<PAGE>   1

                             ANDOVER BANCORP, INC.
                               2000 Annual Report

<PAGE>   2
ANDOVER BANCORP, INC., the multi-bank parent company of Andover Bank and
Gloucester Bank & Trust Company, is headquartered in Andover, Massachusetts,
approximately 25 miles north of downtown Boston. Andover Bank, incorporated in
1834, operates thirteen banking offices in Andover, Lawrence, Methuen, North
Andover and Tewksbury, Massachusetts, as well as Derry, Londonderry and Salem,
New Hampshire. Gloucester Bank & Trust Company is a Massachusetts-chartered
trust company with two banking offices located in Gloucester, Massachusetts.

<PAGE>   3
2000 Financial Highlights

(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                      At or for the years ended December 31,
                                      --------------------------------------
                                                                  Percentage
                                          1999         2000         Change
                                      ----------    ----------    ----------
<S>                                   <C>           <C>           <C>
Total assets                          $1,491,054    $1,823,233       +22%
Loans, net                             1,121,717     1,341,541       +20
Deposits                                 968,533     1,221,189       +26
Stockholders' equity                     130,263       153,621       +18
Non-performing assets                      2,497         1,706       -32

Net interest and dividend income      $   47,309    $   53,703       +14%
Non-interest expense                      21,977        28,208       +28
Fee and other income                       4,613         5,536       +20
Net income                                18,885        20,182       + 7

Diluted earnings per share            $     2.82          3.01       + 7
Dividends declared                          0.87          0.99       +14
Tangible book value (1)                    20.40         21.25       + 4
Year-end market price                      28.00         34.44       +23

Return on average assets                    1.31%         1.22%
Return on average equity (1)               15.05         14.67
Net yield on average earning assets         3.37          3.35
Efficiency ratio                           42.33         47.62
</TABLE>

(1) Excludes the effect of SFAS No. 115


                                                                               i
<PAGE>   4
Letter to Shareholders

Dear Shareholders,

While Andover Bancorp recorded its seventh consecutive year of record earnings,
the more remarkable development in 2000 was the solid growth in all areas and on
both sides of the Company's balance sheet. Before turning to a discussion of
that growth, I should first report on the excellent results of operations in
2000.

     -    Record earnings grew 7% to $20.2 million

     -    Return on average assets of 1.2%

     -    Return on average equity of 14.7%

     -    Dividends of $0.99, a 14% increase

To provide consistent growth in earnings year after year and to ensure adequate
shareholder returns, Andover Bancorp must profitably generate additional assets
and liabilities. Such growth can be realized either through expanding
traditional product lines and market territory using the Company's own
internally generated resources or externally through the acquisition of
additional or different resources and new market territory. Happily, in 2000
Andover Bancorp achieved substantial growth through both internal and external
means.

On July 1, 2000, Andover Bancorp acquired Gloucester Bank & Trust Company.
Gloucester Bank & Trust Company brought $132.6 million of high quality assets, a
strong, local commercial loan portfolio and an expanded market territory to
Andover Bancorp. This new physical presence in Gloucester affords us an
attractive platform from which to offer our more extensive array of residential
mortgage and consumer loan and deposit products.

                                  [BAR CHART]

   1996  $12.5
   1997  $13.2
   1998  $17.4
   1999  $18.9
   2000  $20.2

Earnings

For the years ended December 31,
(In millions)



ii

<PAGE>   5
This externally generated growth from the Gloucester acquisition was amplified
by the significant growth achieved internally by Andover Bank. Every category of
loans increased over the course of the year. The opportunity to seize deposits
from the turmoil caused by large bank mergers and divestitures was realized
beyond our early hopes. In addition, we opened our third southern New Hampshire
branch office in Derry to capitalize on our expanded presence across the border.
Our reception in Derry has exceeded our expectations and we already have $10
million in new deposits after only six months of operation.

The following reflects this cumulative record of growth:

     -    Total deposit growth of 26%

     -    Total checking deposit growth of 60%

     -    Total loan growth of 20%

          Growth of loans by type:

              Residential                 9%
              Commercial real estate     37%
              Construction               41%
              Consumer                   41%
              Commercial loans           74%
              Leasing                    22%

I cannot mention such significant loan growth without some reference to loan
quality, especially in light of reports in the general news media about problem
loans in larger banks. Last year I reported what I thought would be the low
point in adversely classified and delinquent loans. Those adverse numbers
declined even further in 2000.

                                  [BAR CHART]

   1998  $248,905
   1999  $327,523
   2000  $457,645

Corporate Loan Growth
At December 31,
(In thousands)

Includes outstanding balances for construction and land, commercial real estate,
commercial loans and lease financings.

                                  [BAR CHART]

   1996  $14.89
   1997  $16.40
   1998  $18.39
   1999  $20.40
   2000  $21.25

Tangible Book Value Per Share
At December 31,
Excludes the effect of SFAS No. 115


                                                                             iii
<PAGE>   6
Letter to Shareholders (CONTINUED)

I am very pleased to report that as of December 31, 2000, nonaccruing loans
totaled only $1.7 million and total delinquencies amounted to just one-third of
one percent of total loans outstanding.

This remarkable internal growth, in both deposits and loans, validates our
efforts to meet the broad spectrum of financial needs in our marketplace. The
large bank mergers and divestitures remove them further and further from the
local community. Their removal from the market affords us the opportunity to
gain new customers by offering responsive, local service by competent,
knowledgeable, helpful personnel. We believe that our record of growth in 2000
indicates that our efforts have and will continue to meet with customer
acceptance by both individuals and businesses in our local markets. We further
believe that our growth in 2000 provides a firm foundation for the future.

On behalf of the Board of Directors, I wish to thank our Shareholders for their
continued support and our Employees for their commitment and enthusiasm
throughout the past year.

Very truly yours,

   [signature]

Gerald T. Mulligan
President and Chief Executive Officer

                                  [BAR CHART]

   1996  $0.40
   1997  $0.54
   1998  $0.69
   1999  $0.87
   2000  $0.99

Cash Dividends Per Share
For the years ended December 31,



iv

<PAGE>   7


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                -----------------

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
                                       OR
             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-16358

                              ANDOVER BANCORP, INC.
             (Exact name of registrant as specified in its charter)


           DELAWARE                                             04-2952665
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                              Identification No.)

     61 MAIN STREET, ANDOVER, MA                                  01810
(Address of principal executive office)                         (Zip Code)


        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978)749-2000

                               ------------------

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK, $0.10 PAR VALUE
                                (Title of Class)

                        PREFERRED STOCK PURCHASED RIGHTS
                                (Title of Class)

      Indicate by check mark whether: the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during 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 non-affiliates of
the Registrant, based on the closing sale price for the Registrant's Common
Stock on March 1, 2001, as reported by Nasdaq, was $206,838,892.50.

      The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date, is:

                 Class: Common Stock, par value $0.10 per share
                Outstanding as of March 1, 2001: 6,698,944 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Andover Bancorp, Inc. Definitive Notice of Annual Meeting
and Proxy Statement for the 2001 Annual Meeting of Shareholders are incorporated
by reference into Part III of Form 10-K.

<PAGE>   8


                                    FORM 10-K
                                TABLE OF CONTENTS
                                     PART I

<TABLE>
<S>                                                                               <C>
Item 1  Business.........................................................................      3

Item 2  Properties.......................................................................  11-12

Item 3  Legal Proceedings................................................................     12

Item 4  Submission of Matters to a Vote of Security Holders..............................     12

                                                  PART II

Item 5  Market for Registrant's Common Equity and Related Stockholder Matters............     13

Item 6  Selected Consolidated Financial Data.............................................     14

Item 7  Management's Discussion and Analysis of Financial Condition and
        Results of Operations............................................................     15

Item 7A Quantitative and Qualitative Disclosures About Market Risk.......................     37

Item 8  Financial Statements and Supplementary Data

             Independent Auditors' Report ...............................................     39

             Consolidated Financial Statements...........................................  40-44

             Notes to Consolidated Financial Statements..................................  45-69

Item 9  Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure................................................. Non-applicable
</TABLE>

                                    PART III

The information called for by Part III (Items 10 through 13) is incorporated by
reference from Andover's Definitive Notice of Annual Meeting and Proxy Statement
for the 2001 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.

                                     PART IV

Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 70


                                       2

<PAGE>   9

      PRELIMINARY NOTE IN REGARD TO FORWARD-LOOKING STATEMENTS. This Annual
Report on Form 10-K contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. We may also make written or oral
forward-looking statements in other documents we file with the SEC, in our
annual report to stockholders, in press releases and other written materials,
and in oral statements made by our officers, directors or employees. Without
limiting the foregoing, the words "believe", "estimate", "assume", "outlook",
"should", "anticipate", "plan", "expect", "intend" and similar expressions which
predict or indicate future events and which do not relate to historical matters
are intended to identify forward-looking statements. You should not rely on
forward-looking statements, because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond the control of the
Company. These expressed or implied important risks, uncertainties and other
factors may cause the Company's actual results, performance or achievements to
differ materially from those expressed or implied by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results".

      CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS. The following important
factors, among others, could cause actual results, performance or achievements
of the Company to differ materially from those expressed or implied by
forward-looking statements made in this Annual Report on Form 10-K or presented
elsewhere by management from time to time, including future SEC filings. Defined
terms used elsewhere in this Annual Report have the same meanings herein as
therein. A number of uncertainties exist that could affect the Company's future
operating results, performance or achievements including, without limitation,
the Banks' (as defined below) continued ability to originate quality loans,
fluctuation of interest rates, real estate market conditions in the Banks'
lending areas, general and local economic conditions, the Banks' continued
ability to attract and retain deposits, the Company's (as defined below) ability
to control costs, new accounting pronouncements, and changing regulatory
requirements. You should carefully review all of these factors, and you should
be aware that there may be other factors that could cause these differences.
These forward-looking statements were based on information, plans and estimates
at the date of this report and the Company does not promise to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.

                                     PART I

ITEM 1.  BUSINESS

GENERAL

      Andover Bancorp, Inc. ("Andover" or the "Company") is a Delaware
corporation that was organized in 1987. Although Andover has corporate authority
to engage in any activity permitted by the Delaware General Corporation Law,
Andover's primary activity is to act as the multi-bank holding company parent
for Andover Bank (the "Bank") and Gloucester Bank & Trust Company ("Gloucester")
(collectively, the "Banks").

      The Bank is a Massachusetts-chartered savings bank which was incorporated
in 1834 and is headquartered in Andover, Massachusetts. On May 8, 1986, Andover
Bank converted from mutual to stock form.

      On July 1, 2000, the Company completed its acquisition of GBT Bancorp
("GBT") and its wholly-owned subsidiary, Gloucester Bank & Trust Company. The
transaction was accounted for as a purchase and resulted in goodwill totaling
$9.0 million. As of June 30, 2000, Gloucester had $132.6 million in assets,
primarily commercial real estate loans and investment securities, and deposits
of $107.8 million. Gloucester is a Massachusetts-chartered trust company which
was organized in 1987 with two banking offices located in Gloucester,
Massachusetts. The operating results of Gloucester are reflected in the
consolidated Company's results after July 1, 2000.

      Deposits at the Banks are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to $100,000 per separately insured account. Andover
Bank's depositors have the additional insurance of the Depositors Insurance
Fund, Inc. ("DIF") for those portions of deposits in excess of $100,000.


                                       3

<PAGE>   10


      The Banks are engaged principally in the business of attracting deposits
from the general public and investing in residential and commercial real estate
loans, in construction, consumer, commercial loans and lease financing, and in
various securities. Emphasis is placed on both retail and corporate banking.
Retail activities, an important source of franchise value to the Banks, consist
of branch operations, home mortgage and consumer lending, and mortgage banking.
The Banks offer a variety of retail products through branch offices, automated
teller machines ("ATMs"), the telephone call center with its expanded hours,
online banking capabilities and product specialists. Other non-banking services
available to their customers include an insurance program and investment
services provided by third parties. Corporate banking activities consist
primarily of commercial real estate, construction, land and commercial lending
and lease financing. These activities are conducted primarily by experienced
loan officers and business development specialists.

MARKET AREA

      The Banks' market area is centered in northeastern Massachusetts and
southern New Hampshire. Andover Bank operates banking offices in the towns of
Andover, Lawrence, Methuen, North Andover and Tewksbury, Massachusetts and
Derry, Londonderry, and Salem, New Hampshire, which serve those towns as well as
surrounding communities. Gloucester has banking offices in the city of
Gloucester, which serve the surrounding communities collectively known as Cape
Ann. Andover Capital Group, Inc., a subsidiary of Andover Bank, offers
commercial equipment loans and lease financing with the entire Northeast as its
primary market area.

LENDING ACTIVITIES

      General. Lending is the principal business of the Banks and loans
represent the largest portion of the Banks' assets. At December 31, 2000, the
Banks' loan portfolio, prior to the allowance for loan losses, amounted to $1.4
billion or 74.4% of total assets. The Banks' loan portfolio increased 19.7%
during 2000 resulting primarily from the addition of Gloucester and higher
corporate loan originations. For additional information on the composition of
the loan portfolio and loan originations, see Note 4 to the "Consolidated
Financial Statements" and Item 7, "Management's Discussion and Analysis --
Results of Operations -- Financial Condition -- Loans".

      The primary lending activity has been the origination of first mortgage
loans for the purchase or refinance of residential properties in Andover's
primary market area and adjacent communities. Such loans are generally viewed as
having less risk than other types of retail and non-retail loans and provide a
relatively stable source of interest income in the loan portfolio. They also
provide a significant source of fee income when they are sold in the secondary
mortgage market and serviced by the Bank. The Bank is an active servicer of
residential loans for investors in the secondary mortgage market.

      The Banks originate a variety of other loans for consumer purposes. These
include home equity, second mortgage, and personal loans, among others, and
constitute an additional source of interest income in the loan portfolio. The
consumer lending activities of the Banks complement both their home mortgage
activities and their retail deposit gathering activities and position them as
full service retail lenders, strengthening their overall retail franchise value.
At December 31, 2000, retail loans totaled $898.5 million or 66.3% of total
loans.

      The Banks also originate non-retail or corporate loans, such as commercial
real estate, commercial, construction and land loans and lease financing.
Historically, these types of loans have generated higher yields and returns than
retail loans, but also involve additional risk. See "Risk Elements" below.
Corporate loans have also been viewed as a means of maintaining a diversified
loan and asset portfolio. At December 31, 2000, corporate loans amounted to
$457.6 million, or 33.7% of total loans.

      Residential Mortgage Loans. Residential mortgage loans totaling $811.2
million represented 59.8% of the total loan portfolio at December 31, 2000. An
additional $5.0 million in residential mortgage loans was held for sale at that
date. During 2000, loans purchased from other banks and correspondent
relationships totaled $57.4 million of locally originated residential real
estate loans.

                                       4

<PAGE>   11

      Nearly all of the loans in the residential mortgage portfolio are secured
by homes located in Massachusetts or in southern New Hampshire. According to
internal policy, the majority of these loans are written to be eligible for sale
in the secondary mortgage market, primarily to the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA").
Residential mortgage loans include both fixed and variable rate mortgages with
original terms from 5 to 30 years. The Bank remains an active seller of
originated home mortgages in the secondary market.

      Commercial Real Estate Loans. At December 31, 2000, commercial real estate
loans totaled $284.4 million, representing 21.0% of total loans. Approximately
$45.7 million, or 16.1% of these loans, are secured by apartment buildings and
multi-family residential properties. The balance of the commercial real estate
portfolio is secured by commercial facilities, including office, mixed use,
retail or light manufacturing properties, small shopping centers, restaurants,
and various other types of commercial real estate. Over a quarter of all
commercial real estate loans are located in southeastern New Hampshire.
Commercial real estate loans generally amortize over a period from 15 to 25
years. Variable interest rates on such loans are set at a margin above either
the one-year Treasury index or the prime rate as published in the Wall Street
Journal and are subject to periodic adjustment. Commercial real estate loans
with fixed interest rates are generally set at a margin above the equivalent
Federal Home Loan Bank term advance rate.

      Construction and Land Loans. Construction and land loans totaled $89.9
million at December 31, 2000, representing 6.6% of total loans. At that date,
amounts committed but not yet advanced in connection with such loans totaled an
additional $46.7 million. At December 31, 2000, outstanding construction loans
totaled $49.4 million and outstanding land loans (including loans for unimproved
land and land development) totaled $40.5 million. The majority of the
construction and land loans are for development of residential single-family
homes. However, commercial construction projects total approximately 20% of the
total construction and land balances outstanding. Construction and land loans
generally have a term of two years and are subject to periodic adjustment. The
interest rates are generally set at a margin above the prime rate as published
in the Wall Street Journal.

      Consumer Loans. Consumer loans totaled $87.3 million at December 31, 2000,
representing 6.5% of total loans. Home equity lines constitute the greatest
portion of the Banks' consumer lending activity and totaled $54.2 million at
December 31, 2000. At that date, unadvanced amounts relating to home equity
lines totaled an additional $88.4 million. Home equity lines are offered both in
fixed rate and adjustable rate form with varying terms of three to ten years.
The adjustable rate loans are generally tied to the prime rate as published in
the Wall Street Journal. Home equity lines are subject to the same general
underwriting standards as residential first mortgage loans. Other consumer loans
are offered in fixed rate form with varying terms from three to eight years,
while second mortgages have terms from five to fifteen years.

      Commercial and Lease Loans. At December 31, 2000, commercial and lease
loans totaled $47.8 million, or approximately 3.5% of total loans. Secured
equipment loans included in the commercial and lease loan portfolio amounted to
$8.5 million at December 31, 2000. The interest rate on commercial loans
generally varies at a margin above the prime rate as published in the Wall
Street Journal. Commercial loans may be secured in whole or in part by real
estate unrelated to the principal purpose of the loan or secured by inventories
and receivables and are ordinarily guaranteed by the principals of the borrower.
Commercial loans with fixed interest rates are set at a margin above the Federal
Home Loan Bank advance rate.

      Lease Financing. Andover Capital Group, Inc. offers commercial equipment
loan and lease financing as an additional financing option for the Banks'
corporate customers. Total lease financing balances were $35.5 million or 2.6%
of total loans at December 31, 2000.

      Loan Origination. Residential mortgage loans originate from a number of
sources. These include realtor, builder and customer referrals, direct
advertising and participation in home shows and other events. The Banks employ a
number of mortgage loan originators who maintain regular contact with real
estate firms and other sources of business and who respond to general mortgage
inquiries. These mortgage specialists are assigned specific territories and
receive commissions on closed mortgage loans. Total residential mortgages
originated by the Banks


                                       5

<PAGE>   12

in 2000 amounted to $144.5 million. The decline in total residential
originations of 16.9% from 1999 was primarily due to lower mortgage refinancing
activity experienced through 2000 as a result of higher interest rates.

      Consumer loans are solicited by advertising and by direct mail targeted to
existing deposit and mortgage customers and, from time to time, selected market
area households which have no customer relationship with either Bank. The
primary origination activity in the consumer loan area relates to home equity
lines of credit and second mortgages, totaling $30.5 million in 2000, or nearly
82.7% of the total consumer originations.

      Corporate originations, comprised of commercial real estate, commercial,
construction and land loans and lease financing, are originated from direct
solicitation of existing and prospective customers and from a variety of
referral sources. The Banks originated $229.8 million of these corporate loans
during 2000 for an increase of 29.6% over 1999's record level of originations.

RISK ELEMENTS

      General. For further information concerning the composition of the loan
portfolio, nonaccrual loans, impaired loans and the allowance for loan losses,
see Note 4 to the "Consolidated Financial Statements" and Item 7, "Management's
Discussion and Analysis -- Results of Operations -- Financial Condition -- Risk
Elements".

      Non-performing Assets. Non-performing assets consist of nonaccruing loans
and other real estate owned. Non-performing assets decreased 31.7% from 1999
levels to $1.7 million at December 31, 2000. Non-performing assets amounted to
0.1% of total assets at year-end. The Company places all loans, regardless of
collateral values, on nonaccrual status when principal or interest is past due
90 days or more. Loans for which payments are less than 90 days past due are
placed on non-accrual status where there exists serious doubt as to
collectibility.

      Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses charged to the statement of operations. The
allowance is reduced by a credit for loan losses as well as loan charge-offs.
The Company recorded provisions for loan losses of $1.5 million in 2000 as
compared to provisions of $400,000 in 1999. Among the factors used to determine
that the provision for loan losses was appropriate were the level and mix of
loan growth, particularly the growth in corporate loan outstanding balances, the
ratio of the allowance to total loans as well as charge-offs and recoveries. For
further information on the provision for loan losses, see Item 7, "Management's
Discussion and Analysis - Results of Operations".

INVESTMENT ACTIVITIES

      The investment portfolio, an important component of Andover's asset
structure, is a source of earnings in the form of interest and dividends,
provides for diversification and is a source of liquidity. Overall, the
portfolio, comprised of corporate bonds, mortgage-backed securities, U.S.
Treasury and federal agency securities, short-term investments and equity
securities, represented 20.1% of total assets, or $367.0 million as of December
31, 2000.

      In 2000, the investment portfolio produced interest and dividend income of
$24.1 million, or 20.0% of the total interest and dividend income earned by the
Company. Due to a balance sheet restructuring whereby lower yielding assets were
sold during the third quarter of 2000 and replaced with higher earning assets,
the Company recognized losses of $2.1 million in 2000 on the sale of loans and
investments. For additional information on investments, see Notes 1, 2 and 3 to
the "Consolidated Financial Statements" and Item 7, "Management's Discussion and
Analysis -- Results of Operations -- Financial Condition -- Investments".

