8-K filed February 28, 2002
                  (File No. 0-16947).                                                                              *

</TABLE>

                                       82
<PAGE>
<TABLE>
<CAPTION>
<S>      <C>      <C>                                                                                           <C>
       *10.21     Form of Termination Agreement by and among Banknorth, the Company,
                  Ipswich Savings Bank, Eastern Bank, as Trustee, and David L.
                  Grey is incorporated by reference from Exhibit  10.3 of Banknorth's
                  Current Report on Form 8-K filed February 28, 2002
                  (File No. 0-16947).                                                                              *

       *10.22     Form of Employment and Noncompetition Agreement between
                  Banknorth Group, Inc. and David L. Grey is incorporated by reference
                  from Exhibit 10.4 of Banknorth's Current Report on Form 8-K filed
                  February 28, 2002 (File No. 0-16947).                                                            *

       *10.23     Severance Agreement dated November 6, 2001 between
                  Ipswich Savings Bank and Philip Bryan.                                                          84

       *10.24     Severance Agreement dated November 8, 2001 between Ipswich
                  Savings Bank and Kevin Dean.                                                                    84

        10.25     Contract dated April 6, 2000 with U.S. Bancorp for ATM processing
                  services is incorporated by reference to the Company's March 31, 2000 Form 10-Q.                 *

       *10.26     Split Dollar Agreement and Collateral Assignment dated July
                  20, 2000 and March 30, 2001, respectively, between Ipswich
                  Savings Bank and Francis Kenney is incorporated by reference
                  herein from the Company's March 31 2001 Form 10-Q.                                               *

        (11)      A statement regarding the computation of earnings per share is included in
                  the notes to consolidated financial statements.                                                  *

        (12)      Not applicable.                                                                                  *

        (21)      Subsidiaries - Ipswich Savings Bank, Ipswich Statutory Trust I.

        (23)      Consent of Baker Newman & Noyes, LLC.

</TABLE>


     * Denotes management contract or compensation plan.

                                       83