DEPOSITS AND BORROWED FUNDS

      The Banks' major sources of funds are deposits, borrowings, principal
payments or payoffs on loans and mortgage-backed securities, and maturities of
investments. Borrowings are generally used to fund long-term assets and
short-term liquidity requirements or to manage interest rate risk. Total
deposits amounted to $1,221.2 million at December 31, 2000.


                                       6
<PAGE>   13


      The Banks are members of the Federal Home Loan Bank of Boston ("FHLB") and
are authorized to borrow funds to meet withdrawals of savings deposits or to
expand the loan or investment portfolios. These borrowings are subject to
collateral requirements and borrowing limitations. The Banks also have available
various other sources of funds, including secured borrowings, federal funds
purchased or lines of credit from commercial banks and reverse repurchase
agreements from brokerage firms, FHLMC and FNMA. In addition, the Banks have
overnight repurchase agreements with various corporate customers. At December
31, 2000, total borrowings outstanding from all of the Company's sources
amounted to $436.2 million.

      For additional information concerning the composition and maturity of
deposits and borrowings, see Notes 8, 9 and 10 to the "Consolidated Financial
Statements" and Item 7, "Management's Discussion and Analysis -- Results of
Operations -- Financial Condition -- Deposits -- Borrowings -- Asset and
Liability Management and Market Risk -- Liquidity".

OTHER SERVICES

      Investment Services. The Bank makes investment and brokerage services
available to its customers through a contract with Liberty Securities
Corporation, an unaffiliated company. A fully licensed broker of Liberty
Securities is available for consultation on investment opportunities, including
mutual funds, municipal bonds, government-backed securities and annuities. The
Bank received income of approximately $51,000 from these referral services in
2000.

COMPETITION

      The Bank's lending and deposit-taking activities are concentrated in the
Merrimack Valley and the surrounding communities in northeastern Massachusetts
and southeastern New Hampshire. Gloucester's lending and deposit- taking
activities are concentrated in the Cape Ann area. The Banks face strong
competition both in originating loans and in attracting deposits. Competition in
originating loans in the Banks' expansive lending areas comes primarily from
thrift institutions, commercial banks, mortgage companies, credit unions and
consumer finance companies. The Banks compete for loans principally on the basis
of interest rates and loan fees, the types of loans offered, and the quality of
service and convenience provided to borrowers.

      In attracting deposits, the Banks' primary competitors are thrift
institutions, commercial banks, credit unions and mutual funds. The attraction
and retention of deposits depends on the Banks' ability to provide investment
opportunities that satisfy the requirements of depositors with respect to the
rate of return, liquidity, risk, service and other factors. The Banks compete
for these deposits by offering competitive rates, convenient branch locations,
extended business hours, electronic delivery channels and automated teller
machines.

      On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Gramm-Leach-Bliley Act"). Under the
Gramm-Leach-Bliley Act, effective March 11, 2000, securities firms, insurance
companies and other financial services providers that elect to become financial
holding companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act may significantly change the competitive environment in
which the Company and its subsidiaries conduct business. See "Supervision and
Regulation -- Gramm-Leach-Bliley Act of 1999" below. The financial services
industry is also likely to become more competitive as further technological
advances enable more companies to provide financial services.

SUPERVISION AND REGULATION

      General. The Company and the Banks are heavily regulated. As a multi-bank
holding company, Andover is subject to regulation and supervision by the Board
of Governors of the Federal Reserve System ("the Federal Reserve Board") and is
also subject to the jurisdiction of the Massachusetts Board of Bank
Incorporation. The activities of bank holding companies, such as Andover, 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, Andover may not directly or indirectly acquire the ownership or
control of more than 5 percent of any class of voting shares or substantially


                                       7
<PAGE>   14


all of the assets of any company (other than a bank or a bank holding company)
that is not engaged in activities determined by the Federal Reserve Board to be
so closely related to banking or managing and controlling banks as to be a
proper incident thereto, and also must provide notice to or obtain the approval
of the Federal Reserve Board in connection with any such acquisition. The
Federal Reserve Board has the authority to issue orders to bank holding
companies to cease and desist from unsound banking practices and violations of
conditions imposed by, or violations of agreements with, the Federal Reserve
Board. The Federal Reserve Board is also empowered to asses civil monetary
penalties against companies or individuals who violate the Bank Holding Company
Act of 1956, as amended, (the "BHCA") or orders or regulations thereunder, to
order termination of non-banking activities of non-banking subsidiaries of bank
holding companies, and to order termination of ownership and control of a
non-banking subsidiary by a bank holding company.

      The Bank, as a Massachusetts-chartered savings bank and Gloucester, as a
Massachusetts-chartered trust company, are subject to regulation, examination
and supervision by the FDIC and the Massachusetts Commissioner of Banks ("the
Commissioner"). The Banks are also subject to certain requirements established
by the Federal Reserve Board.

      Federal Reserve Board Capital Requirements. The Federal Reserve Board has
adopted requirements setting minimum standards for capital adequacy and imposing
minimum leverage capital ratios. The Company exceeded all applicable
requirements at December 31, 2000. U.S. bank regulatory authorities and
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 capital requirements and
guidelines. For additional information on regulatory capital ratios, see Item 7,
"Management's Discussion and Analysis - Financial Condition - Capital
Resources".

      Federal Deposit Insurance Corporation. The FDIC insures the Banks' deposit
accounts up to the $100,000 maximum per separately insured account and 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 Banks exceeded all applicable requirements at December 31,
2000. Furthermore, under the capital standards established pursuant to the FDIC
Improvement Act of 1991, the Banks are currently well-capitalized. Bank
regulators may raise capital requirements applicable to banking organizations
beyond current levels. Because we are unable to predict whether higher capital
requirements will be imposed and, if so, at what levels and on what schedules,
it therefore cannot predict what effect such higher requirements may have on
Andover and the Banks. For additional information on regulatory capital ratios,
see Note 12 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 Banks'
business in a manner which is unsafe, unsound or contrary to the depositors'
interest, or been negligent in the performance of their duties. In response to a
Massachusetts law enacted in 1996, in 1997 and 1999, the Commissioner finalized
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.

      Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally
authorizes bank holding companies to acquire banks located in any state,
possibly subject to certain state-imposed age and deposit concentration limits,
and also generally authorizes interstate mergers and to a lesser extent,
interstate branching.

      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


                                       8
<PAGE>   15


providers by revising and expanding the Bank Holding Company Act framework to
permit a holding company system, such as Andover, 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. In sum, the Gramm-Leach-Bliley Act permits bank holding companies
that qualify and elect to be treated as a financial holding company to engage in
a significantly broader range of financial activities than the companies
described above that are not so treated. Generally, the Gramm-Leach-Bliley Act
and its implementing regulations do the following: (i) repeal 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) permit investment in non-financial
enterprises, subject to significant operational, holding period and other
restrictions; (iii) provide a uniform framework for the functional regulation of
the activities of banks, savings institutions, and their holding companies; (iv)
broaden the activities that may be conducted by national banks (and
derivatively, state banks), banking subsidiaries of bank holding companies, and
their financial subsidiaries; (v) require all financial institutions to provide
notice of their privacy policies at specified times to their retail customers
and consumers of their financial products or services, and permits retail
customers and consumers, under certain circumstances, to prohibit financial
institutions from sharing certain nonpublic personal information pertaining to
them by opting out of such sharing; (vi) establish guidelines for safeguarding
the security, confidentiality and integrity of customer information; (vii) adopt
a number of provisions related to the capitalization, membership, corporate
governance, and other measures designed to modernize the Federal Home Loan Bank
system; (viii) modify the laws governing the implementation of the Community
Reinvestment Act of 1977; and (ix) address 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 Andover, 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 federal 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, Andover has
not determined whether it will become a financial holding company.

      Activities and Investments of Insured State-Chartered Banks. Section 24 of
the Federal Deposit Insurance Act generally limits the activities as principal
and equity investments of FDIC-insured, state-chartered banks to those that are
permissible for national banks. In 1999, the FDIC substantially revised its
regulations implementing Section 24 to ease the ability of state banks to engage
in certain activities not permissible for national banks, and to expedite FDIC
review of bank applications and notice to engage in such activities.

      Further, the Gramm-Leach-Bliley Act, which includes new sections of the
National Bank Act and the Federal Deposit Insurance Act governing the
establishment and operation of financial subsidiaries, permits national banks
and 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 national banks and state
banks to retain all existing subsidiaries. In order to form a financial
subsidiary, a national bank or state bank must be well-capitalized, and such
banks would be subject to certain capital deduction, risk management and
affiliate transaction rules. Also, the FDIC recently issued final rules
governing the establishment of financial subsidiaries by insured state nonmember
banks. The final rules restate the FDIC's position that activities that a
national bank could only engage in through a financial subsidiary, such as
securities underwriting, only may be conducted in a financial subsidiary by a
state nonmember bank. However, activities that a national bank could not engage
in through a financial subsidiary, such as real estate development or
investment, will continue to be governed by the FDIC's standard activities
rules. Moreover, to mirror the Federal Reserve Board's actions with respect to
state member banks, the final rules provide that a state bank subsidiary that
engages only in activities that the bank could engage in directly (regardless of
the nature of the activities) will not be deemed a financial subsidiary.


                                       9

<PAGE>   16

EMPLOYEES

      At December 31, 2000, Andover had 306 full-time equivalent employees. None
of the employees of Andover are represented by a collective bargaining group and
management considers relations with its employees to be good.

SUBSIDIARIES

      Andover has two direct subsidiaries, the Bank and Gloucester. The Bank has
four wholly-owned subsidiaries and one majority-owned subsidiary. One of the
Bank's subsidiaries, AB Insurance Services LLC, was created in 1999 to act as an
insurance agent or broker enabling it to sell all lines of consumer and
commercial insurance. Two other subsidiaries of the Bank were organized as
Massachusetts security corporations to take advantage of beneficial state tax
treatment related to the holding of certain investments. The fourth subsidiary
of the Bank, Andover Preferred Capital Corporation ("APCC"), is a Massachusetts
business corporation which has elected to be taxed as a real estate investment
trust for federal and Massachusetts tax purposes. APCC holds mortgage loans
which were previously originated by Andover Bank. The majority-owned subsidiary
of the Bank, Andover Capital Group, Inc., provides secured equipment lending and
lease financing. Gloucester has one wholly-owned subsidiary, GBT Securities
Corp., which was created in 2000 as a Massachusetts security corporation.


                                       10

<PAGE>   17


ITEM 2.  PROPERTIES

      Andover conducts its business from its main office and multiple locations
listed below, all of which are considered to be in good condition and suitable
for the purposes for which they are used. Andover also serves customers through
its affiliation with several Automatic Teller Machine ("ATM") networks: SUM(R)
NYCE(R), EXCHANGE(R), and CIRRUS(R) programs with over 340,000 ATM locations
worldwide. As a member of the SUM program, Andover customers receive surcharge
free access at over 2,000 locations throughout New England and the Northeast. In
addition, the Company has an affiliation with Mastercard International(R) for
its debit card customers. The following table sets forth general information
relating to bank premises owned or used by Andover and its subsidiaries in
conducting its business.

                                                                  OWNED OR
LOCATION                                                           LEASED
--------                                                           ------

ANDOVER BANK

Main Office:
   Andover, Massachusetts
      61 Main Street................................................Owned
      31-45 Main Street-Annex.......................................Owned
      11 Chestnut Street............................................Owned
      18-20 Central Street (1)......................................Leased

Branches:
   Lawrence, Massachusetts
      450 Essex Street..............................................Owned
      305 South Broadway............................................Owned

   Methuen, Massachusetts
      547 Broadway..................................................Owned
      91 Pleasant Valley Street (2).................................Owned
      228 Haverhill Street..........................................Owned
      145-147 Pelham Street (ATM only) (3)..........................Leased

   North Andover, Massachusetts
      108 Main Street...............................................Owned
      1077 Osgood Street (ATM only) (4).............................Leased

   Tewksbury, Massachusetts
      995 Main Street...............................................Owned
      2345 Main Street..............................................Owned

   Andover, Massachusetts
      159 River Road................................................Owned

   Derry, New Hampshire
      35 Manchester Road (5)........................................Owned

   Londonderry, New Hampshire
      62 Nashua Road................................................Owned

   Salem, New Hampshire
      130 Main Street (6)...........................................Leased

Schedule continued on next page.

                                       11

<PAGE>   18

ITEM 2. PROPERTIES - CONTINUED

                                                                   OWNED OR
LOCATION                                                            LEASED
--------                                                            ------

GLOUCESTER BANK & TRUST COMPANY

Main Office:
   Gloucester, Massachusetts
      2 Harbor Loop.................................................Owned
      72-74 Rogers Street (7).......................................Leased

Branches:
   Gloucester, Massachusetts
      224 Washington Street.........................................Owned
      75 Essex Avenue (ATM only) (8)................................Leased
      298 Washington Street (ATM only)..............................Leased

Loan Office:
   Woburn, Massachusetts
      444 Washington Street, Suite 302 (9)..........................Leased


(1)   Lease expires January 31, 2004, with a renewal option for an additional
      four years.
(2)   Land is held under a ground lease which expires December 1, 2006, with
      renewal options for an additional 69 years.
(3)   Lease expires May 31, 2006, with renewal options for an additional ten
      years.
(4)   Lease expires May 31, 2001, with renewal options for an additional ten
      years.
(5)   Land is held under a ground lease which expires December 31, 2010, with
      renewal options for an additional 35 years.
(6)   Lease expires July 31, 2001, with a renewal option for an additional two
      years.
(7)   Lease expires June 30, 2004, with a renewal option for an additional five
      years.
(8)   Lease expires June 30, 2003, with a renewal option for an additional five
      years.
(9)   Lease expires October 30, 2003.

ITEM 3. LEGAL PROCEEDINGS

      Andover, Andover Bank and Gloucester are involved in various legal
proceedings which are ordinary, routine litigation incidental to their business,
none of which is believed by management to be material to the financial
condition of Andover, Andover Bank or Gloucester.

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

      None.


                                       12

<PAGE>   19

                                     PART II

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

STOCK PRICES AND DIVIDENDS

      Andover's Common Stock trades on The Nasdaq Stock Market(R) under the
symbol "ANDB". On March 1, 2001, there were approximately 2,414 holders of
record of the 6,698,944 shares of Andover Common Stock outstanding.

      The following table sets forth the comparative market prices per share of
Andover Common Stock based on high and low sale prices as reported on by
Nasdaq(R) and the dividends per share that have been declared by Andover, for
the periods indicated.

<TABLE>
<CAPTION>
                                                   PRICE              DIVIDENDS
                                            -----------------          DECLARED
        QUARTER ENDED                       HIGH          LOW         PER SHARE
        -------------                       ----          ---         ---------
<S>     <C>                                <C>           <C>           <C>
1998    March 31, 1998.....................$33.00        $27.40        $.152
----
        June 30, 1998.....................  38.75         31.50         .180
        September 30, 1998................  40.75         25.50         .180
        December 31, 1998.................  35.00         24.75         .180

1999    March 31, 1999.....................$34.75        $27.00        $.210
----
        June 30, 1999.....................  32.63         25.50         .210
        September 30, 1999................  34.75         28.88         .210
        December 31, 1999.................  31.50         27.38         .240

2000    March 31, 2000.....................$28.56        $25.00        $.240
----
        June 30, 2000.....................  29.75         25.88         .240
        September 30, 2000................  31.50         26.44         .240
        December 31, 2000.................  35.56         27.81         .270
</TABLE>

      The payment of dividends by Andover is subject to the discretion of
Andover's Board of Directors. Holding companies such as Andover engage in no
business other than acting as the holding company of their subsidiaries. The
only funds available to Andover for the payment of dividends are cash and cash
equivalents held at the holding company level, dividends paid by the Banks to
Andover, and borrowings. At December 31, 2000, Andover held $5.9 million in cash
and interest-bearing deposits at the holding company level.

      Dividend payments to stockholders totaled $6.5 million in 2000 and $5.7
million in 1999. On January 22, 2001, a dividend of $0.27 per share was
declared, payable on February 15, 2001.


                                       13

<PAGE>   20

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

      The following table summarizes selected consolidated financial data of
Andover at or for the periods indicated, and should be read in conjunction with
the consolidated financial statements and related notes thereto included in Item
8 of this Report.

<TABLE>
<CAPTION>

                                                                                   AT DECEMBER 31,
                                                    -----------------------------------------------------------------------
                                                        2000            1999         1998            1997          1996
                                                    -----------    -----------    -----------    -----------    -----------
                                                                                (DOLLARS IN THOUSANDS)
<S>                                                 <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
     Total assets ................................  $ 1,823,233    $ 1,491,054    $ 1,410,247    $ 1,322,745    $ 1,204,813
     Total loans .................................    1,356,181      1,133,101      1,050,765        978,823        870,035
     Allowance for loan losses ...................       14,640         11,384         10,486         12,521         12,229
     Investments (1) .............................      366,988        286,722        283,048        282,813        276,727
     Deposits ....................................    1,221,189        968,533        988,656        946,982        824,311
     Borrowed funds ..............................      436,218        379,384        283,824        258,732        274,418
     Stockholders' equity ........................      153,621        130,263        121,142        107,079         95,846
     Non-performing assets .......................        1,706          2,497          3,492          8,255         12,382
     Number of banking offices and locations .....           16             13             13             13             12

<CAPTION>
                                                                            YEARS  ENDED DECEMBER 31,
                                                    -----------------------------------------------------------------------
                                                        2000            1999         1998            1997          1996
                                                    -----------    -----------    -----------    -----------    -----------
                                                                   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
     Interest and dividend income ..................$   120,547    $   100,010    $    97,246    $    90,752    $    83,823
     Interest expense ..............................     66,844         52,701         55,015         52,047         48,529
                                                    -----------    -----------    -----------    -----------    -----------
       Net interest and dividend income ............     53,703         47,309         42,231         38,705         35,294
     Provision (credit) for loan losses ............      1,500            400         (1,705)           983          2,555
     Net gains (losses) from sales of
       assets held for sale and investments(1) .....     (1,967)          (368)           670            422           (265)
     Gains (losses) on real estate operations, net..        (40)            (5)            14           (971)        (1,542)
     Other income ..................................      5,536          4,613          3,502          5,307          4,804
     Merger recovery ...............................       --             --             --             --             (225)
     Non-interest expense ..........................     28,208         21,977         22,577         21,986         20,045
                                                    -----------    -----------    -----------    -----------    -----------
     Income before income tax expense
       and extraordinary item ......................     27,524         29,172         25,545         20,494         15,916
     Income tax expense ............................      7,342         10,287          8,159          7,288          3,264
                                                    -----------    -----------    -----------    -----------    -----------
     Income before extraordinary item ..............     20,182         18,885         17,386         13,206         12,652
     Extraordinary item ............................       --             --             --             --             (173)
                                                    -----------    -----------    -----------    -----------    -----------
     Net income ....................................$    20,182    $    18,885    $    17,386    $    13,206    $    12,479
                                                    ===========    ===========    ===========    ===========    ===========

PER SHARE DATA:
     Basic earnings per share:
       Income per share before extraordinary item   $      3.09    $      2.89    $      2.68    $      2.05    $      1.98
       Extraordinary item per share, net of tax ....       --             --             --             --            (0.03)
                                                    -----------    -----------    -----------    -----------    -----------
       Net income per share ........................$      3.09    $      2.89    $      2.68    $      2.05    $      1.95
                                                    ===========    ===========    ===========    ===========    ===========
     Diluted earnings per share:
       Income per share before extraordinary item...$      3.01    $      2.82    $      2.60    $      1.99    $      1.95
       Extraordinary item per share, net of tax ....       --             --             --             --            (0.03)
                                                    -----------    -----------    -----------    -----------    -----------
       Net income per share ........................$      3.01    $      2.82    $      2.60    $      1.99    $      1.92
                                                    ===========    ===========    ===========    ===========    ===========

     Dividends declared.............................$      0.99    $      0.87    $      0.69    $      0.54    $      0.40
     Tangible book value at end of period ..........      21.72          19.94          18.58          16.58          14.94
     Tangible book value (2) .......................      21.25          20.40          18.39          16.40          14.89

SELECTED FINANCIAL RATIOS:
     Return on average assets ......................       1.22%          1.31%          1.27%          1.06%          1.08%
     Return on average equity (2) ..................      14.67          15.05          15.64          13.24          13.89
     Average equity as a percentage
       of average assets (2) .......................       8.30           8.68           8.13           8.00           7.76
     Dividend payout ratio .........................      32.89          30.85          26.54          27.14          20.83
     Weighted average interest rate spread .........       2.74           2.79           2.57           2.67           2.66
       Net yield on average earning assets .........       3.35           3.37           3.18           3.22           3.16
     Efficiency ratio ..............................      47.62          42.33          49.37          49.95          49.43
</TABLE>.

----------------------------
(1)   Includes investment securities, mortgage-backed securities and short-term
      investments, both available for sale and held to maturity.
(2)   Excludes the effect of SFAS No. 115.

                                       14

<PAGE>   21


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

      General. The Company's results of operations depend to a great extent on
the Banks' net interest income, which is the difference between income earned on
the loan and investment portfolios and the interest paid by the Banks on
deposits and borrowed funds, the size of the provisions or credits for loan
losses, operating expenses and income taxes. Net interest income is primarily
affected by the level of earning assets as a percentage of total assets, the
level of interest-bearing liabilities, yields earned on assets and rates paid on
liabilities. Earnings are also affected by non-interest income which consists
primarily of mortgage banking income, transaction account fees, and gains or
losses on sales of the investment portfolio.

      On July 1, 2000, the Company completed its acquisition of GBT Bancorp
("GBT") and its wholly-owned subsidiary, Gloucester Bank & Trust Company. The
transaction was accounted for as a purchase and resulted in goodwill totaling
$9.0 million. As of June 30, 2000, Gloucester had $132.6 million in assets,
primarily commercial real estate loans and investment securities, and deposits
of $107.8 million. Gloucester is a Massachusetts-chartered trust company with
two banking offices located in Gloucester, Massachusetts. The operating results
of Gloucester are reflected in the consolidated Company's results after July 1,
2000.

      The following is a discussion and analysis of the Company's consolidated
results of operations for the last three years and its financial condition at
the end of fiscal 2000 and 1999. This section is intended to be read in
conjunction with the Consolidated Financial Statements and accompanying
footnotes.

      The following also contains forward-looking statements. There are a number
of important risks, uncertainties and other factors that could cause the
Company's actual results, performance or achievements to differ materially from
those expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include, without limitation, those set forth
prior to Part I of this Annual Report under the caption "Certain Factors That
May Affect Future Results".

RESULTS OF OPERATIONS

      Andover generated net income of $20.2 million or $3.01 per diluted share,
$18.9 million or $2.82 per diluted share and $17.4 million or $2.60 per diluted
share, in 2000, 1999 and 1998, respectively. Andover's return on average assets
decreased slightly in 2000 to 1.22%, as compared to 1.31% in 1999 and 1.27% in
1998. Return on average stockholders' equity decreased in 2000 to 14.67%, as
compared to 15.05% in 1999 and 15.64% in 1998. The Company's financial
performance in 2000 includes a tax benefit of $3.0 million offset by losses of
$2.1 million resulting from the sale of low yielding assets combined with higher
costs associated with running a larger, more geographically diverse company. The
Company's financial performance in 1999 includes a pre-tax gain of $1.6 million
from the termination of the Company's defined benefit pension plan, increased
mortgage banking income and an increase in net interest income. The Company's
financial performance in 1998 was positively impacted by a credit for loan
losses of $1.7 million and an increase in net interest income.

      Net Interest and Dividend Income. Net interest and dividend income was
$53.7 million in 2000, $47.3 million in 1999 and $42.2 million in 1998. Net
interest income increased $6.4 million in 2000, $5.1 million in 1999 and $3.5
million during 1998, 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 2000, market interest rates continued to rise throughout the first
half of the year, creating pressure on the Banks to increase deposit rates in
order to retain balances. The latter half of 2000 has seen a reduction in the
long-term interest rates, thereby creating a flat yield curve. The challenge for
the Company in 2000 was to manage its interest rate position. Notwithstanding
the volatility of the market interest rates, the Company was able to minimize
their impact and recognized an interest rate spread of 2.74% and a net yield on
earning assets of 3.35% for the year ended December 31, 2000. In addition, the
acquisition of Gloucester aided the overall results of 2000 by increasing both
the net yield on earning assets and the interest spread by 4 basis points. The
Company was able to hold down the rates paid on deposits during 1999 in spite of
market rate increases, the effect of which allowed the interest rate spread to
widen to 2.79% and the net yield to increase to 3.37% in 1999. During 1998, the
Company realized an interest rate spread of 2.57% and a net yield on earning


                                       15
<PAGE>   22

assets of 3.18%. The amount of foregone interest income from nonaccruing loans
totaled $217,000 in 2000, $256,000 in 1999 and $491,000 in 1998.

      Average earning assets increased 14.0% in 2000 to $1,600.7 million and
5.9% in 1999 to $1,404.3 million as of December 31, 1999. The increase in each
of the two years was primarily due to higher loan growth resulting from
increased loan originations and purchases. The acquisition of Gloucester aided
the growth experienced by the Company.

      The volatility in market interest rates has also impacted the yields
earned on the investment portfolio. The yield earned on investment securities
increased 47 basis points to 6.83% while the average balances increased $63.1
million in 2000. The yield earned on investment securities decreased 32 basis
points in 1999 to 6.36% as compared to 6.68% in 1998. The yield on
mortgage-backed securities increased 49 basis points to 7.01% in 2000 and
decreased 9 basis points during 1999 to 6.52%. The increase in the yield on the
investment securities and mortgage-backed securities reflects an increase in
longer term interest rates experienced over the past two years. In addition, the
Company has sold lower yielding investments in each of the past two years at a
loss and reinvested the proceeds in higher yielding investments, thereby
improving the total investment yield.

      Total average loans increased $155.4 million or 14.2% during 2000 and
$71.5 million during 1999 primarily due to higher levels of loan originations
and whole loan purchases. The addition of Gloucester in 2000 also contributed to
the growth in the current year. The yield on real estate loans increased 34
basis points to 7.60% in 2000 and decreased 19 basis points in 1999 to 7.26%.
The increase in the market interest rates noted above has positively impacted
each real estate loan category. In addition, as the mix of the loan portfolio
has shifted from the retail loan balances to the corporate loan balances, the
overall yield earned on the total portfolio has increased. The yield on the
residential loan portfolio increased 16 basis points in 2000 after dropping 27
basis points in 1999. The yield earned on the commercial real estate portfolio
increased 20 basis points in 2000 after dropping 19 basis points in 1999.
However, the largest increase in 2000 was experienced in the construction and
land portfolio which saw a 105 basis point increase in 2000, offsetting the 78
basis point decline in 1999. A contributing factor in the increased yield is the
increasing percentage of residential originations with a variable rate as well
as an increase in the total variable rate loans as a percentage of the total
loan portfolio. Variable rate loans represent almost 65% of the total loan
portfolio as of December 31, 2000 compared to 58% at the end of the prior year.
This increase indicates the correlation of the yields earned by the Company to
external market-driven interest rates. The yield on consumer loans increased 69
basis points in 2000 to 8.63% and decreased 55 basis points in 1999. The impact
of the increase in the prime rate in 2000 positively impacted the consumer
portfolio while the declines in the prime rate in the fourth quarter of 1998
were felt in 1999. The yield on commercial loans increased 41 basis points in
2000 to 8.46% and decreased 101 basis points in 1999 to 8.05%. The changes in
the yield on commercial loans reflect the changes in the prime rate as well as
competitive pricing pressures. In addition, the yield on the lease financings,
included in the commercial portfolio, was lower than the portfolio, thereby
dragging down the overall yield on commercial loans.

      The rate paid on interest-bearing deposits increased 28 basis points in
2000 to 4.20% and decreased 56 basis points in 1999 to 3.92%. As stated above,
the Company increased the rates paid on all deposit products to retain balances.
However, the Company has lagged the increases in the market interest rates as
much as possible. Core deposits, which include NOW, savings and money market
accounts, typically have rates lower than those paid on certificates of deposit.
The addition of the Gloucester balances combined with promotional rates on
various core deposits led to increases in the rates paid on each deposit
category in 2000, offsetting the declines experienced in each category in 1999.
The rate paid on NOW accounts increased 37 basis points in 2000 to 1.18% and
decreased 13 basis points in 1999 with the average balances increasing $23.3
million and $9.4 million in 2000 and 1999, respectively. Rates paid on money
market accounts increased 20 basis points in 2000 after decreasing 8 basis
points in 1999. The growth in the average savings balances totaled $18.1 million
and $34.0 million in 2000 and 1999, respectively, while the rate paid increased
26 basis points in 2000 and decreased 33 basis points in 1999. The increase in
the average balance of the certificates of deposit totaled $52.1 million and is
primarily due to the acquisition of Gloucester. The rates paid on certificates
of deposit increased 34 basis points to 5.44% in 2000 and decreased 62 basis
points to 5.10% in 1999.


                                       16
<PAGE>   23


      The Company has continued its reliance on borrowed funds as an alternative
source of funds to deposits in order to grow average earning assets. In 2000,
the average balance of borrowed funds increased $79.8 million and the rate paid
increased 76 basis points to 6.15%. During 1999, the average balance of borrowed
funds increased $59.3 million while the rate paid decreased 25 basis points. The
changes in the rates paid on the borrowed funds experienced by the Company were
consistent with the changes in market interest rates from one year to the next.

      The combination of the factors mentioned above contributed to a 5 basis
point decrease in the interest rate spread in 2000 to 2.74% and a 22 basis point
increase in the interest rate spread to 2.79% during 1999. The net yield on
earnings assets was 3.35% for the year ended December 31, 2000 and 3.37% and
3.18%, respectively, for 1999 and 1998.


                                       17

<PAGE>   24


The following table presents an analysis of the average yields earned and rates
paid for the years indicated.

<TABLE>
<CAPTION>
                                                                             YEARS ENDED DECEMBER 31,
                                               ----------------------------------------------------------------------------------
                                                            2000                      1999                        1998
                                               -------------------------  ----------------------------   --------------------------
                                                        INTEREST  AVERAGE             INTEREST  AVERAGE            INTEREST  AVERAGE
                                                AVERAGE  EARNED/   YIELD/  AVERAGE     EARNED/   YIELD/   AVERAGE   EARNED/   YIELD/
                                                BALANCE   PAID     RATE    BALANCE      PAID     RATE     BALANCE    PAID     RATE
ASSETS                                                                           (DOLLARS IN THOUSANDS)
<S>                                          <C>         <C>       <C>    <C>         <C>        <C>    <C>         <C>       <C>
Interest-earning assets:
  Short-term investments ..................  $    2,262  $   140   6.19   $   10,313  $    518   5.02   $   15,760  $   837   5.31%
  Investment securities (1)(2) ............     223,682   15,271   6.83      160,535    10,212   6.36      109,920    7,340   6.68
  Mortgage-backed securities (1) ..........     124,309    8,719   7.01      138,376     9,028   6.52      177,276   11,711   6.61
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
  Total investments .......................     350,253   24,130   6.89      309,224    19,758   6.39      302,956   19,888   6.56
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
  Residential loans .......................     782,600   54,222   6.93      754,626    51,118   6.77      747,430   52,616   7.04
  Commercial real estate loans ............     243,282   21,664   8.90      171,982    14,959   8.70      145,352   12,927   8.89
  Construction and land loans .............      81,767    8,322  10.18       62,565     5,715   9.13       39,988    3,964   9.91
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
    Total real estate loans(1)(3) .........   1,107,649   84,208   7.60      989,173    71,792   7.26      932,770   69,507   7.45
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
  Consumer loans(3) .......................      74,762    6,455   8.63       60,196     4,781   7.94       65,159    5,531   8.49
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
  Commercial and lease loans(3) ...........      37,492    3,538   9.44       28,717     2,424   8.44       21,368    1,998   9.35
  Lease financing (3) .....................      30,556    2,216   7.25       16,969     1,255   7.40        4,234      322   7.61
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
    Total commercial ......................      68,048    5,754   8.46       45,686     3,679   8.05       25,602    2,320   9.06
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
      Total loans .........................   1,250,459   96,417   7.71    1,095,055    80,252   7.33    1,023,531   77,358   7.56
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
    Total interest-earning assets..........   1,600,712  120,547   7.53    1,404,279   100,010   7.12    1,326,487   97,246   7.33%
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----

Allowance for loan losses .................     (12,873)                     (11,271)                      (11,524)
Other assets ..............................      71,034                       52,878                        52,100
                                             ----------                   ----------                    ----------

    Total assets...........................  $1,658,873                   $1,445,886                    $1,367,063
                                             ==========                   ==========                    ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
  NOW accounts.............................  $  118,719  $ 1,396   1.18%  $   95,390  $    772   0.81%  $   86,028  $   806   0.94%
  Money market deposit accounts ...........     101,827    3,017   2.96       96,184     2,657   2.76      100,751    2,861   2.84
  Savings accounts.........................     228,763    7,938   3.47      210,668     6,770   3.21      176,633    6,256   3.54
  Certificates of deposit .................     525,900   28,615   5.44      473,764    24,142   5.10      510,794   29,214   5.72
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
    Total interest-bearing deposits .......     975,209   40,966   4.20      876,006    34,341   3.92      874,206   39,137   4.48
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
Borrowed funds:
  Other borrowings ........................      89,474    5,455   6.10       44,574     2,146   4.81       11,794      578   4.90
  Federal Home Loan Bank
      advances ............................     331,142   20,423   6.17      296,237    16,214   5.47      269,766   15,300   5.67
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
    Total borrowed funds...................     420,616   25,878   6.15      340,811    18,360   5.39      281,560   15,878   5.64
                                             ----------  -------   ----   ----------  --------   ----   ----------  -------   ----
    Total interest-bearing
       liabilities ........................   1,395,825   66,844   4.79    1,216,817    52,701   4.33    1,155,766   55,015   4.76%
                                             ----------                   ----------                    ----------

Demand deposits............................     114,540                       92,662                       89,051
Other liabilities..........................      10,896                       10,926                       11,104
                                             ----------                   ----------                    ----------
    Total liabilities......................   1,521,261                    1,320,405                    1,255,921

Stockholders' equity.......................     137,612                      125,481                      111,142
                                             ----------                   ----------                    ----------
    Total liabilities and stock-
      holders' equity......................  $1,658,873                   $1,445,886                    $1,367,063
                                             ==========                   ==========                    ==========
Net interest income .......................              $53,703                      $ 47,309                      $42,231
                                                         =======                      ========                      =======
Interest rate spread ......................                        2.74%                         2.79%                        2.57%
                                                                   ====                          ====                         ====

Net yield on earning assets ...............                        3.35%                         3.37%                        3.18%
                                                                   ====                          ====                         ====
</TABLE>

(1)   Included in the average balance amounts are the corresponding components
      of the assets held for sale, available for sale and held to maturity. The
      yield is calculated using interest income divided by the average balance
      of the amortized historical cost.

(2)   Included in the average balance and interest earned amounts is the stock
      in FHLB of Boston.

(3)   Interest on nonaccruing loans has been included only to the extent
      reflected in the statement of operations. However, the loan balances are
      included in the average outstanding.


                                       18
<PAGE>   25


      Rate/Volume Analysis. The following table shows the changes in interest
income and interest expense caused by changes in the volume of interest earning
assets and interest bearing liabilities, and changes in interest rates received
and paid, respectively. The change attributable to a mix of volume and rate has
been allocated proportionally to the change due to volume and the change due to
rate.

<TABLE>
<CAPTION>
                                                                        YEARS  ENDED DECEMBER 31,
                                               -------------------------------------------------------------------------------
                                                    2000 COMPARED TO 1999                            1999 COMPARED TO 1998
                                               ---------------------------------           -----------------------------------
                                                            INCREASE                                    INCREASE
                                                           (DECREASE)                                  (DECREASE)
                                                             DUE TO                                      DUE TO
                                               VOLUME         RATE          TOTAL          VOLUME         RATE           TOTAL
                                               ------         ----          -----          ------         ----           -----
                                                                             (IN THOUSANDS)
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>
Interest and dividend income:
  Investments:
    Short-term investments ............      $   (477)      $     99       $   (378)      $   (276)      $    (43)      $   (319)
    Investment securities .............         4,265            794          5,059          3,235           (363)         2,872
    Mortgage-backed securities ........          (957)           648           (309)        (2,540)          (143)        (2,683)
                                             --------       --------       --------       --------       --------       --------
      Total interest and dividends
      on investments ..................         2,831          1,541          4,372            419           (549)          (130)
                                             --------       --------       --------       --------       --------       --------
  Loans:
    Residential loans .................         1,922          1,182          3,104            503         (2,001)        (1,498)
    Commercial real estate loans ......         6,341            364          6,705          2,322           (290)         2,032
    Construction and land loans .......         1,900            707          2,607          2,084           (333)         1,751
                                             --------       --------       --------       --------       --------       --------
      Total real estate loans .........        10,163          2,253         12,416          4,909         (2,624)         2,285
                                             --------       --------       --------       --------       --------       --------
    Consumer loans ....................         1,231            443          1,674           (407)          (343)          (750)
                                             --------       --------       --------       --------       --------       --------
    Commercial and lease loans ........           804            310          1,114            635           (209)           426
    Lease financing ...................           986            (25)           961            942             (9)           933
                                             --------       --------       --------       --------       --------       --------
      Total commercial ................         1,790            285          2,075          1,577           (218)         1,359
                                             --------       --------       --------       --------       --------       --------
        Total interest on loans .......        13,184          2,981         16,165          6,079         (3,185)         2,894
                                             --------       --------       --------       --------       --------       --------
Total interest and dividend
      income ..........................        16,015          4,522         20,537          6,498         (3,734)         2,764
                                             --------       --------       --------       --------       --------       --------
Interest expense:
  Core deposits .......................         1,252            900          2,152          1,015           (739)           276
  Certificates of deposit .............         2,768          1,705          4,473         (2,026)        (3,046)        (5,072)
  Other borrowings ....................         2,617            692          3,309          1,578            (10)         1,568
  Federal Home Loan Bank advances .....         2,027          2,182          4,209          1,463           (549)           914
                                             --------       --------       --------       --------       --------       --------
    Total interest expense ............         8,664          5,479         14,143          2,030         (4,344)        (2,314)
                                             --------       --------       --------       --------       --------       --------

Net increase (decrease) in net interest
  and dividend income .................      $  7,351       $   (957)      $  6,394       $  4,468       $    610       $  5,078
                                             ========       ========       ========       ========       ========       ========
</TABLE>

      Provision (Credit) for Loan Losses. The allowance for loan losses is
established through a provision for loan losses charged to the statement of
operations. The allowance is reduced by a credit for loan losses as well as loan
charge-offs. Assessing the adequacy of the allowance for loan losses involves
substantial uncertainties and is based upon management's evaluation of the
amounts required to meet possible losses in the loan portfolio after weighing
various factors. Among the factors management may consider are the quality of
specific loans, risk characteristics of the loan portfolio generally, the level
of nonaccruing loans, current economic conditions, trends in delinquencies,
actual charge-off experience, and the collateral values of the underlying
security. Ultimate loan losses may vary significantly from current estimates and
future additions may be necessary. In addition, various regulatory agencies, as
an integral part of their examination process, review the Banks' allowance and
may require the Banks to provide additions to the allowance based on their
assessment, which may differ from management's assessment.


                                       19

<PAGE>   26


      Purchase accounting rules arising from the acquisition of Gloucester
resulted in $1.8 million of the increase in the allowance for loan losses in
2000. In addition, there were provisions for loan losses in 2000 and 1999 of
$1.5 million and $400,000, respectively, as compared to a credit for loan losses
in 1998 of $1.7 million. Net charge-offs amounted to $70,000 in 2000 compared to
net recoveries of $498,000 in 1999, while net charge-offs totaled $330,000 in
1998. The provision for loan losses of $1.5 million in 2000 was primarily due to
the increase in total loans and corporate loans in particular. Corporate loan
originations were the highest ever experienced and totaled over 56% of all
originations as compared to 30% in 1997. The provision for loan losses of
$400,000 in 1999 was taken in the fourth quarter due to the fact that almost
half of the corporate loan growth occurred in the fourth quarter, which when
combined with the sudden deterioration of two lease financing relationships,
necessitated the charge to earnings. The credit for loan losses in 1998 resulted
from a significant improvement in overall loan quality in that year.

      While management believes that it has been reasonable in its analysis of
the allowance for loan losses and in estimating the net fair values of other
real estate owned, management is unable to predict the ultimate course of the
economy or the extent of its impact on the Company's financial condition. See
"Financial Condition -- Risk Elements" and Notes 1 and 4 to the "Consolidated
Financial Statements".

      Non-interest Income. The Company recorded income from non-interest sources
in the amount of $3.5 million in 2000 and $4.2 million in both 1999 and 1998.
The decrease of $711,000 in 2000 was primarily due to net losses from sales of
assets held for sale totaling $1.2 million and investments available for sale
totaling $723,000 partially offset by increased other income.

      The Company recorded net losses from sales of assets held for sale of $1.2
million in 2000, while recording net gains of $17,000 in 1999 and $653,000 in
1998. The Company realized losses of $1.3 million from the sale of $46.0 million
of lower yielding residential loans as part of the third quarter 2000 balance
sheet restructuring. Included in each of the three years were gains totaling
$481,000, $439,000 and $726,000, respectively, from the capitalization of
originated mortgage servicing rights. See "Financial Condition -- Loans" and
Notes 1, 2 and 5 to the "Consolidated Financial Statements".

      Andover may incur gains and losses on the sale of the loans that it
originates. These loans are generally securitized prior to sale in the form of
mortgage-backed securities which are guaranteed by a government agency and are
then held for sale. Because loans held for sale are stated at the lower of cost
or market value and mortgage-backed securities held for sale are stated at fair
value, periods of rising interest rates, such as was experienced in 2000 and
1999, cause the values of loans and mortgage-backed securities held for sale to
decrease, resulting in a charge to income. These losses, resulting from the sale
of originated loans, excluding the impact of any capitalized servicing rights,
totaled $140,000, $398,000 and $79,000, respectively, in 2000, 1999 and 1998.
The Company frequently enters into forward delivery contracts to reduce its
exposure to this risk from rising interest rates. Forward delivery contracts
may, however, increase exposure to the risk from declining interest rates if
sufficient loans or mortgage-backed securities held for sale bearing interest
rates specified by the contracts are not available to meet the delivery
schedules under the contracts. See Note 17 to the "Consolidated Financial
Statements".

      Net losses from sales and redemptions of investments totaled $723,000 in
2000 and $385,000 in 1999, compared to net gains of $17,000 in 1998. In the
third quarter of 2000, approximately $31.7 million of lower yielding investments
were sold at a loss of $718,000 as part of the balance sheet restructuring. In
the third quarter of 1999, approximately $27.6 million of lower yielding
investments available for sale were sold at a loss of $385,000. The reinvestment
of the sales proceeds in each of the years is intended to improve the Company's
net interest margin, and ultimately, to enhance future earnings. See "Financial
Condition -- Investments" and Notes 1 and 3 to the "Consolidated Financial
Statements".

      Mortgage banking income represents the gross servicing fee income less
amortization and provisions or credits for the valuation allowance on the
mortgage servicing assets. The Company retains as a service fee a portion of the
interest paid by the borrower. A credit to the valuation allowance was recorded
in 2000 and 1999 totaling $500,000 and $175,000, respectively, as compared to
provisions charged against earnings totaling $1.5 million for the year ended
December 31, 1998. In a low interest rate environment, the underlying
residential loans may repay faster


                                       20

<PAGE>   27


than expected, causing the fair value of the mortgage servicing assets to
decline as well as reducing the gross cash flows collected on a shrinking
serviced portfolio. This prepayment risk results in increased provisions and
charge-offs to the valuation allowance, and thus lower mortgage banking income.

      Mortgage banking income totaled $1.1 million in 2000, $908,000 in 1999, as
compared to a mortgage banking loss of $389,000 in 1998. The increase in income
in both 2000 and 1999 was mainly due to the change in fair values caused by
higher market interest rates, thereby enabling the Company to record a credit to
the valuation allowance. The gross servicing income has fluctuated over the past
three years but generally corresponds to the level of average loans serviced for
investors.

The table below summarizes the Company's results from servicing loans for
investors.


<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                 ------------------------------------------
                                                   2000            1999            1998
                                                 ---------       ---------       ---------
                                                             (IN THOUSANDS)
<S>                                              <C>             <C>             <C>
Gross servicing income ......................    $   3,193       $   3,219       $   3,137
Amortization ................................       (2,582)         (2,486)         (2,061)
Credit (provisions) for valuation allowance..          500             175          (1,465)
                                                 ---------       ---------       ---------
Net mortgage banking income (loss) ..........    $   1,111       $     908       $    (389)
                                                 =========       =========       =========

Average loans serviced for investors ........    $ 944,238       $ 851,981       $ 887,071
Year-end loans serviced for investors .......    $ 936,026       $ 956,358       $ 894,432
</TABLE>

      During 2000, 1999 and 1998, the Company purchased mortgage servicing
rights to $60.6 million, $233.2 million and $184.7 million, respectively, in
residential first mortgage loans. These purchased balances are included in the
balance of loans serviced for investors. As part of its long-term business plan,
the Company intends to continue purchasing mortgage servicing rights to
maintain, or even increase, the use of its existing servicing capacity as well
as increase non-interest income when it is deemed appropriate. The Company also
expects to continue selling mortgages in the secondary market while retaining
the servicing rights. Therefore, servicing income related to this activity is
accordingly expected to continue for the foreseeable future. See Notes 1 and 5
to the "Consolidated Financial Statements".

      Other income totaled $4.4 million, $3.7 million and $3.9 million in 2000,
1999 and 1998, respectively, and was derived primarily from customer service
charges and fees. Deposit account service charges, representing the largest
component of such other income, totaled $3.0 million in 2000, $2.5 million in
1999 and $2.3 million in 1998. Deposit fees attributable to Gloucester totaled
$291,000 in 2000. Loan late charges and other fees remained relatively flat in
2000 and 1999 and totaled $505,000 and $502,000, respectively and totaled
$703,000 in 1998. The majority of the increase in deposit fee income in each of
the two years is due to increased ATM fee income. As customers increasingly use
debit cards or non-customers use the Banks' multiple ATM's, overall fee income
has increased. The swing in the loan fee income reflect the changes in the
residential loan originations which had increased tremendously in 1998 and then
decreased in 2000 and 1999. Other income totaled $522,000, $432,000 and
$577,000, respectively, for 2000, 1999 and 1998 and includes income from Liberty
Securities, IRA, safe deposit and miscellaneous charges. See Note 13 to the
"Consolidated Financial Statements".

      Non-interest Expense. Non-interest expenses totaled $28.2 million in 2000,
$22.0 million in 1999 and $22.6 million in 1998. The increase in 2000 was
primarily in salaries and benefits expense due to high levels of staffing from
running a larger, more geographically diverse company. The decrease in 1999 was
primarily due to the curtailment and settlement gains of $1.6 million on
terminating the Company's defined benefit plan.

      Salaries and employee benefits, the largest component of non-interest
expense, increased $4.3 million to $15.4 million in 2000 and decreased $893,000
to $11.1 million in 1999. The increase in 2000 was primarily due to the
reduction of $1.6 million in gains in 1999 due to the defined benefit pension
plan termination, staffing costs attributable to Gloucester totaling $787,000,
the introduction of a new money purchase plan which accounted for $463,000 and
the enhanced 401(k) benefits added another $115,000 while the discretionary
incentive program

                                       21

<PAGE>   28

added $206,000 and the costs of running a larger institution. The decrease in
1999 resulted from the previously mentioned gains of $1.6 million from the
termination of the Company's defined benefit pension plan which were reflected
as a reduction of salary and employee benefits. Offsetting the gains in 1999,
however, were increased costs for higher staff levels, merit increases and
employee benefits. See Note 14 to the "Consolidated Financial Statements".

      Office occupancy and equipment increased $531,000 to $3.7 million in 2000
and increased $195,000 to $3.2 million in 1999. The increase in 2000 was
primarily due to the costs attributable to the addition of Gloucester's banking
facilities totaling $365,000. The increase in 1999 was primarily due to
increased depreciation costs on equipment purchases and higher expenses on the
Company's leased properties. See Note 6 to the "Consolidated Financial
Statements".

      Data processing expenses totaled $2.9 million in 2000, $2.4 million in
1999 and $2.1 million in 1998. Data processing expenses increased $554,000 in
2000 due to a higher loan and deposit base resulting primarily from the purchase
of Gloucester which contributed $222,000. The increase of $289,000 in 1999 was
due to the purchase of loans and mortgage loan servicing and internally
generated loan growth. In addition, the various alternative delivery systems,
such as accessing accounts via customers' computers, debit cards and/or the
telephone service center, have caused overall processing costs to increase in
each of the two years. The level of data processing expenses incurred in 1999 on
behalf of the Company's effort in its year 2000 compliance was approximately
$70,000. As the size and complexity of the Company continues to increase, the
information systems needed to support the Company will likely increase.

      Professional fees, including corporate legal and accounting and auditing
expenses, totaled $1.1 million in 2000, $1.2 million in 1999 and $940,000 in
1998. Professional fees decreased $52,000 in 2000 resulting from a reduction in
corporate legal expenses while increasing $238,000 in 1999 due to increased
recruiting expenses and consulting fees.

      Marketing expenses totaled $1.1 million in 2000, $908,000 in 1999 and
$831,000 in 1998. Marketing expenses increased $211,000 in 2000 due to increased
advertising for the Banks' deposit products in light of the large bank
divestitures occurring in the Company's market area. The increase of $77,000 in
1999 is due to an increase in discretionary promotions.

      Mortgage banking expenses totaled $107,000 in 2000, $267,000 in 1999 and
$606,000 in 1998. Costs included in mortgage banking expenses are commissions
and related expenses paid to the mortgage loan originators, net of any deferred
origination expenses, and costs associated with servicing the portfolio for
outside investors. The swing in expenses in each of the two years corresponds to
the reduced level of residential loan origination volume.

      Amortization of goodwill amounted to $300,000 in 2000, resulting from the
acquisition of Gloucester on July 1, 2000.

      Other operating expenses totaled $3.5 million in 2000, $3.0 million in
1999 and $3.1 million in 1998. The increase in 2000 resulted from the continued
growth of the Company in both loans and deposits which impacts office supplies,
printing expenses, postage expenses and others costs. Some of the cost savings
in 1999 resulted from a combination of two subsidiary banks as well as a
continued focus on cost containment, particularly in the area of corporate
insurance and telephone expenses.

      Federal and State Income Tax Expense. The Company recorded tax expenses of
$7.3 million, $10.3 million and $8.2 million in 2000, 1999 and 1998,
respectively, and realized effective tax rates of 27%, 35% and 32%,
respectively. Due to the favorable resolution of several tax issues in 2000, the
Company recorded income tax benefits of $3.0 million. The income tax expense
increase of $2.1 million in 1999 resulted from an increase in pre-tax income of
14.2% offset by tax benefits of $440,000. Notwithstanding the tax benefits in
2000, the Company anticipates a normalized effective tax rate of approximately
37% to 38% in 2001 due to the nondeductibility of the goodwill amortization and
higher effective tax rates for Gloucester. Recognition of deferred tax assets
and liabilities is based on the expected future tax consequences of temporary
differences between the financial reporting


                                       22

<PAGE>   29


and tax basis of the Company's assets and liabilities. Measurement of deferred
tax assets and liabilities is based upon the provision of enacted tax laws and
the effects of future changes in tax laws or rates.

      Management believes the existing net deductible temporary differences that
give rise to the net deferred income tax asset will reverse in periods in which
the Company generates net taxable income. For the years ending December 31,
2000, 1999 and 1998, the Company generated taxable income of approximately $23.0
million, $27.0 million and $22.1 million, respectively. Taxable income differs
from pre-tax book income primarily as a result of loan losses and provision for
losses on other real estate owned being recognized in a different period than
for book income.

      At December 31, 2000, the net deferred tax asset is supported by
recoverable income taxes of approximately $16.9 million. Management believes
that the net deferred income tax asset at December 31, 2000 will be realized
based upon the high level of taxable income in each of the past three years. 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.

      See Note 11 to the "Consolidated Financial Statements" for further
information.

FINANCIAL CONDITION

      Total assets increased $332.2 million, or 22.3%, to $1,823.2 million at
December 31, 2000. The growth in total assets during 2000 was primarily due to
an increase of $223.1 million in total loans and $80.3 million in total
investments. The acquisition of Gloucester was a contributing factor to the
growth in 2000 by adding $132.6 million in total assets. Total assets at
December 31, 1999 amounted to $1,491.1 million, an increase of $80.8 million or
5.7% from $1,410.2 million at December 31, 1998, resulting primarily from an
increase in total loans of $82.3 million.

LOANS

      Total loans at December 31, 2000, prior to the allowance for loan losses,
amounted to $1,356.2 million compared with $1,133.1 million at December 31,
1999, an increase of $223.1 million or 19.7%, primarily due to internally
generated loan growth. The purchase of Gloucester, which accounted for $94.5
million in loans at December 31, 2000, and purchases totaling $59.5 million in
residential and commercial real estate whole loans, were also factors in the
growth achieved by the Company during 2000. As of December 31, 2000, 64.8% of
Andover's total loan portfolio consisted of loans with adjustable rates as
compared to 58.1% at December 31, 1999, reflecting the increased preference of
variable rate products in light of the higher interest rates charged for the
longer term fixed rate products.


                                       23

<PAGE>   30


      The following table shows the composition of the Company's loan portfolio
at the dates indicated. The balances shown are net of unadvanced funds, loan
premiums or discounts and deferred loan origination fees and costs.

<TABLE>
<CAPTION>
                                                                          AT DECEMBER 31,
                                ----------------------------------------------------------------------------------------------------
                                         2000                1999                1998              1997                   1996
                                         ----                ----                ----              ----                   ----
                                                                        (DOLLARS IN THOUSANDS)
<S>                             <C>         <C>     <C>          <C>     <C>          <C>     <C>        <C>      <C>         <C>
Real estate loans:
  Residential ..................$  811,214   59.8%  $  743,747    65.6%  $  740,009    70.4%  $715,503    73.1%   $ 619,955    71.3%
  Commercial ...................   284,419   21.0      207,364    18.3      163,999    15.6    148,462    15.2      142,496    16.4
  Construction and land ........    89,922    6.6       63,660     5.6       56,568     5.4     31,499     3.2       35,001     4.0
                                ----------  -----   ----------   -----   ----------   -----   --------   -----    ---------   -----
       Total real estate loans.. 1,185,555   87.4    1,014,771    89.5      960,576    91.4    895,464    91.5      797,452    91.7
                                ----------  -----   ----------   -----   ----------   -----   --------   -----    ---------   -----
Consumer loans:
  Home equity lines of credit
    and second mortgages .......    75,898    5.6       56,412     5.0       55,691     5.3     58,605     6.0       49,670     5.7
  Other consumer ...............    11,424    0.9        5,419     0.5        6,160     0.6      9,599     1.0        9,554     1.1
                                ----------  -----   ----------   -----   ----------   -----   --------   -----    ---------   -----
    Total consumer loans .......    87,322    6.5       61,831     5.5       61,851     5.9     68,204     7.0       59,224     6.8
                                ----------  -----   ----------   -----   ----------   -----   --------   -----    ---------   -----
Commercial loans:
  Commercial and lease loans ...    47,828    3.5       27,378     2.4       18,365     1.7     14,325     1.5       13,359     1.5
  Lease financing ..............    35,476    2.6       29,121     2.6        9,973     1.0        830      --           --      --
                                ----------  -----   ----------   -----   ----------   -----   --------   -----    ---------   -----
    Total commercial loans .....    83,304    6.1       56,499     5.0       28,338     2.7     15,155     1.5       13,359     1.5
                                ----------  -----   ----------   -----   ----------   -----   --------   -----    ---------   -----

  Total loans .................. 1,356,181  100.0%   1,133,101   100.0%   1,050,765   100.0%   978,823   100.0%     870,035   100.0%
                                            =====                =====                =====              =====                =====
Allowance for loan losses ......   (14,640)            (11,384)             (10,486)           (12,521)             (12,229)
                                ----------          ----------           ----------           --------            ---------

  Net loans.....................$1,341,541          $1,121,717           $1,040,279           $966,302            $ 857,806
                                ==========          ==========           ==========           ========            =========
</TABLE>

      Total real estate loans, which represent the largest component of the loan
portfolio, increased $170.8 million in 2000 to $1,185.6 million at December 31,
2000, due to real estate loan originations of $321.4 million and the purchase of
Gloucester which contributed $72.2 million. Origination volumes are sensitive to
market rates, particularly in the residential loan refinancing arena. As
indicated by the following table, total loan originations were the highest in
1998, a year with low interest rates throughout the year. At the start of 1999,
low interest rates prevailed but in the spring of 1999, market interest rates
increased, a trend that continued through the middle part of 2000, when longer
term interest rates declined. However, total loan originations were strong in
each of the other years but the mix between retail and corporate originations,
and even in fixed rate versus variable rate products, change in relation to the
level of mortgage refinance activity.

The following table shows the composition of the Company's loan originations and
loan purchases, including the results of Gloucester subsequent to July 1, 2000,
for the years indicated:

<TABLE>
<CAPTION>
                                                                YEARS  ENDED DECEMBER 31,
                                             ------------------------------------------------------------
                                               2000        1999          1998        1997         1996
                                             --------     --------     --------     --------     --------
                                                                     (IN THOUSANDS)
<S>                                          <C>          <C>          <C>          <C>          <C>
Retail loans:
  Residential fixed rate loans .........     $ 31,975     $ 82,500     $212,248     $ 81,342     $ 89,830
  Residential variable rate loans ......      112,543       91,321      117,146       83,917       78,453
                                             --------     --------     --------     --------     --------
    Total residential originations .....      144,518      173,821      329,394      165,259      168,283
                                             --------     --------     --------     --------     --------
  Home equity lines of credit
    and second mortgages ...............       30,544       22,471       22,562       28,486       25,411
  Other consumer .......................        6,399        4,881        5,489        6,029        6,149
                                             --------     --------     --------     --------     --------
    Total consumer originations ........       36,943       27,352       28,051       34,515       31,560
                                             --------     --------     --------     --------     --------
     Total retail originations .........      181,461      201,173      357,445      199,774      199,843
                                             --------     --------     --------     --------     --------
Corporate loans:
  Commercial real estate loans .........       61,062       68,318       64,662       32,858       32,800
  Construction and land loans ..........      115,844       52,941       51,852       31,800       41,888
  Commercial and lease loans ...........       41,087       33,330       24,296       18,591       19,732
  Lease financing ......................       11,849       22,735       13,098          830         --
                                             --------     --------     --------     --------     --------
    Total corporate originations .......      229,842      177,324      153,908       84,079       94,420
                                             --------     --------     --------     --------     --------
  Residential and commercial real estate
      whole loan purchases .............       59,457       38,346       22,875       71,297       32,474
                                             --------     --------     --------     --------     --------
Total loan originations and purchases ..     $470,760     $416,843     $534,228     $355,150     $326,737
                                             ========     ========     ========     ========     ========
</TABLE>

                                       24

<PAGE>   31

      Residential loan originations totaled $144.5 million in 2000, $173.8
million in 1999 and $329.4 million in 1998. It should be noted that 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 the new loan
production. As mentioned above, the originations of residential loans are
sensitive to market interest rates. As a result, 1998 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. Andover 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 directly amounted to $20.7 million in 2000,
$1.4 million in 1999 and $6.1 million in 1998. Those sold in the form of
mortgage-backed securities held for sale or available for sale totaled $31.4
million, $32.3 million and $53.3 million, respectively, in 2000, 1999 and 1998.
Included in these amounts are the loans sold as part of the balance sheet
restructuring in 2000 in the amount of $46.0 million. The portfolio of
residential mortgage loans serviced for others totaled $936.0 million at
December 31, 2000, compared to $956.4 million at December 31, 1999 and $894.4
million at December 31, 1998.

      Commercial real estate loans increased $77.1 million in 2000 to $284.4
million at December 31, 2000, while construction and land loan balances
increased $26.3 million to $89.9 million in the same period. Outstanding
commercial loans increased $26.8 million in 2000 to $83.3 million at December
31, 2000. While originations of corporate loans, comprised of commercial real
estate, commercial, construction and land loans and lease financings, are
sensitive to the interest rate environment; a customer's capacity for borrowing,
real estate values and current and anticipated economic conditions have a more
critical role. Origination volumes for these loan types have increased
substantially in 2000, reflecting increasing real estate values, higher capacity
for borrowings, as well as the Company's continued interest in corporate
lending. Total originations of corporate loans were $229.8 million in 2000,
$177.3 million in 1999 and $153.9 million in 1998. The level of corporate
originations in 2000 exceeded the level of retail originations for the first
time. Not all originations reflect the balances advanced at the time of
origination due to amounts available for future commitments, nor does it reflect
the level of prepayments experienced in the corporate loan portfolio.

      Commercial real estate, construction and land, commercial loans and lease
financing involve significant risks compared with single-family residential
mortgage and consumer lending. See Item 1, "Business -- Lending Activities".

      Consumer loans outstanding increased to $87.3 million at December 31,
2000, after decreasing in 1999 and 1998. Over the past several years, the
Company has aggressively priced its home equity lines of credit and second
mortgage loans, thereby keeping originations of these loans in excess of $20
million per year. Other consumer loans include collateral loans and installment
loans. Originations of consumer loans are also sensitive to changes in the
interest rate environment and increasing real estate values.

RISK ELEMENTS

      The following table shows the composition of non-performing assets at
December 31:

<TABLE>
<CAPTION>
                                       2000          1999          1998          1997          1996
                                       ----          ----          ----          ----          ----
                                                             (DOLLARS IN THOUSANDS)

<S>                                   <C>           <C>           <C>           <C>           <C>
Nonaccruing loans .................   $ 1,676       $ 2,456       $ 3,240       $ 7,849       $10,699
Other real estate owned ...........        30            41           252           406         1,683
                                      -------       -------       -------       -------       -------
     Total non-performing assets...   $ 1,706       $ 2,497       $ 3,492       $ 8,255       $12,382
                                      =======       =======       =======       =======       =======

Total non-performing assets as a
  percentage of total assets ......       0.1%          0.2%          0.2%          0.6%          1.0%
</TABLE>

                                       25
<PAGE>   32

      During 2000, continued progress was made in reducing non-performing assets
with a decline of $791,000 or 31.7%, primarily due to a reduction of nonaccruing
loans. Loans transferred into other real estate owned totaled $269,000, $395,000
and $773,000 in 2000, 1999 and 1998, respectively.

      While the Company has experienced the lowest level of non-performing
assets since 1987, there is a heightened awareness of any changes in the local
economy or real estate values which may have an impact on the continued success
in keeping the non-performing assets and delinquent loans to a minimum. For
instance, approximately 29% and 14% of the total balances in the lease financing
portfolio are represented by the manufacturing and retail sectors, respectively,
which have experienced overall slowness in their respective industries. The
Company has been monitoring a potential problem loan in the amount of $2.5
million, which is included in the accruing commercial portfolio as of December
31, 2000. The borrower with this potential problem loan manufactures products
for the automobile industry and has communicated that it is experiencing
difficulties in paying its obligations and may need to engage in a restructuring
of its debt in order to fulfill its financial obligations. The Company is
currently analyzing the status of this loan as it is possible this loan will be
placed on nonaccrual status.

      At December 31, 2000, total impaired loans were $2.0 million, of which
$372,000 had related allowances of $122,000 and $1.6 million which did not
require a related impairment allowance. All of the $2.0 million in impaired
loans have been measured using the fair value of the collateral method. During
the year ended December 31, 2000, the average recorded value of impaired loans
was $2.6 million and the related amount of interest income recognized was
$36,000.

      See Notes 1 and 4 to the "Consolidated Financial Statements" for further
information.

      Nonaccruing Loans. Management places loans, regardless of collateral
values, on nonaccrual status when principal or interest is past due 90 days or
more. All previously accrued but uncollected interest is reversed against
current period interest income when a loan is placed on nonaccrual status. Loans
for which payments are less than 90 days past due are placed on nonaccrual
status when concern exists as to the collection of principal or interest.
Non-performing loans are not returned to performing status until the obligation
is brought current and when concern no longer exists as to the collectibility of
principal or interest.

      The following table shows the composition of nonaccruing loans at
December 31:

<TABLE>
<CAPTION>
                                           2000         1999           1998         1997          1996
                                           ----         ----           ----         ----          ----
                                                              (DOLLARS IN THOUSANDS)

<S>                                      <C>           <C>           <C>           <C>           <C>
Residential real estate .............    $   342       $   588       $   932       $ 2,436       $ 2,838
Commercial real estate ..............        799         1,308         2,023         4,866         6,901
Construction and land ...............       --            --            --            --              79
Commercial and lease loans ..........        382           101           255           513           727
Lease financing .....................        100           435          --            --            --
Consumer ............................         53            24            30            34           154
                                         -------       -------       -------       -------       -------
  Total nonaccrual loans ............    $ 1,676       $ 2,456       $ 3,240       $ 7,849       $10,699
                                         =======       =======       =======       =======       =======

Allowance for loan losses ...........    $14,640       $11,384       $10,486       $12,521       $12,229
                                         =======       =======       =======       =======       =======
Allowance for loan losses as a
  percentage of nonaccruing loans....      873.5%        463.5%        323.6%        159.5%        114.3%

Allowance for loan losses as a
  percentage of total loans .........        1.1           1.0           1.0           1.3           1.4
</TABLE>

      During 2000, loans on nonaccrual decreased 31.8% to $1.7 million,
throughout most loan categories. Interest income of approximately $482,000 would
have been recorded in 2000 on nonaccruing loans if those loans had been on a
current basis in accordance with their original terms. Interest income actually
recognized in 2000 on


                                       26

<PAGE>   33


nonaccruing loans amounted to approximately $174,000. In addition, $91,000 in
interest payments were received on nonaccruing loans during 2000 and applied as
a reduction of the loan balance instead of as interest income.

      Other Real Estate Owned. Andover's other real estate owned has
consistently declined over the last several years as economic conditions and
real estate values have improved. The valuation allowance represents
management's estimate of the net fair value of other real estate owned.

      The following table shows the composition of other real estate owned at
December 31:

<TABLE>
<CAPTION>
                                         2000          1999           1998         1997          1996
                                         ----          ----           ----         ----          ----
                                                               (IN THOUSANDS)

<S>                                     <C>           <C>           <C>           <C>           <C>
Other real estate owned ............    $    50       $    61       $   293       $   641       $ 1,859
Valuation allowance ................        (20)          (20)          (41)         (235)         (176)
                                        -------       -------       -------       -------       -------
     Total other real estate owned..    $    30       $    41       $   252       $   406       $ 1,683
                                        =======       =======       =======       =======       =======
</TABLE>

      All other real estate owned is carried at the lower of the carrying value
of the loan or the net fair value of the property. Initial writedowns to net
fair value are charged to the allowance for loan losses and totaled $50,000 in
2000, $104,000 in 1999 and $172,000 in 1998. There were no subsequent provisions
taken in 2000. In 1999 and 1998, credit provisions were taken to reduce the
valuation allowance in the amount of $20,000 and $107,000, respectively. Gains
of $64,000, $52,000 and $50,000 were recognized on sales of $344,000, $678,000
and $1.1 million in other real estate owned in 2000, 1999 and 1998,
respectively.

      Allowance for Loan Losses. The following table summarizes the activity in
Andover's allowance for loan losses during the five years ended December 31:

<TABLE>
<CAPTION>
                                             2000            1999            1998            1997            1996
                                             ----            ----            ----            ----            ----
                                                                    (DOLLARS IN THOUSANDS)
<S>                                        <C>             <C>             <C>             <C>             <C>
Balance at beginning of year ........      $ 11,384        $ 10,486        $ 12,521        $ 12,229        $ 11,665
Balance of acquired institution .....         1,826            --              --              --              --
Provision (credit) for loan losses ..         1,500             400          (1,705)            983           2,555

Charge-offs:
     Residential real estate ........           (17)            (97)           (223)           (767)           (822)
     Commercial real estate .........           (16)            (20)           (739)           (920)         (2,208)
     Construction and land ..........          --              --              --              --              --
     Commercial and lease loans .....           (77)           (162)            (37)            (90)           (100)
     Lease financing ................          (652)           (462)           (491)           --              --
     Consumer .......................            (8)             (7)            (10)            (27)           (153)
                                           --------        --------        --------        --------        --------
     Total charge-offs ..............          (770)           (748)         (1,500)         (1,804)         (3,283)
                                           --------        --------        --------        --------        --------
Recoveries:
     Residential real estate ........            17              30              80              27              45
     Commercial real estate .........           255             706             400             142             178
     Construction and land ..........          --                19             371             324             588
     Commercial and lease loans .....           214             289             289             597             461
     Lease financing ................           206             180            --              --              --
     Consumer .......................             8              22              30              23              20
                                           --------        --------        --------        --------        --------
     Total recoveries ...............           700           1,246           1,170           1,113           1,292
                                           --------        --------        --------        --------        --------
Net (charge-offs) recoveries ........           (70)            498            (330)           (691)         (1,991)
                                           --------        --------        --------        --------        --------

Balance at end of year ..............      $ 14,640        $ 11,384        $ 10,486        $ 12,521        $ 12,229
                                           ========        ========        ========        ========        ========

Ratio of net (charge-offs) recoveries
  to average loans outstanding ......         (0.01)%          0.05%          (0.03)%         (0.08)%         (0.24)%
</TABLE>


                                       27
<PAGE>   34


      The allowance for loan losses as a percentage of total loans was 1.1% at
December 31, 2000 while it remained stable at 1.0% at both December 31, 1999,
and December 31, 1998. While the Company had previously experienced four years
with loan recoveries in excess of $1.1 million each, this trend did not continue
in 2000; nor is it expected to continue in the future. Management analyzes the
adequacy of the allowance for loan losses on a quarterly basis. See "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 in order to
maintain an adequate allowance. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Banks'
allowance for loan losses. Such agencies may require the Banks 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 specific 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.

      The changes in the allowance allocated to each category of loan directly
corresponds to the level of nonaccrual loans and adversely classified loans as
well as the level of outstanding loans. Andover historically has experienced
lower losses in its residential mortgage loan portfolio and, therefore,
allocations applicable to this portfolio are lower.

      The following table summarizes the allocation of the allowance for loan
losses at December 31:

<TABLE>
<CAPTION>

                                2000                   1999                  1998                 1997                  1996
                         --------------------- --------------------  -------------------  --------------------  --------------------
                                        LOAN                LOAN                 LOAN                 LOAN                  LOAN
                                     CATEGORY             CATEGORY             CATEGORY             CATEGORY              CATEGORY
                                    AS A % OF             AS A % OF           AS A % OF              AS A % OF           AS A % OF
                                       TOTAL                TOTAL                TOTAL                 TOTAL                TOTAL
                          AMOUNT       LOAN      AMOUNT     LOAN       AMOUNT    LOAN       AMOUNT     LOAN      AMOUNT     LOAN
LOAN CATEGORY            ALLOCATED  PORTFOLIO  ALLOCATED  PORTFOLIO  ALLOCATED PORTFOLIO  ALLOCATED  PORTFOLIO  ALLOCATED  PORTFOLIO
-------------            ---------  ---------  ---------  ---------  -------------------  ---------  ---------  ---------  ---------
                                                                    (DOLLARS IN THOUSANDS)
<S>                       <C>        <C>       <C>           <C>       <C>       <C>       <C>           <C>    <C>          <C>
Real estate:
  Residential............ $ 2,336     60%      $ 2,346        66%      $ 2,341    70%      $ 2,399        73%   $ 2,154       71%
  Commercial............    5,901     21         5,017        18         4,425    16         5,526        15      5,952       16
  Construction and land.    1,913      6         1,470         6         1,256     5           697         3        802        4
                          -------    ---       -------       ---       -------   ---       -------       ---    -------      ---
    Total real estate....  10,150     87         8,833        90         8,022    91         8,622        91      8,908       91
Consumer.................     524      6           358         5           365     6           421         7        392        7
Commercial and lease
  loans..................   1,220      4           992         2           716     2           798         2        848        2
Lease financing..........   1,086      3           801         3           274     1            23        --         --       --
Unallocated..............   1,660     --           400        --         1,109    --         2,657        --      2,081       --
                          -------    ---       -------       ---       -------   ---       -------       ---    -------      ---

     Totals.............. $14,640    100%      $11,384       100%      $10,486   100%      $12,521       100%   $12,229      100%
                          =======    ===       =======       ===       =======   ===       =======       ===    =======      ===
</TABLE>


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


                                       28

<PAGE>   35


INVESTMENTS

      Andover's investment portfolio totaled $367.0 million as of December 31,
2000, of which Gloucester's investments added $19.5 million. Investments totaled
$286.7 million as of December 31, 1999. The Company manages the investment
portfolio in accordance with an investment policy adopted by the Board of
Directors. The primary objectives are to provide interest and dividend income,
to ensure adequate liquidity and to achieve an acceptable asset/liability gap
position while diversifying the asset mix. The investment portfolio is also
evaluated in comparison to returns that are earned by the loan portfolio.

      During the third quarter of 2000, the Company sold lower yielding
investment securities totaling $31.7 million at a loss of $718,000. These
included a U.S. government obligation, a federal agency, FNMA pass-through
certificates, and FHLMC participation certificates. During the third quarter of
1999, approximately $27.6 million of lower yielding investments were sold at a
loss of $385,000. These included U.S. government obligations and GNMA
mortgage-backed securities. The reinvestment of the sales proceeds in both years
was intended to enhance future earnings.

      The principal component of the total investment portfolio is corporate
bonds, which accounted for 38.5% of total investments at December 31, 2000.
Mortgage-backed securities used to account for the majority of the investment
portfolio and account for 30.2% at December 31, 2000, down from 43.0% of total
investments as of December 31, 1999. The remaining portion of the total
investment portfolio consists of U.S. government and federal agency obligations,
short-term investments, equity securities and other investment grade securities.

      All of the mortgage-backed securities represent undivided interests in
pools of mortgages which have been formed into pass-through securities and sold
to investors by GNMA, FHLMC and FNMA. Securities issued by GNMA, a wholly-owned
U.S. government corporation, are fully guaranteed as to the timely payment of
principal and interest. Securities issued by FHLMC and FNMA, which are
government sponsored corporations, carry each corporation's guarantee as to the
timely payment of interest and the ultimate payment of principal. Cash flows
from the underlying mortgages of all mortgage-backed securities are passed
through to Andover in the form of monthly payments of interest, scheduled
principal amortization, and prepayments of mortgage balances. These securities,
therefore, have unpredictable cash flows. Principal repayments on all
mortgaged-backed securities in the investment portfolio totaled $24.0 million in
2000 as compared to $54.4 million in 1999, reflecting, among other things, the
slowdown in the mortgage refinance market due to higher market interest rates.
The approximate market value of adjustable rate mortgage-backed securities
included in the investment portfolio totaled $9.4 million at December 31, 2000,
as compared to $11.6 million at December 31, 1999, primarily due to the sale of
investments mentioned above.

      The carrying amount of callable securities included in investments
available for sale and investments held to maturity totaled $29.6 million and
$8.5 million, respectively, as of December 31, 2000.


                                       29

<PAGE>   36


      The following table sets forth information regarding the carrying amounts
of the investment portfolio at December 31:

<TABLE>
<CAPTION>
                                                         2000          1999         1998
                                                       --------      --------      --------
                                                                  (IN THOUSANDS)

<S>                                                    <C>           <C>           <C>
SHORT-TERM INVESTMENTS ..........................      $ 29,300      $  1,600      $ 16,100
                                                       ========      ========      ========
INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
Common stocks ...................................      $  3,494      $  1,248      $    537
                                                       --------      --------      --------

U.S. government and federal agency obligations ..        73,691        65,191        62,556
Other bonds and obligations .....................       140,457        84,336        37,561
                                                       --------      --------      --------
  Total bonds and obligations ...................       214,148       149,527       100,117
                                                       --------      --------      --------

GNMA mortgage-backed securities .................        29,387        27,381        35,884
FHLMC participation certificates ................        18,366        19,118        26,981
FNMA pass-through certificates ..................        11,986        11,433         2,509
Collateralized mortgage obligations .............        11,774        12,663          --
                                                       --------      --------      --------
  Total mortgage-backed securities ..............        71,513        70,595        65,374
                                                       --------      --------      --------
    Total investments available for sale ........      $289,155      $221,370      $166,028
                                                       ========      ========      ========

INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST):
U.S. government and federal agency obligations ..      $  8,500      $  8,507      $  8,526
Other bonds and obligations .....................         1,005         2,514         4,545
                                                       --------      --------      --------
  Total bonds and obligations ...................         9,505        11,021        13,071
                                                       --------      --------      --------

FNMA pass-through certificates ..................        17,917        24,082        35,435
FHLMC participation certificates ................        12,207        18,073        30,207
GNMA mortgage-backed securities .................         1,573         1,923         2,576
Collateralized mortgage obligations .............         7,042         8,268        19,080
Other asset-backed securities ...................           289           385           551
                                                       --------      --------      --------
  Total mortgage-backed securities ..............        39,028        52,731        87,849
                                                       --------      --------      --------
    Total investments held to maturity ..........      $ 48,533      $ 63,752      $100,920
                                                       ========      ========      ========

      Total investments .........................      $366,988      $286,722      $283,048
                                                       ========      ========      ========
</TABLE>

      Debt securities are classified as held to maturity only when there is
positive intent and ability to hold them to maturity. Such securities are
recorded at amortized cost. Trading securities are debt and equity securities
held principally for the purpose of selling in the near term. The Company does
not have any securities designated as trading securities. Such securities are
recorded at fair value, with unrealized gains and losses recorded in earnings.
Investments available for sale are any debt or equity security not classified as
either held to maturity or trading securities. Investments available for sale
are recorded at fair value with any changes in fair value recorded as a separate
component of stockholders' equity, net of related income taxes.

      See Notes 1, 2 and 3 to the "Consolidated Financial Statements" for
further information.

      There was a fair value increase of $11.9 million in the investment
portfolio, from a net unrealized loss of $6.2 million at December 31, 1999 to a
net unrealized gain of $5.7 million at December 31, 2000, resulting from the
changes in market interest rates as mentioned previously. Changes in interest
rates and their impact on the unrealized gain or loss in the investment
portfolio are not material factors in the Company's overall investment strategy.
This is largely due to the fact that neither the changes nor their impact can be
controlled by the Company.

                                       30

<PAGE>   37


      The following table presents unrealized gains and losses by major
categories of securities at December 31, 2000. The net unrealized gains of $5.3
million on investments available for sale are included in stockholders' equity,
net of applicable income taxes at December 31, 2000. At that date, Andover's net
unrealized gains on investments held to maturity amounted to $481,000.

<TABLE>
<CAPTION>
                                                    UNREALIZED     UNREALIZED
                                                       GAINS         LOSSES
                                                       -----         ------
                                                           (IN THOUSANDS)
<S>                                                   <C>            <C>
INVESTMENTS AVAILABLE FOR SALE:

Common stocks ..................................      $   864        $   --
U.S. government and federal agency obligations..        1,649           (130)
Other bonds and obligations ....................        2,234           (752)
Mortgage-backed securities .....................        1,561           (173)
                                                      -------        -------
  Total investments available for sale .........      $ 6,308        $(1,055)
                                                      =======        =======
INVESTMENTS HELD TO MATURITY:

U.S. government and federal agency obligations..      $     2        $   --
Other bonds and obligations ....................           17            --
Mortgage-backed securities .....................          543            (81)
                                                      -------        -------
  Total investments held to maturity ...........      $   562        $   (81)
                                                      =======        =======

  Total unrealized gains and losses ............      $ 6,870        $(1,136)
                                                      =======        =======
</TABLE>

      The following table presents an analysis of the maturity distribution and
average yields of investments available for sale and held to maturity at
December 31, 2000. Callable investments available for sale and investments held
to maturity are shown in the periods corresponding to their scheduled maturity
without regard to call dates. Mortgage-backed securities are shown in the
periods corresponding to scheduled principal amortization computed based on
their weighted average maturities and weighted average rates without regard to
prepayments.

<TABLE>
<CAPTION>
                                                                        LENGTH OF TIME TO MATURITY
                                                                        --------------------------
                                                               AFTER ONE        AFTER FIVE
                                                                YEAR BUT        YEARS BUT
                                             WITHIN              WITHIN           WITHIN             AFTER
                                           ONE YEAR            FIVE YEARS        TEN YEARS          TEN YEARS             TOTAL
                                        --------------     ----------------    --------------    ---------------    ----------------
                                        AMOUNT   YIELD     AMOUNT     YIELD    AMOUNT   YIELD    AMOUNT    YIELD    AMOUNT     YIELD
                                        ------   -----     ------     -----    ------   -----    ------    -----    ------     -----
                                                                      (DOLLARS IN THOUSANDS)
<S>                                    <C>        <C>     <C>         <C>      <C>       <C>     <C>       <C>     <C>         <C>
Short-term investments .............   $29,300    5.94%   $     --     .--%    $    --    .--%   $    --    .--%   $ 29,300    5.94%
                                       =======    ====    ========    ====     =======   ====    =======   ====    ========
Investments available for sale:
  Total bonds and obligations ......   $16,647    6.46%   $144,417    6.91%    $49,213   6.96%   $ 3,871   5.68%   $214,148    6.86%
  Total mortgage-backed
    securities .....................     3,435    7.13      15,947    7.14      26,472   7.12     25,659   7.10      71,513    7.12
                                       -------    ----    --------    ----     -------   ----    -------   ----    --------    ----
      Total investments
        available for sale..........   $20,082    6.57%   $160,364    6.93%    $75,685   7.02%   $29,530   6.91%   $285,661    6.93%
                                       =======    ====    ========    ====     =======   ====    =======   ====    ========    ====
Investments held to maturity:
  Total bonds and obligations ......   $ 1,005    8.37%   $  8,500    6.52%    $    --     --%   $    --     --%   $  9,505    6.72%
  Total mortgage-backed
    securities .....................     2,139    6.92       9,153    6.92      13,694   6.99     14,042   6.97      39,028    6.96
                                       -------    ----    --------    ----     -------   ----    -------   ----    --------    ----
      Total investments held
        to maturity ................   $ 3,144    7.38%   $ 17,653    6.73%    $13,694   6.99%   $14,042   6.97%   $ 48,533    6.91%
                                       =======    ====    ========    ====     =======   ====    =======   ====    ========    ====

Total investments ..................   $52,526    6.27%   $178,017    6.91%    $89,379   7.01%   $43,572   6.93%   $363,494    6.85%
                                       =======    ====    ========    ====     =======   ====    =======   ====    ========    ====
</TABLE>


                                       31

<PAGE>   38

DEPOSITS

      Total deposits increased $252.7 million during 2000 to $1,221.2 million at
December 31, 2000, of which Gloucester contributed $108.7 million, compared to a
decrease of $20.1 million during 1999. This increase was most pronounced in
certificates of deposit which increased $95.7 million during 2000 although the
balances decreased $13.3 million in 1999. In addition, demand deposit accounts
rose by $58.8 million during 2000 while decreasing $16.2 million in 1999. The
rise in NOW account balances totaled $52.1 million in 2000 compared with a
decrease of $3.6 million in 1999. Savings accounts increased $33.5 million and
$14.0 million in 2000 and 1999, respectively. The popularity of these accounts
was primarily due to the introduction of a tiered savings product offering
customers a premium rate on balances in excess of $50,000. This premium product
represents more than half of the savings account balances in each of the past
two years. Money market accounts increased $12.5 million in 2000 from a decrease
of $1.0 million in 1999.

      See Note 8 to the "Consolidated Financial Statements" for further
information.

      The following table reflects the balance of deposit accounts of Andover at
each date indicated and the weighted average interest rates at December 31:

<TABLE>
<CAPTION>
                                               2000                       1999                        1998
                                  ---------------------------  --------------------------- ----------------------------
                                                     WEIGHTED                     WEIGHTED                     WEIGHTED
                                             PERCENT  AVERAGE            PERCENT  AVERAGE             PERCENT   AVERAGE
                                                OF   INTEREST               OF    INTEREST              OF     INTEREST
                                   AMOUNT     TOTAL   RATE     AMOUNT     TOTAL     RATE    AMOUNT     TOTAL     RATE
                                   ------     -----   ----     ------     -----     ----    ------     -----     ----
                                                                (DOLLARS IN THOUSANDS)

<S>                             <C>          <C>      <C>    <C>          <C>       <C>    <C>          <C>       <C>
Demand deposit accounts ....... $  145,660    11.9%    .--%  $ 86,871       9.0%     .--%  $103,029      10.4%     .--%
NOW accounts ..................    151,168    12.4    1.38     99,040      10.2     0.76    102,635      10.4     0.79
Money market deposit accounts..    107,814     8.8    2.97     95,291       9.8     2.75     96,332       9.7     2.77
Savings accounts ..............    246,812    20.2    3.65    213,286      22.0     3.25    199,304      20.2     3.19
Variable rate certificates ....     23,006     1.9    6.68      3,434       0.4     4.59      4,463       0.5     4.31
Fixed rate certificates .......    546,729    44.8    5.78    470,611      48.6     5.05    482,893      48.8     5.53
                                ----------   -----           --------     -----            --------     ----
  Total deposits .............. $1,221,189   100.0%   3.88%  $968,533     100.0%    3.53%  $988,656     100.0%    3.72%
                                ==========   =====    ====   ========     =====     ====   ========     =====     ====
</TABLE>


      Deposits are derived from customers who work or reside in the Company's
market area and surrounding communities, and from businesses located in that
area. Brokered deposits totaled $45.0 million at December 31, 2000. There were
no brokered deposits in each of the prior two years.

      The following table presents Andover's outstanding time certificates in
denominations of $100,000 or greater, with remaining maturities at December 31:

<TABLE>
<CAPTION>

REMAINING TERM TO MATURITY                               2000               1999                1998
--------------------------                               ----               ----                ----
                                                                       (IN THOUSANDS)

<S>                                                    <C>                 <C>                 <C>
Three months or less.................................  $ 29,715            $18,448             $21,612
Over three months to six months......................    50,371             18,421              24,751
Over six months to twelve months.....................    40,025             21,701              23,114
Over twelve months...................................    37,343             32,781              17,711
                                                       --------            -------             -------
    Total............................................  $157,454            $91,351             $87,188
                                                       ========            =======             =======
</TABLE>

BORROWINGS

      Total borrowings increased $56.8 million in 2000 to $436.2 million at
December 31, 2000, and increased $95.6 million during 1999 to $379.4 million at
December 31, 1999. In order to fund the strong growth in total assets in 2000,
the Banks have increased their reliance on borrowed funds to supplement the
growth in total deposits. The Banks will continue to rely on borrowed funds as
an alternative source of funds in order to grow interest earning assets. The
Banks have multiple sources for borrowed funds, including their primary source,
the FHLB of Boston.

                                       32

<PAGE>   39


      The weighted average rate on the total borrowings rose to 6.07% at
December 31, 2000, from 5.31% at December 31, 1999, and 5.64% at December 31,
1998. The rise in the weighted average interest rate since year end 1999 was due
to the increase in interest rates experienced in 2000. The decline in the
weighted average interest rate in 1999 was due to a change in the mix of
borrowed funds and reflects the shorter term maturities during 1999. Borrowed
funds, maturing within one year or with an initial call date within one year as
of December 31, 2000, were approximately 86.8% as compared to 81.4% at December
31, 1999. This shorter term position will enable the Company to take advantage
of falling interest rates in the early part of 2001.

      The amount of callable advances included in total borrowings totaled
$193.0 million as of December 31, 2000. These advances are callable at the
discretion of the FHLB of Boston, starting in 2001 and at regular intervals
thereafter.

See Notes 9 and 10 to the "Consolidated Financial Statements" for further
information.

ASSET AND LIABILITY MANAGEMENT AND MARKET RISK

      The Banks' earnings are largely dependent on its net interest income,
which is the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities. The Company seeks to manage its exposure
to changes in interest rates, or market risk, through active monitoring and
management of its interest rate risk exposure. The policies and procedures for
managing both on and off balance sheet activities are established by Andover's
asset/liability management committee (ALCO). The Board of Directors reviews and
approves the ALCO policy annually and monitors its related activities on an
ongoing basis.

      Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities.

      The main objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the Company's net interest income
and to preserve capital, while adjusting the Company's asset/liability structure
to obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset/liability structure to control interest rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis.

      The following two tables reflect different methods of disclosing the
Company's exposure to a change in interest rates and its potential impact on the
Company's net interest income. The gap analysis uses estimated prepayments,
contractual maturities and next repricing dates while the market risk analysis
excludes the next repricing dates. The interest rate sensitivity of the
Company's assets and liabilities in both tables would vary substantially if
different assumptions were used or if actual experience differs from the
assumptions provided.

      One method used to measure the interest rate risk exposure is the
Company's gap analysis, which involves comparing the difference between assets
and liabilities that mature or reprice during a given period of time. These
differences are a primary component of the risk to net interest income. A gap is
considered positive when the amount of interest sensitive assets exceeds the
amount of interest sensitive liabilities. A gap is considered negative when the
amount of interest sensitive liabilities exceeds the amount of interest
sensitive assets. A positive gap would produce increased net interest income
during a period of rising interest rates and decreased net interest income when
interest rates decline. A negative gap would have the reciprocal impact on net
interest income.

      The primary cause for the change in the Company's gap position from
December 31, 1999 to December 31, 2000, was the prepayment speeds used on the
residential loan and mortgage-backed securities portfolios from one year to the
next. This resulted in a negative gap position of 16.0% at December 31, 2000, as
compared to a negative gap position of 22.4% at December 31, 1999.


                                       33
<PAGE>   40


     The following table illustrates the Company's gap position, or the
estimated maturity and repricing structure of its interest sensitive assets and
interest sensitive liabilities, at December 31, 2000.

<TABLE>
<CAPTION>

                                            1-180         181-365          >1-3         >3-5           5+
                                            DAYS           DAYS           YEARS         YEARS         YEARS        TOTAL
                                            ----           ----           -----         -----         -----        -----
                                                                        (DOLLARS IN THOUSANDS)
<S>                                      <C>            <C>            <C>            <C>           <C>           <C>
Interest sensitive assets:
  Fixed rate securities...............   $   37,490     $   12,939     $   72,869     $  126,098    $   75,422    $  324,818
  Variable rate securities ...........       36,001          2,675           --             --            --          38,676
  Fixed rate loans ...................       44,018         42,185        151,762         97,015       142,268       477,248
  Variable rate loans ................      284,578        138,056        260,352        126,906        67,365       877,257
  Other interest sensitive assets ....       28,403           --             --             --            --          28,403
                                         ----------     ----------     ----------     ----------    ----------    ----------
    Total interest sensitive assets ..      430,490        195,855        484,983        350,019       285,055     1,746,402
                                         ----------     ----------     ----------     ----------    ----------    ----------

Interest sensitive liabilities:
  NOW accounts .......................        6,217          5,910         20,848         15,336       102,857       151,168
  Savings and money market
   deposit accounts ..................       59,192         57,770         97,573         19,832       120,259       354,626
  Certificates of deposit ............      269,995        139,875        154,773          5,089             3       569,735
  Total borrowed funds ...............      265,474        113,090         55,154            365         2,135       436,218
                                         ----------     ----------     ----------     ----------    ----------    ----------
    Total interest sensitive
       liabilities ...................      600,878        316,645        328,348         40,622       225,254     1,511,747
                                         ----------     ----------     ----------     ----------    ----------    ----------

Net interest rate sensitivity gap ....   $ (170,388)    $ (120,790)    $  156,635     $  309,397    $   59,801    $  234,655
                                         ==========     ==========     ==========     ==========    ==========    ==========

Cumulative net interest rate
  sensitivity gap ....................   $ (170,388)    $ (291,178)    $ (134,543)    $  174,854    $  234,655
                                         ==========     ==========     ==========     ==========    ==========
Cumulative net interest rate
  sensitivity gap as a percentage
  of total assets ....................         (9.3)%        (16.0)%         (7.4)%         9.6%         12.9%

AT DECEMBER 31, 1999:
Cumulative net interest rate
  sensitivity gap ....................   $ (255,666)    $ (333,789)    $ (209,071)    $   42,591    $  174,304
                                         ==========     ==========     ==========     ==========    ==========
Cumulative net interest rate
  sensitivity gap as a percentage
  of total assets ....................        (17.2)%        (22.4)%        (14.0)%         2.9%         11.7%
</TABLE>


      The balances on the interest sensitive asset and liability accounts have
been allocated among the various periods using common industry techniques and
market consensus data. Fixed and variable rate retail loans, the largest
component of the loan portfolio, are shown in the table in the time period
corresponding to scheduled principal amortization and anticipated prepayments
using annual conditional prepayment rates that vary from 9.1% to 28.4% at
December 31, 2000, as compared with 11.1% to 18.0% at December 31, 1999. In
addition, variable rate retail and corporate loans are allocated to the periods
in which the loans could be next adjusted. Fixed rate mortgage-backed securities
are allocated using annual conditional prepayment rates of 11.1% to 11.7% at
December 31, 2000, versus 10.3% to 11.2% at December 31, 1999. All other loans
and securities, certificates of deposit and borrowed funds are allocated to the
period in which the rates could be next adjusted or to their final contractual
maturity for the fixed rate instruments. Other interest sensitive assets include
assets held for sale and FHLB stock. Nonaccruing loans have been excluded from
both the gap analysis and the market risk analysis.

      A substantial portion of the savings, money market and NOW accounts are
considered core deposits by management and, therefore, relatively insensitive to
interest rates. In addition, any future changes to the interest rates paid on
these accounts are at the sole discretion of management. Despite the foregoing
factors, these deposits have been allocated between each time period based on
the Banks' own historical experience, or decay rates, in determining the deposit
runoff.

                                       34

<PAGE>   41


     Another method used to measure interest rate risk is the market risk
analysis. The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 2000.

<TABLE>
<CAPTION>
                                                        EXPECTED MATURITY DATE AS OF DECEMBER 31, 2000
                                                        ----------------------------------------------
                                                                                                                FAIR VALUE
                                                                                                                    AT
                                    2001        2002       2003        2004      2005  THEREAFTER      TOTAL     12/31/00
                                    ----        ----       ----        ----      ----  ----------      -----     --------
                                                                   (DOLLARS IN MILLIONS)
<S>                               <C>         <C>        <C>        <C>        <C>       <C>         <C>         <C>
Interest sensitive assets:
Fixed rate securities............ $  50.4     $ 26.8     $ 46.1     $ 63.9     $ 62.2    $ 75.4      $ 324.8     $  325.3
  Average interest rate..........     6.38%      7.01%      6.77%      6.93%      7.05%     6.65%        6.79%
Variable rate securities......... $  32.1     $  2.0     $  1.4     $  1.0     $  0.7    $  1.5      $  38.7     $   38.7
  Average interest rate..........     6.08%      6.88%      6.88%      6.88%      6.88%     6.88%        6.21%
Fixed rate retail loans.......... $  50.8     $ 44.5     $ 38.2     $ 31.4     $ 28.0    $116.5      $ 309.4     $  305.4
  Average interest rate..........     7.23%      7.13%      7.13%      7.14%      7.13%     6.93%        7.07%
Variable rate retail loans....... $ 110.8     $ 90.6     $ 72.4     $ 59.1     $ 47.1    $207.2      $ 587.2     $  586.0
  Average interest rate..........     7.46%      7.41%      7.41%      7.43%      7.50%     7.36%        7.41%
Fixed rate corporate loans....... $  35.4     $ 33.8     $ 35.3     $ 22.6     $ 14.9    $ 25.8      $ 167.8     $  168.0
  Average interest rate..........     8.63%      8.53%      8.64%      8.67%      8.85%    10.37%        8.90%
Variable rate corporate loans.... $  71.5     $ 72.2     $ 19.6     $ 22.5     $ 18.2    $ 86.0      $ 290.0     $  286.1
  Average interest rate..........     9.21%      9.41%      8.98%      8.73%      8.64%     8.86%        9.07%
Other interest sensitive assets.. $   5.0        --         --         --         --     $ 23.4      $  28.4     $   28.5
  Average interest rate..........    8.03%       --         --         --         --        6.55%        6.81%
                                  ------      ------     ------     ------     ------    ------      --------    --------
Total interest sensitive assets.. $356.0      $269.9     $213.0     $200.5     $171.1    $535.8      $1,746.3    $1,738.0
                                  ======      ======     ======     ======     ======    ======      ========    ========

Interest sensitive liabilities:
NOW accounts..................... $ 14.4      $ 12.7     $ 12.3     $   9.5    $ 9.6     $ 92.7      $ 151.2     $  151.2
  Average interest rate..........    1.75%       1.83%      1.84%       2.05%    2.05%      1.41%        1.59%
Savings and money market
   deposit accounts.............. $123.6      $ 52.4     $ 52.5     $  12.3    $11.9     $101.9      $ 354.6     $  354.6
  Average interest rate..........    3.68%       3.94%      3.94%       2.75%    2.73%      2.63%        3.39%
Certificates of deposit.......... $409.9      $123.1     $ 31.7     $   3.3    $ 1.7         --      $ 569.7     $  574.0
  Average interest rate..........    5.73%       5.92%      6.15%       5.37%    5.94%       --          5.79%
Total borrowed funds............. $200.5      $ 34.6     $100.5 $       --     $20.4     $ 80.2      $ 436.2     $  436.5
  Average interest rate..........    6.30%       6.45%      6.12%       --       6.85%      5.20%        6.11%
                                  ------      ------     ------     ------     ------    ------      --------    --------
Total interest sensitive
  liabilities.................... $748.4      $222.8     $197.0     $ 25.1     $43.6     $274.8      $1,511.7    $1,516.3
                                  ======      ======     ======     ======     =====     ======      ========    ========
AT DECEMBER 31, 1999:

Total interest sensitive assets.. $253.9      $217.0     $200.5     $159.6     $155.7    $448.6      $1,435.3    $1,410.6
                                  ======      ======     ======     ======     ======    ======      ========    ========

Total interest sensitive
  liabilities.................... $661.0      $167.7     $127.6     $ 24.1     $  32.3   $248.3      $1,261.0    $1,260.7
                                  ======      ======     ======     ======     =======   ======      ========    ========
</TABLE>

      Market risk sensitive instruments are generally defined as on and off
balance sheet derivatives and other financial instruments. Expected maturities
are contractual maturities adjusted for prepayments of principal. The Company
uses certain assumptions to estimate fair values and expected maturities. For
interest sensitive assets, expected maturities are based upon contractual
maturity, projected repayments and prepayments of principal using the same
ratios used for the gap analysis presented previously. However, as mentioned
above, the market risk analysis excludes repricing features on all interest
sensitive assets. Retail loans include residential and consumer loans while
corporate loans are comprised of commercial real estate, commercial,
construction and land loans and lease financing. For interest sensitive
liabilities, the same decay rates and contractual maturities used for the gap
analysis are used for the market risk analysis. The only difference between the
gap analysis and the market analysis of the interest sensitive liabilities are
the callable features on the FHLB advances. The market risk analysis uses the
advances contractual maturity date in all cases, whereas the gap report
allocates the callable advances using their respective initial call date.


                                       35
<PAGE>   42

      The following table reflects the scheduled maturities of selected loans at
December 31, 2000:

<TABLE>
<CAPTION>

                                                                 ONE             OVER
                                             LESS THAN         THROUGH           FIVE
                                             ONE YEAR         FIVE YEARS         YEARS         TOTAL
                                             ---------        ----------        -------       --------
                                                                 (IN THOUSANDS)

<S>                                           <C>              <C>              <C>           <C>
Construction and land loans.................  $27,534          $50,133          $12,255       $ 89,922
Commercial loans............................   17,265           18,082            3,972         39,319
                                             --------          -------          -------       --------
                                              $44,799          $68,215          $16,227       $129,241
                                              =======          =======          =======       ========
</TABLE>


     Of the loans maturing after one year, $10.1 million, or 11.9%, have fixed
rates and $74.4 million, or 88.1%, have floating or variable rates.

LIQUIDITY

     The Company's primary source of funds is dividends from its bank
subsidiaries. The Company could also access the capital market to raise
additional equity or debt. Dividends from the Bank to the Company totaled $19.0
million in 2000, $7.0 million in 1999 and $9.5 million in 1998.

     The Company made payments of dividends to stockholders in the amount of
$6.5 million, $5.7 million and $4.5 million, respectively, for the years ended
December 31, 2000, 1999 and 1998. The Company also paid $8.1 million in cash to
the former shareholders of GBT Bancorp shareholders as part of the merger
consideration.

     The goal of the Company's liquidity management process is to assess funding
requirements so as to efficiently meet the cash needs of borrowers and
depositors, while also providing funds for attractive investment opportunities.
Liquidity involves the Company's ability to raise or gain access to funds in
order to fulfill its existing and anticipated financial obligations.

     The Banks have a diverse base of funding. Sources of liquidity include
maturation, amortization and prepayment of the investment and loan portfolios.
In addition, the Banks' investments available for sale portfolio provides the
Banks with flexibility to sell these securities quickly. Other sources of
liquidity are increasing deposit balances, funds purchased from other banks, the
sale of securities under repurchase agreements, corporate customer repurchase
agreements, and borrowings from the FHLB, of which the Banks are voluntary
members. The Banks may also obtain funds at the discount window of the Federal
Reserve Bank of Boston.

     At December 31, 2000, the Company had home equity, reserve credit and
commercial unadvanced lines of credit totaling $131.1 million. Outstanding
commitments to originate loans totaled $55.2 million. Unadvanced portions of
construction and land loans amounted to $46.7 million. Standby letters of credit
were $3.9 million. Loans sold with recourse totaled $811,000. Management
believes that its sources of liquidity are sufficient to meet these commitments
if and as called upon.

     See Notes 9, 10, 12, 16 and 17 to the "Consolidated Financial Statements"
for further information.

     Cash flows provided by operating activities decreased by $9.5 million to
$20.7 million at December 31, 2000, and increased by $9.7 million to $30.2
million at December 31, 1999. The change in 2000 was primarily attributable to
an increase in assets held for sale. The increase in cash flows provided in 1999
was due to a decrease in assets held for sale. Cash flows used by investing
activities increased by $36.7 million to $153.8 million during 2000 and
increased $43.0 million during 1999 to $117.1 million. The increase in 2000
resulted from a $28.4 million increase in net loans and increased purchases of
whole loans offset by lower purchased of investments available for sale. The
change in 1999 was primarily attributable to a higher level of purchases of
investments and mortgage-backed securities available for sale. Cash flows
provided by financing activities increased by $104.2 million to $174.2 million
during 2000 due to a significant increase in deposits and FHLB advances offset
by a decrease in other borrowings. The increase of $6.7 million in cash flows
provided by financing activities to $70.0


                                       36
<PAGE>   43


million at December 31, 1999, was mainly attributable to a significant increase
in total borrowed funds offset by a decline in deposits.

CAPITAL RESOURCES

     At December 31, 2000, the Company reported total capital of $153.6 million,
or 8.4% of total assets as compared to $130.3 million, or 8.7% at December 31,
1999. The Company and the Banks continue to maintain capital ratios in excess of
all applicable regulatory minimums.

     The capital position of banks and bank holding companies are regulated by
various Federal and state agencies. The following table presents regulatory
capital ratios under current regulatory and risk-based capital requirements as
of December 31, 2000:

<TABLE>
<CAPTION>

                                        REGULATORY              ANDOVER           ANDOVER           GLOUCESTER
                                         MINIMUM             BANCORP, INC.         BANK            BANK & TRUST
                                        ----------           -------------        -------          ------------
<S>                                        <C>                  <C>                 <C>                <C>
Leverage Capital Ratio Tier 1..........    4.0%                 8.0%                7.5%               7.6%
Risk Based Capital Ratio:
     Tier 1............................    4.0                 11.7                11.1               10.2
     Total.............................    8.0                 12.9                12.2               11.4

</TABLE>


     Under the FDIC's prompt corrective action regulations promulgated pursuant
to the FDIC Improvement Act of 1991, the Banks have sufficient capital to be
considered "well capitalized". Therefore, the Banks are entitled to pay the
lowest deposit premiums possible.

     In 1998, the Company's Board of Directors approved a stock repurchase
program. During 2000, the Company repurchased 177,900 common shares. Treasury
stock held at December 31, 2000, totaled 167,953 shares.

     See Item 1, "Business -- Supervision and Regulation" and Note 12 to the
"Consolidated Financial Statements" for further information.

IMPACT OF INFLATION

     The Consolidated Financial Statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The
primary impact of inflation on operations of Andover is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the price of
goods and services.

RECENT ACCOUNTING DEVELOPMENTS

     In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes new
accounting and reporting standards for derivative instruments. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities and
measure those instruments at fair value. This statement, as amended by SFAS 137,
is effective for financial statements issued for all fiscal years beginning
after January 1, 2001. SFAS 133 did not have a material impact on the
consolidated financial statements of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See Item 7, "Management Discussion and Analysis of Condition and Results of
Operations -- Asset and Liability Management and Market Risk" for the response
to this item.


                                       37
<PAGE>   44


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            PAGE

Independent Auditors' Report..............................................    39

Consolidated Balance Sheets as of December 31, 2000 and 1999..............    40

Consolidated Statements of Operations for each of the years ended
  December 31, 2000, 1999 and 1998........................................    41

Consolidated Statements of Changes in Stockholders' Equity for each of the
  years ended December 31, 2000, 1999 and 1998............................    42

Consolidated Statements of Cash Flows for each of the years ended
  December 31, 2000, 1999 and 1998........................................ 43-44

Notes to Consolidated Financial Statements................................ 45-69


                                       38

<PAGE>   45
                          INDEPENDENT AUDITORS' REPORT





The Board of Directors and Stockholders
Andover Bancorp, Inc.:

     We have audited the accompanying consolidated balance sheets of Andover
Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

     We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Andover
Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.


/s/KPMG LLP
-------------------------------
KPMG LLP


Boston, Massachusetts
January 18, 2001


                                       39
<PAGE>   46


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2000 and 1999

<TABLE>
<CAPTION>

                                                                                       2000              1999
                                                                                    -----------       -----------
                                                                                           (IN THOUSANDS)
<S>                                                                                 <C>               <C>

                                     ASSETS
Cash and due from banks (note 17) ............................................      $    40,256       $    26,913
Short-term investments (note 3) ..............................................           29,300             1,600
                                                                                    -----------       -----------
  Cash and cash equivalents ..................................................           69,556            28,513
                                                                                    -----------       -----------
Assets held for sale (market value $5,103 in 2000 and $1,494 in 1999) (note 2)            5,037             1,494
Investments available for sale (amortized cost $283,902 in 2000
  and $226,332 in 1999) (notes 3, 9 and 10) ..................................          289,155           221,370
Investments held to maturity (market value $49,014 in 2000 and
  $62,557 in 1999) (notes 3, 9 and 10) .......................................           48,533            63,752
Loans (notes 4, 9 and 10) ....................................................        1,356,181         1,133,101
Allowance for loan losses (note 4) ...........................................          (14,640)          (11,384)
                                                                                    -----------       -----------
     Net loans ...............................................................        1,341,541         1,121,717
                                                                                    -----------       -----------
Mortgage servicing assets, net (note 5) ......................................            9,842            10,635
Premises and equipment, net (note 6) .........................................           13,422            10,663
Accrued interest receivable ..................................................           11,366             8,236
Stock in FHLB of Boston, at cost (notes 7 and 10) ............................           23,366            17,737
Net deferred income taxes receivable (note 11) ...............................              318             5,259
Income taxes receivable ......................................................               51                --
Goodwill, net of amortization ................................................            8,743                --
Other assets .................................................................            2,303             1,678
                                                                                    -----------       -----------
          Total assets .......................................................      $ 1,823,233       $ 1,491,054
                                                                                    ===========       ===========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
     Deposits (note 8) .......................................................      $ 1,221,189       $   968,533
     Other borrowings (notes 9 and 10) .......................................           18,941            73,662
     Federal Home Loan Bank advances (notes 9 and 10) ........................          417,277           305,722
     Mortgagors' escrow accounts .............................................            3,634             3,412
     Income taxes payable (note 11) ..........................................               --             3,817
     Accrued expenses and other liabilities ..................................            8,571             5,645
                                                                                    -----------       -----------
          Total liabilities ..................................................        1,669,612         1,360,791
                                                                                    -----------       -----------
Commitments and contingencies (notes 6 and 17)
Stockholders' equity (notes 12 and 14):
     Serial preferred stock, $0.10 par value per share;
       3,000,000 shares authorized, none issued ..............................               --                --
     Common stock, $0.10 par value per share; 15,000,000 shares authorized;
       6,837,133 and 6,534,072 shares issued in 2000 and 1999, respectively;
       shares outstanding 6,669,180 and 6,534,072 in 2000 and 1999,
         respectively ........................................................              684               653
     Additional paid-in capital ..............................................           68,615            60,745
     Retained earnings .......................................................           85,646            71,924
     Treasury stock (167,953 and -0- shares in 2000 and 1999, respectively,
       at cost) ..............................................................           (4,454)               --
     Accumulated other comprehensive income (loss) (notes 3 and 11) ..........            3,130            (3,059)
                                                                                    -----------       -----------
          Total stockholders' equity .........................................          153,621           130,263
                                                                                    -----------       -----------
          Total liabilities and stockholders' equity .........................      $ 1,823,233       $ 1,491,054
                                                                                    ===========       ===========
</TABLE>

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


                                       40
<PAGE>   47


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  Years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                                                       2000         1999          1998
                                                                    ---------     ---------     ---------

                                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                                 <C>           <C>           <C>
Interest and dividend income:
  Loans ........................................................    $  96,417     $  80,252     $  77,358
  Investment securities ........................................       13,490         9,094         6,320
  Mortgage-backed securities ...................................        8,719         9,028        11,711
  Dividends on equity securities (note 7) ......................        1,781         1,118         1,020
  Short-term investments .......................................          140           518           837
                                                                    ---------     ---------     ---------
    Total interest and dividend income .........................      120,547       100,010        97,246
                                                                    ---------     ---------     ---------
Interest expense:
  Deposits (note 8) ............................................       40,966        34,341        39,137
  Federal Home Loan Bank advances ..............................       20,423        16,214        15,300
  Other borrowings .............................................        5,455         2,146           578
                                                                    ---------     ---------     ---------
    Total interest expense .....................................       66,844        52,701        55,015
                                                                    ---------     ---------     ---------
      Net interest and dividend income .........................       53,703        47,309        42,231
Provision (credit) for loan losses (note 4) ....................        1,500           400        (1,705)
                                                                    ---------     ---------     ---------
    Net interest and dividend income after provision (credit)
      for loan losses ..........................................       52,203        46,909        43,936
                                                                    ---------     ---------     ---------
Non-interest income:
  Net gains (losses) from sales of assets held for sale (note 2)       (1,244)           17           653
  Net gains (losses) from sales
    of investments available for sale (note 3) .................         (723)         (385)           17
  Mortgage banking income (loss), net (note 5) .................        1,111           908          (389)
  Other income (note 13) .......................................        4,385         3,700         3,905
                                                                    ---------     ---------     ---------
    Total non-interest income ..................................        3,529         4,240         4,186
                                                                    ---------     ---------     ---------
Non-interest expense:
  Salaries and employee benefits (note 14) .....................       15,400        11,116        12,009
  Office occupancy and equipment (note 6) ......................        3,698         3,167         2,972
  Data processing ..............................................        2,933         2,379         2,090
  Professional fees ............................................        1,126         1,178           940
  Marketing ....................................................        1,119           908           831
  Mortgage banking expense .....................................          107           267           606
  Amortization of goodwill (note 18) ...........................          300            --            --
  Other operating expense ......................................        3,525         2,962         3,129
                                                                    ---------     ---------     ---------
    Total non-interest expense .................................       28,208        21,977        22,577
                                                                    ---------     ---------     ---------
    Income before income tax expense ...........................       27,524        29,172        25,545
Income tax expense (note 11) ...................................        7,342        10,287         8,159
                                                                    ---------     ---------     ---------
Net income .....................................................    $  20,182     $  18,885     $  17,386
                                                                    =========     =========     =========

Average number of common shares outstanding, basic .............        6,532         6,527         6,482
Average number of common shares outstanding, diluted ...........        6,705         6,708         6,697

Basic earnings per share .......................................    $    3.09     $    2.89     $    2.68
                                                                    =========     =========     =========

Diluted earnings per share .....................................    $    3.01     $    2.82     $    2.60
                                                                    =========     =========     =========
</TABLE>

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


                                       41
<PAGE>   48


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  Years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                                                                                    ACCUMULATED
                                                                                                     OTHER          TOTAL
                                                           ADDITIONAL                                COMPRE-        STOCK-
                                                COMMON      PAID-IN      RETAINED       TREASURY     HENSIVE        HOLDERS'
                                                STOCK       CAPITAL      EARNINGS        STOCK     INCOME (LOSS)    EQUITY
                                              ---------    ---------     ---------     ---------   -------------    --------
                                                                               (IN THOUSANDS)
<S>                                           <C>          <C>            <C>          <C>           <C>           <C>

Balance at December 31, 1997 .............    $     517    $  59,619     $  45,814     $      --     $   1,129     $ 107,079
Comprehensive income:
  Net income .............................           --           --        17,386            --            --        17,386
  Other comprehensive income:
  Unrealized holding gains arising during
    the period, net of taxes of $70 ......           --           --            --            --           126           126
  Realized gains included in
    net income, net of taxes of $5 .......           --           --            --            --            12            12
                                                                                                                   ---------
    Total comprehensive income ...........                                                                            17,524
  Dividends declared and paid
    ($0.69 per share) ....................           --           --        (4,484)           --            --        (4,484)
  Par value adjustment for stock split ...          130         (130)           --            --            --            --
  Stock options exercised (note 14) ......            5        1,018            --            --            --         1,023
                                              ---------    ---------     ---------     ---------     ---------     ---------
Balance at December 31, 1998 .............          652       60,507        58,716            --         1,267       121,142

Comprehensive income:
  Net income .............................           --           --        18,885            --            --        18,885
  Other comprehensive income (loss):
  Unrealized holding losses arising during
    the period, net of tax benefit of
    $2,592 ...............................           --           --            --            --        (4,077)       (4,077)
  Realized losses included in net
    income, net of tax benefit of $136 ...           --           --            --            --          (249)         (249)
                                                                                                                   ---------
    Total comprehensive income ...........                                                                            14,559
  Dividends declared and paid
    ($0.87 per share) ....................           --           --        (5,677)           --            --        (5,677)
  Stock options exercised (note 14) ......            1          238            --            --            --           239
                                              ---------    ---------     ---------     ---------     ---------     ---------
Balance at December 31, 1999 .............          653       60,745        71,924            --        (3,059)      130,263

Comprehensive income:
  Net income .............................           --           --        20,182            --            --        20,182
  Other comprehensive income:
  Unrealized holding gains arising during
    the period, net of taxes of $4,294 ...           --           --            --            --         6,644         6,644
  Realized losses included in
    net income, net of tax benefit of $268           --           --            --                        (455)         (455)
                                                                                                                   ---------
    Total comprehensive income ...........                                                                            26,371
  Dividends declared and paid
    ($0.99 per share) ....................           --           --        (6,460)           --            --        (6,460)
  Stock options exercised (note 14) ......            1           (7)           --           264            --           258
Stock issued for acquired institution ....           30        7,877            --            --            --         7,907
Purchase of treasury stock ...............           --           --            --        (4,718)           --        (4,718)
                                              ---------    ---------     ---------     ---------     ---------     ---------
Balance at December 31, 2000 .............    $     684    $  68,615     $  85,646     $  (4,454)    $   3,130     $ 153,621
                                              =========    =========     =========     =========     =========     =========
</TABLE>

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

                                       42

<PAGE>   49


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                                                         2000            1999            1998
                                                                      -----------     -----------     -----------
                                                                                      (IN THOUSANDS)
<S>                                                                   <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income ..................................................    $    20,182     $    18,885     $    17,386
Adjustments to reconcile net income to net cash
  provided by operating activities:
     Provision (credit) for loan losses ..........................          1,500             400          (1,705)
     Net gains on sales and provisions for other real
      estate owned ...............................................            (64)            (72)           (157)
     Net (gains) losses from sales of
       investments available for sale ............................            723             385             (17)
     Net (gains) losses from sales of assets held for sale .......          1,244             (17)           (653)
     Depreciation and amortization ...............................          1,686           1,463           1,362
     Amortization of fees, discounts and premiums, net ...........            642           1,109             541
     Deferred income taxes .......................................            (72)            394          (1,168)
     Amortization of goodwill ....................................            300              --              --
     (Increase) decrease in:
       Assets held for sale ......................................         (4,787)          9,805          (5,092)
       Accrued interest receivable ...............................         (2,444)           (804)            135
       Mortgage servicing assets .................................          2,082           2,311           3,110
       Other assets ..............................................            315              97             128
     Increase (decrease) in:
       Mortgagors' escrow accounts ...............................            222             593             341
       Accrued income taxes payable ..............................         (3,190)         (3,814)          5,381
       Accrued expenses and other liabilities ....................          2,362            (530)            951
                                                                      -----------     -----------     -----------
          Net cash provided by operating activities ..............         20,701          30,205          20,543
                                                                      -----------     -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Net cash of acquired institution ............................          3,212              --              --
     Investment and mortgage-backed securities available for sale:
       Purchases .................................................        (95,283)       (151,683)        (60,915)
       Proceeds from sales .......................................         47,907          28,618           3,017
       Proceeds from maturities and redemptions ..................          3,425          40,063           4,000
       Principal repayments ......................................         10,352          19,359          26,989
     Investment and mortgage-backed securities held to maturity:
       Purchases .................................................             --              --         (15,058)
       Proceeds from maturities and redemptions ..................          1,500           2,000          10,000
       Principal repayments ......................................         13,681          35,086          33,416
     Net change FHLB stock .......................................         (3,843)         (1,990)             --
     Purchases of whole loans ....................................        (59,457)        (38,346)        (22,875)
     Purchased and capitalized mortgage servicing assets .........         (1,289)         (3,990)         (2,566)
     Net increase in loans .......................................        (72,434)        (44,052)        (50,215)
     Capital expenditures on premises and equipment, net .........         (1,962)         (2,871)         (1,024)
     Proceeds from sales of other real estate owned ..............            344             678           1,084
                                                                      -----------     -----------     -----------
Net cash used by investing activities ............................       (153,847)       (117,128)        (74,147)
                                                                      -----------     -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Net increase (decrease) in deposits .........................        144,877         (20,123)         41,674
     Net increase (decrease) in other borrowings .................        (54,721)         57,330           6,161
     Proceeds from issuance of FHLB advances .....................      1,368,000         345,300         310,100
     Principal repayments of FHLB advances .......................     (1,273,047)       (307,070)       (291,169)
     Treasury stock purchased ....................................         (4,718)             --              --
     Dividends paid ..............................................         (6,460)         (5,677)         (4,484)
     Stock options exercised .....................................            258             239           1,023
                                                                      -----------     -----------     -----------
          Net cash provided by financing activities ..............        174,189          69,999          63,305
                                                                      -----------     -----------     -----------
Net increase (decrease) in cash and cash equivalents .............         41,043         (16,924)          9,701
Cash and cash equivalents, beginning of year .....................         28,513          45,437          35,736
                                                                      -----------     -----------     -----------
Cash and cash equivalents, end of year ...........................    $    69,556     $    28,513     $    45,437
                                                                      ===========     ===========     ===========
</TABLE>

Statement continued on next page.

                                       43
<PAGE>   50


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                  Years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                                                         2000        1999        1998
                                                                       --------    --------    --------
                                                                               (IN THOUSANDS)
<S>                                                                    <C>         <C>          <C>
Supplemental disclosures of cash flow information:
Cash paid during the year
     for:
          Interest ................................................    $ 64,884    $ 52,499    $ 55,191
          Income taxes ............................................       9,094      13,619       4,010
     Cash received during the year for:
          Income taxes ............................................         155          --         397
Supplemental noncash investing and financing activities:
     Conversion of real estate loans to mortgage-backed
       securities held for sale or investments available for sale .      32,644      32,153      53,300
     Transfer of loans to other real estate owned .................         269         395         773

In conjunction with the purchase acquisition detailed in Note 18 to
the Consolidated Financial Statements, assets were acquired and
liabilities were assumed as follows:

Fair value of assets acquired .....................................    $132,625    $     --    $     --
Less liabilities assumed ..........................................     124,724          --          --
Net effect on capital .............................................       7,901          --          --
</TABLE>


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


                                       44
<PAGE>   51


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Andover Bancorp, Inc. ("Andover" or the "Company") is a Delaware
corporation and the multi-bank holding company of Andover Bank and Gloucester
Bank & Trust Company. Andover Bank (the "Bank") is a state-chartered savings
bank with its headquarters located in Andover, Massachusetts; Gloucester Bank &
Trust Company ("Gloucester") is a Massachusetts-chartered trust company
headquartered in Gloucester, Massachusetts, known collectively as the "Banks".
The Banks provide a variety of loan and deposit services to its customers
through 16 locations. The Company is supervised by the Board of Governors of the
Federal Reserve System ("FRB") and it is also subject to the jurisdiction of the
Massachusetts Board of Bank Incorporation, while the Banks are subject to
regulation and supervision by the Federal Deposit Insurance Corporation ("FDIC")
and the Massachusetts Commissioner of Banks (the "Commissioner"). The Banks'
deposits are insured by the FDIC and Andover Bank has the additional insurance
of the Depositors Insurance Fund, Inc. ("DIF").

     The accounting and reporting policies of Andover Bancorp, Inc. and
subsidiaries conform with accounting principles and practices 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 income and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to change relate to the allowance for loan loss and the valuation of
mortgage servicing assets. The following is a summary of the more significant
accounting policies.

  Principles of Consolidation
     The consolidated financial statements include the accounts of Andover
Bancorp, Inc. and its subsidiaries, including its principal bank subsidiaries
Andover Bank and Gloucester. All intercompany accounts and transactions have
been eliminated in consolidation. Certain amounts in the prior years' financial
statements have been reclassified to conform with the current year's
presentation for comparative purposes. Such reclassifications had no effect on
net income. In addition, the Company is reporting its results as one operating
segment.

  Mortgage Banking Activities
     Loans held for sale in the secondary market are stated at the lower of
aggregate amortized cost or market value. Market value is estimated based on
outstanding investor commitments or, in the absence of such commitments, current
investor yield requirements. Net unrealized losses, if any, are provided for in
a valuation allowance by charges to operations. When loans are sold, a gain or
loss is recognized to the extent that the sale proceeds exceed or are less than
the carrying amount of the loans. Gains and losses are determined using the
specific identification method.

     The Company recognizes a servicing asset based on an allocation of the
carrying amount of the assets sold between the underlying asset sold and the
servicing obligation or other retained interests using the relative fair value
of the assets sold to the interests retained. These capitalized mortgage loan
servicing rights are a significant component of the net gains from sales of
assets held for sale income category.

     Mortgage loan servicing rights purchased or originated are amortized
against mortgage banking income using a method which approximates the level
yield method in proportion to, and over the period of, estimated net servicing
income. Prepayment experience on each mortgage servicing asset is reviewed
periodically, and, when actual prepayments exceed estimated prepayments, the
balance of the mortgage servicing asset is adjusted by a charge to the valuation
allowance. On a regular basis, the mortgage servicing assets are assessed for
impairment based on the fair value of such rights. The fair value is estimated
using market prices when available or, alternatively, using a valuation model
that calculates the present value of future servicing asset cash flows using
discount rates and prepayment assumptions that management believes market
participants would use. Any impairment in the fair value of those mortgage
servicing assets is recognized by a charge to the valuation allowance. The risk
characteristics of the underlying loans used to measure impairment of originated
and purchased mortgage loan servicing rights include the loan type, interest
rate, loan origination date, term to maturity and geographic location.

                                       45
<PAGE>   52


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

Investments
     Investments include short-term, available for sale, held to maturity and
trading. Debt securities are classified as held to maturity only when there is
positive intent and ability to hold them to maturity. Such securities are
recorded at amortized cost, adjusted for amortization of premiums and accretion
of discounts and adjusted as necessary for estimated prepayments. Trading
securities are debt or equity securities held principally for the purpose of
selling in the near term. Such securities are recorded at fair value, with
unrealized gains and losses recorded in earnings. Investments available for sale
are any debt or equity securities not classified as either held to maturity or
trading securities. Such investments are recorded at fair value with changes in
fair value recorded as a separate component of stockholders' equity, net of the
related income tax effect. Originated mortgage loans converted to
mortgage-backed securities to be sold are classified as trading. Gains and
losses on sales of investment and mortgage-backed securities are recognized
using the specific identification method. Premiums and discounts on investment
and mortgage-backed securities are amortized or accreted into income by use of
the level-yield method. The yields on mortgage-backed securities are affected by
prepayments and changes in interest rates. If a decline in fair value below the
amortized cost basis of an investment or mortgage-backed security is judged to
be other than temporary, the cost basis of the security is written down to fair
value. The amount of the writedown is included as a charge against gain on sale
of securities. Short-term investments with original maturities of 90 days or
less are carried at cost, which approximates market value.

Loans
     Accrual of interest income on loans and amortization of net deferred loan
fees are discontinued when loan payments are 90 days or more past due or earlier
when concern exists as to the ultimate collection of principal or interest. When
loans are placed on nonaccrual status, the interest receivable on the loan is
reversed against interest income of the current period. Non-performing loans are
not returned to performing status until the obligation is brought current, the
loan becomes well-secured and in the process of collection and, in either case,
when concern no longer exists as to the ultimate collectibility of principal or
interest. Interest received on nonaccruing loans is either applied against
principal or reported as income according to management's judgment as to the
collectibility of principal.

     Loan origination fees and related direct incremental loan origination costs
are deferred and amortized over the life of the related loans as yield
adjustments using the level yield method. When loans are sold or paid off, the
unamortized fees and costs are recognized as income. Purchased loan discounts
and premiums are amortized or accreted into income over the weighted average
repricing term of the underlying loans.

Allowance for Loan Losses
     The Banks maintain an allowance for losses that are inherent in their
respective loan portfolios. The allowance is increased by provisions charged
against earnings or by recoveries of previously charged-off loans. The allowance
is decreased as loans are charged-off.

     The allowance is an amount that management believes will be adequate for
loan losses based on evaluations of collectibility and prior loss experience,
changes in the nature and volume of the loan portfolio, overall portfolio
quality, specific problem loans and current and anticipated economic conditions
that may affect the borrower's ability to pay. A substantial portion of the
Banks' loans are secured by real estate in Massachusetts and New Hampshire.
Accordingly, the ultimate collectibility of a substantial portion of the Banks'
loan portfolio is susceptible to changes in market conditions in these areas.

     Management believes 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 based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowance for loan
losses. Such agencies may require the Banks to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.

                                       46
<PAGE>   53

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

     Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans", although the two categories overlap.
Nonaccrual loans include impaired loans and are those on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have been contractually past due
90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency, while not classifying the loan as impaired due to
insignificant payment delays and insignificant shortfalls in payment amounts.
Factors considered by management in determining impairment include payment
status and collateral value. The amount of impairment for these types of
impaired loans is determined by the difference between the present value of the
expected cash flows related to the loan, using the original contractual interest
rate and its recorded value, or, as a practical expedient in the case of
collateral dependent loans, the difference between the fair value of the
collateral and the recorded amount of the loans. When foreclosure is probable,
impairment is measured based on the fair value of the collateral. Loan
restructurings at below current market rates are reported as impaired loans and
impairment is measured as described above using the loan's pre-modification rate
of interest. Income received on impaired loans is recognized in income similar
to nonaccrual loans.

Premises and Equipment
     Premises and equipment are stated at cost less accumulated depreciation.
Depreciation or amortization is computed on the straight-line method over the
lesser of the estimated useful lives of the assets or over the terms of their
respective leases for leasehold improvements. It is the Company's practice to
charge the cost of maintenance and repairs to operations when incurred; major
expenditures for improvements are capitalized and depreciated.

Goodwill
     Goodwill results from a business combination being accounted for under the
purchase method. Goodwill represents the excess of the purchase price over the
fair value of the net identifiable assets acquired. Goodwill generated from the
Company's acquisition of Gloucester Bank & Trust Company on July 1, 2000,
amounted to $9.0 million. This non-cash expense is recorded on a straight line
basis and will be incurred for the next fifteen years. Goodwill is reviewed for
impairment when it is determined that events or changed circumstances may affect
the underlying basis of the assets.

Other Real Estate Owned
     Other real estate owned is comprised of properties acquired through
foreclosure proceedings, acceptance of a deed in lieu of foreclosure or when the
Banks are in possession of the collateral. Real estate owned is recorded at the
lower of the carrying value of the loan or the net fair value of the property.
Losses arising from the acquisition of such properties are charged against the
allowance for loan losses. Operating expenses, net of related income, and any
provisions to increase the valuation allowance are charged to real estate
operations. Subsequent declines in net fair value are charged-off to the
valuation allowance while gains and losses upon disposition are reflected in
real estate operations. Management believes the allowance is adequate to provide
for potential losses. However, future additions to the valuation allowance may
be necessary based on changes in economic conditions.

Income Taxes
     Income taxes are accounted for using the asset and liability method of
accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The valuation allowance
related to deferred tax assets is recognized when,

                                       47
<PAGE>   54

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

in management's judgment, it is more likely than not that all, or a portion of,
such deferred tax assets will not be realized.

Employee Benefits
     The Company accounts for postretirement benefits on the net periodic cost
method for financial reporting purposes. This method recognizes the compensation
cost of any employee's benefit over that employee's approximate service period.

     The Company continues to follow APB Opinion No. 25 "Accounting for Stock
Issued to Employees" as permitted by Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). For companies
that elect to continue using APB 25, SFAS 123 requires disclosure of the pro
forma effect of using the fair value method of accounting for stock-based
compensation that is encouraged by SFAS 123. See Note 14 for the expanded
disclosures required by SFAS 123.

  Earnings Per Share
     There are two methods of calculating earnings per share: basic and diluted.
Basic earnings per share excludes common stock equivalents and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted earnings per share gives effect to all potential
dilutive common shares using the average market price of the Company's common
stock for the period plus the weighted average number of common shares
outstanding for the equivalent period of time.

     A reconciliation of the common shares outstanding for the three years ended
December 31, follows:

<TABLE>
<CAPTION>
                                                                        2000              1999             1998
                                                                       ------            ------           -------
                                                                                     (IN THOUSANDS)

<S>                                                                     <C>               <C>               <C>
     Average number of common shares outstanding, basic.............    6,532             6,527             6,482
     Dilutive impact of stock options...............................      173               181               215
                                                                       ------            ------           -------
     Average number of common shares outstanding, diluted...........    6,705             6,708             6,697
</TABLE>


    The numerator in the earnings per common share calculation is net income, as
reported, for both the basic and dilutive calculations.

(2)  ASSETS HELD FOR SALE

     The composition of assets held for sale at December 31 follows:


                                         2000                       1999
                                ----------------------      --------------------
                                AMORTIZED        FAIR       AMORTIZED     FAIR
                                  COST           VALUE        COST        VALUE

                                                  (IN THOUSANDS)

     Loans.....................  $5,037         $5,103       $1,494      $1,494
                                 ======         ======       ======      ======


     Proceeds from sales, realized and net unrealized gains and losses on assets
held for sale for the years ended December 31, follow:

                                        2000            1999            1998
                                       -------        -------          -------

                                                   (IN THOUSANDS)
     Proceeds from sales.............. $52,030        $33,611          $60,082
     Realized gains on sales..........     507            454              870
     Realized losses on sales.........  (1,780)          (408)            (217)
     Net unrealized gains (losses)....      29            (29)              --


     Included in the realized gains on sales are capitalized originated mortgage
servicing rights of $481,000, $439,000 and $726,000, respectively, for each of
the three years ended December 31, 2000, 1999 and 1998.


                                       48
<PAGE>   55

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998


(3)  INVESTMENTS

     The amortized cost and approximate fair value of the investment portfolio
at December 31 follow:

<TABLE>
<CAPTION>

                                                       2000                                            1999
                                      ------------------------------------------    ----------------------------------------------
                                                   GROSS       GROSS                             GROSS        GROSS
                                      AMORTIZED  UNREALIZED  UNREALIZED     FAIR    AMORTIZED  UNREALIZED   UNREALIZED    FAIR
                                        COST       GAINS       LOSSES      VALUE      COST        GAINS       LOSSES      VALUE
                                      ---------  ----------  ----------  ---------   --------- ----------   ----------   ---------
                                                                           (IN THOUSANDS)
<S>                                   <C>         <C>         <C>        <C>         <C>         <C>        <C>          <C>
SHORT-TERM INVESTMENTS:
Federal funds sold ................   $  29,300   $    --    $     --    $  29,300   $   1,600   $    --    $      --    $   1,600
                                      =========   =======    ========    =========   =========   =======    =========    =========

INVESTMENTS AVAILABLE FOR SALE:
Common stocks .....................   $   2,630   $   864    $     --    $   3,494   $   1,240   $    76    $     (68)   $   1,248
U.S. government and federal
  agency obligations ..............      72,172     1,649        (130)      73,691      66,370        43       (1,222)      65,191
Other bonds and obligations .......     138,975     2,234        (752)     140,457      87,049        14       (2,727)      84,336
GNMA mortgage-backed securities ...      28,791       636         (40)      29,387      27,631        35         (285)      27,381
FHLMC participation certificates ..      17,974       392          --       18,366      19,292         9         (183)      19,118
FNMA pass-through certificates ....      11,824       261         (99)      11,986      11,676        10         (253)      11,433
Collateralized mortgage obligations      11,536       272         (34)      11,774      13,074        --         (411)      12,663
                                      ---------   -------    --------    ---------   ---------   -------    ---------    ---------
                                      $ 283,902   $ 6,308    $ (1,055)   $ 289,155   $ 226,332   $   187    $  (5,149)   $ 221,370
                                      =========   =======    ========    =========   =========   =======    =========    =========
INVESTMENTS HELD TO MATURITY:
U.S. government and federal
  agency obligations ..............   $   8,500   $     2    $     --    $   8,502   $   8,507   $    --    $     (90)   $   8,417
Other bonds and obligations .......       1,005        17          --        1,022       2,514        26           --        2,540
FHLMC participation certificates ..      12,207       239          (5)      12,441      18,073        89         (236)      17,926
FNMA pass-through certificates ....      17,917       260         (17)      18,160      24,082        68         (500)      23,650
GNMA mortgage-backed securities ...       1,573        44          --        1,617       1,923         6           --        1,929
Collateralized mortgage obligations       7,042        --         (57)       6,985       8,268        --         (548)       7,720
Other asset-backed securities .....         289        --          (2)         287         385        --          (10)         375
                                      ---------   -------    --------    ---------   ---------   -------    ---------    ---------
                                      $  48,533   $   562    $    (81)   $  49,014   $  63,752   $   189    $  (1,384)   $  62,557
                                      =========   =======    ========    =========   =========   =======    =========    =========

  Total investments ...............   $ 361,735   $ 6,870    $ (1,136)   $ 367,469   $ 291,684   $   376    $  (6,533)   $ 285,527
                                      =========   =======    ========    =========   =========   =======    =========    =========
</TABLE>


Proceeds from sales, realized gains and losses on investments available for sale
for the years ended December 31, follow:

                                         2000          1999          1998
                                       -------       -------       -------

                                                 (IN THOUSANDS)

     Proceeds from sales.............  $47,907       $28,618        $3,017
     Realized gains on sales.........        1             1            17
     Realized losses on sales........     (724)         (386)          ---

     There were no sales of investments held to maturity in 2000, 1999 and 1998.

The amortized cost and fair value of mortgage-backed and asset-backed securities
available for sale and held to maturity at December 31 follow:

<TABLE>
<CAPTION>


                                                      2000                                   1999
                                  ---------------------------------------   -----------------------------------------
                                  AVAILABLE  FOR SALE    HELD TO MATURITY   AVAILABLE FOR SALE    HELD TO MATURITY
                                  -------------------   -----------------    -----------------   --------------------
                                  AMORTIZED    FAIR     AMORTIZED    FAIR    AMORTIZED   FAIR    AMORTIZED     FAIR
                                    COST      VALUE       COST      VALUE      COST     VALUE      COST        VALUE
                                  --------   --------   ---------  -------   --------  -------    -------     -------
                                                                     (IN THOUSANDS)

<S>                               <C>        <C>         <C>        <C>       <C>      <C>        <C>         <C>
Mortgage-backed and asset-backed
  securities....................  $70,125    $71,513    $39,028    $39,490    $71,673  $70,595    $52,731     $51,600
                                  =======    =======    =======    =======    =======  =======    =======     =======
</TABLE>

                                       49
<PAGE>   56

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2000, 1999 and 1998

     The amortized cost and fair value of adjustable rate investments available
for sale and held to maturity at December 31 follow:

<TABLE>
<CAPTION>

                                                  2000                                  1999
                                 ---------------------------------------   ----------------------------------------
                                 AVAILABLE  FOR SALE   HELD TO MATURITY    AVAILABLE FOR SALE   HELD TO MATURITY
                                 -------------------  ------------------   ------------------  --------------------
                                 AMORTIZED   FAIR     AMORTIZED    FAIR    AMORTIZED   FAIR    AMORTIZED     FAIR
                                   COST      VALUE      COST       VALUE      COST     VALUE     COST        VALUE
                                 ---------  --------  ---------   ------   ---------   -----   ---------     ------
                                                                    (IN THOUSANDS)

<S>                               <C>       <C>        <C>        <C>        <C>       <C>      <C>         <C>
Mortgage-backed securities.....   $7,876    $7,901     $1,475     $1,487     $9,901    $9,904   $1,652      $1,682
                                  ======    ======     ======     ======     ======    ======   ======      ======
</TABLE>


     The carrying amounts of callable securities included in investments
available for sale and investments held to maturity totaled $29,573,000 and
$8,500,000 in 2000 and $44,585,000 and $5,005,000 in 1999, respectively.

     The maturity distribution of debt securities available for sale and held to
maturity at December 31 follows:

<TABLE>
<CAPTION>


                                               2000                                       1999
                             -----------------------------------------   -----------------------------------------
                             AVAILABLE FOR SALE     HELD TO MATURITY     AVAILABLE FOR SALE    HELD TO MATURITY
                             --------------------   -------------------  -------------------  ---------------------
                              AMORTIZED    FAIR     AMORTIZED    FAIR    AMORTIZED   FAIR     AMORTIZED     FAIR
                                COST      VALUE       COST       VALUE     COST      VALUE       COST       VALUE
                              ---------  --------   ---------   -------   --------  --------    -------    --------
                                                                  (IN THOUSANDS)
<S>                           <C>        <C>         <C>        <C>       <C>       <C>         <C>        <C>
Within 1 year...............  $ 20,017   $ 20,082    $ 3,144    $ 3,187   $ 13,275   $ 13,245   $ 4,531    $  4,482
1 to 5 years................   157,923    160,364     17,653     17,778     99,632     98,047    23,045      22,753
5 to 10 years...............    74,283     75,685     13,694     13,893     78,912     76,214    22,064      21,712
Over 10 years...............    29,049     29,530     14,042     14,156     33,273     32,616    14,112      13,610
                              --------   --------    -------    -------   --------   --------   -------     -------
                              $281,272   $285,661    $48,533    $49,014   $225,092   $220,122   $63,752     $62,557
                              ========   ========    =======    =======   ========   ========   =======     =======
</TABLE>

------------------------
Maturities of mortgage-backed securities are based on contractual maturities
with scheduled amortization. Actual maturities will differ from contractual
maturities due to prepayments.


Securities pledged at December 31 follow:

<TABLE>
<CAPTION>

                                                                                     CORPORATE          SECURITIES SOLD
                                                                                      CUSTOMER          UNDER AGREEMENTS
                                                        GOVERNMENT DEPOSITS     REPURCHASE AGREEMENTS    TO REPURCHASE
                                                        --------------------    ---------------------  -------------------
                                                        AMORTIZED      FAIR       AMORTIZED   FAIR     AMORTIZED    FAIR
                                                          COST         VALUE        COST      VALUE      COST       VALUE
                                                        ---------     -------     ---------   ------   ---------   -------
                                                                                  (IN THOUSANDS)
<S>                                                       <C>          <C>         <C>        <C>       <C>        <C>
AT DECEMBER 31, 2000
U.S. government obligations available for sale.......    $3,001        $3,092      $    --    $   --    $   --     $    --
FHLMC participation certificates available for sale..     2,500         2,603           --        --        --          --
GNMA mortgage-backed securities available for sale...        --            --       22,310     22,905       --          --

AT DECEMBER 31, 1999
FHLMC participation certificates available for sale..       500           497           --         --         --        --
GNMA mortgage-backed securities available for sale...        --            --       14,705     14,528         --        --
U.S. government obligations available for sale.......        --            --           --         --     25,119    25,020
</TABLE>


                                       50

<PAGE>   57


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998


(4) LOANS

     The Company's lending activities are conducted principally in northeastern
Massachusetts and southeastern New Hampshire. The Company grants single-family
and multi-family residential loans, commercial real estate loans, commercial and
lease loans and lease financing and a variety of consumer loans. In addition,
the Company grants loans for the construction of residential homes, commercial
real estate properties and for land development. The ability and willingness of
the single-family residential and consumer borrowers to honor their repayment
commitments is generally dependent on the level of overall economic activity
within the borrowers' geographic areas and real estate values. The ability and
willingness of commercial real estate, commercial and construction loan
borrowers to honor their repayment commitments are generally dependent on the
health of the real estate economic sector in the borrowers' geographic areas and
the general economy.

     The composition of loans, shown net of unadvanced funds, loan premiums or
discounts and deferred loan origination fees and costs, at December 31 follows:

                                                    2000             1999
                                                 ----------       ----------
                                                       (IN  THOUSANDS)
     Real estate loans:
          Residential........................... $  811,214       $  743,747
          Commercial............................    284,419          207,364
          Construction and land.................     89,922           63,660
                                                 ----------       ----------
               Total real estate loans..........  1,185,555        1,014,771
                                                 ----------       ----------

     Consumer loans:
          Home equity lines of credit
            and second mortgages................     75,898           56,412
          Other consumer........................     11,424            5,419
                                                 ----------       ----------
               Total consumer loans.............     87,322           61,831
                                                 ----------       ----------

     Commercial loans:
          Commercial and lease loans............     47,828           27,378
          Lease financing.......................     35,476           29,121
                                                 ----------       ----------
               Total commercial loans...........     83,304           56,499
                                                 ----------       ----------

               Total loans......................  1,356,181        1,133,101
     Allowance for loan losses..................    (14,640)         (11,384)
                                                 ----------       ----------
               Net loans........................ $1,341,541       $1,121,717
                                                 ==========       ==========

                                       51
<PAGE>   58


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

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


                                         2000            1999         1998
                                        -------        -------       -------
                                                    (IN THOUSANDS)

Balance at beginning of year..........  $11,384        $10,486       $12,521
Balance of acquired institution.......    1,826             --            --
Provision (credit) for loan losses....    1,500            400        (1,705)
Charge-offs...........................     (770)          (748)       (1,500)
Recoveries............................      700          1,246         1,170
                                        -------        -------       -------
Balance at end of year................  $14,640        $11,384       $10,486
                                        =======        =======       =======

     The balance of loans on nonaccrual status because of delinquency or other
problem characteristics amounted to $1,676,000 and $2,456,000 at December 31,
2000 and 1999, respectively.

     The reduction in interest income for the years ended December 31,
associated with nonaccrual loans, follows:


                                         2000      1999        1998
                                         ----      ----        ----
                                               (IN THOUSANDS)

Interest income in accordance with
 original loan terms................... $ 482     $ 477       $ 803
Interest income recognized.............  (174)     (159)       (103)
Interest income applied as a reduction
 in loan balance.......................   (91)      (62)       (209)
                                        -----     -----       -----
Foregone interest income............... $ 217     $ 256       $ 491
                                        =====     =====       =====

     The components of impaired loans at December 31 follow:


                                        2000         1999            1998
                                       ------       ------          ------
                                                 (IN THOUSANDS)

Total impaired loans.................. $2,016       $2,499          $2,504
Impaired loans with reserve...........    372        1,110             809
Impaired loan reserve.................    122          197              94
Impaired loans without reserve........  1,644        1,389           1,695
Impaired loans average balance........  2,571        2,103           4,184
Interest income recognized............     36           40              73
Interest income in accordance with
 original loan terms..................    157          235             458

     The impaired loan reserve represents an allocation from the existing
allowance for loan losses.

     A summary of the activity with respect to loans made to directors and
officers and their related interests whose total aggregate loan balances
exceeded $60,000 during the years ended December 31, follows:


                                                    2000              1999
                                                   ------            -------
                                                        (IN THOUSANDS)

Balance at beginning of year...................... $ 1,028            $1,889
New loans granted.................................     354               149
Increase resulting from acquired institution......   2,206               ---
Retirement/reduction of directors and officers....    (236)             (666)
Repayment of principal............................  (1,525)             (344)
                                                   -------            ------
Balance at end of year............................ $ 1,827            $1,028
                                                   =======            ======

                                       52
<PAGE>   59


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

     The outstanding balances of loans to directors and principal officers of
Andover Bank and Gloucester included above totaled $1,189,000 and $450,000,
respectively, at December 31, 2000 and 1999. These loans were made in the Banks'
ordinary course of business, on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than the normal risk
of collectibility.

(5)  MORTGAGE SERVICING ASSETS

     A summary of the components of the mortgage servicing assets, including the
valuation allowance, for the years ended December 31, follows:


                                       MORTGAGE
                                      SERVICING        VALUATION
                                       ASSETS          ALLOWANCE       TOTAL
                                      ---------        ---------      -------
                                                     (IN THOUSANDS)

Balance as of December 31, 1997......  $ 9,900         $  (400)       $ 9,500

Purchased and capitalized............    3,292              --          3,292
Amortization.........................   (2,061)             --         (2,061)
Provision for valuation allowance....       --          (1,465)        (1,465)
Charge-offs..........................   (1,050)            740           (310)
                                       -------         -------        -------
Balance as of December 31, 1998......   10,081          (1,125)         8,956

Purchased and capitalized............    3,990              --          3,990
Amortization.........................   (2,486)             --         (2,486)
Credit for valuation allowance.......       --             175            175
Charge-offs..........................     (450)            450             --
                                       -------         -------        -------
Balance as of December 31, 1999......   11,135            (500)        10,635

Purchased and capitalized............    1,289              --          1,289
Amortization.........................   (2,582)             --         (2,582)
Credit for valuation allowance.......       --             500            500
                                       -------         -------        -------
Balance as of December 31, 2000......  $ 9,842         $    --        $ 9,842
                                       =======         =======        =======

     At December 31, 2000, 1999 and 1998, mortgage loans partially or wholly
owned by others and serviced by the Company amounted to approximately
$936,026,000, $956,358,000 and $894,432,000, respectively, and are not reflected
in the accompanying consolidated financial statements since they are not assets
of the Company. The custodial balances included in the demand deposits totaled
$14,149,000 in 2000, $12,689,000 in 1999 and $22,627,000 in 1998.

     During 2000, 1999 and 1998, the Company purchased mortgage servicing rights
to $60.6 million, $233.2 million and $184.7 million, respectively, in
residential first mortgage loans. These purchased balances are included in the
loans serviced for others reflected above. Gains resulting from the
capitalization of originated mortgage servicing rights are included in net gains
on assets held for sale. Amortization of the mortgage servicing assets and the
provisions for the valuation allowance are included as a reduction of mortgage
banking income. However, credits for the valuation allowance increase mortgage
banking income.


                                       53


<PAGE>   60


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

(6) PREMISES AND EQUIPMENT

     The composition of premises and equipment at December 31 follows:


                                               2000               1999
                                              ------             -------
                                                   (IN THOUSANDS)

     Land and buildings..................... $ 15,137            $13,124
     Furniture, fixtures and equipment......    7,845              4,820
     Leasehold improvements.................      529                271
     Construction in progress...............      ---                509
                                             --------            -------
                                               23,511             18,724
     Less: accumulated depreciation.........  (10,089)            (8,061)
                                             --------            -------
                                             $ 13,422            $10,663
                                             ========            =======

     Rent expense totaled $283,000, $283,000 and $231,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. Rental income on portions of the
Company owned and occupied premises totaled $366,000, $316,000 and $322,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.

     A summary of future minimum rental expense and income under non-cancelable
operating leases at December 31, 2000 follows:

                                              MINIMUM       MINIMUM
                                              RENTAL        RENTAL
                                              EXPENSE       INCOME
                                              -------       -------
                                                  (IN THOUSANDS)

     2001..................................... $250          $300
     2002.....................................  220           112
     2003.....................................  212           108
     2004.....................................  131           104
     2005.....................................  114            35
     Thereafter...............................  350            --


(7) STOCK IN FEDERAL HOME LOAN BANK OF BOSTON

     As voluntary members of the Federal Home Loan Bank ("FHLB") of Boston, the
Banks are required to invest in $100 par value stock of the FHLB of Boston in
the amount of 1% of its outstanding home loans or 5% of its outstanding advances
from the FHLB of Boston, whichever is higher. As and when such stock is
redeemed, the Banks would receive from the FHLB of Boston an amount equal to the
par value of the stock. At its discretion, the FHLB of Boston may declare
dividends on this stock. Such dividends, which are included in dividend income
on equity securities, amounted to $1,677,000, $1,093,000 and $1,008,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.


                                       54
<PAGE>   61


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

(8) DEPOSITS

     The composition of deposits at December 31 follows:

<TABLE>
<CAPTION>

                                                        2000                            1999
                                             ---------------------------        --------------------------
                                                                WEIGHTED                          WEIGHTED
                                                                AVERAGE                            AVERAGE
                                                AMOUNT           RATE           AMOUNT              RATE
                                             ----------         --------        --------          --------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                          <C>                 <C>            <C>                 <C>
     Non-interest bearing:
          Demand deposit accounts..........  $  145,660            --%          $ 86,871              --%
     Interest bearing:
          NOW accounts.....................     151,168          1.38             99,040            0.76
          Money market deposit accounts....     107,814          2.97             95,291            2.75
          Savings accounts.................     246,812          3.65            213,286            3.25
          Variable rate certificates.......      23,006          6.68              3,434            4.59
          Fixed rate certificates..........     546,729          5.78            470,611            5.05
                                             ----------                         --------
               Total deposits..............  $1,221,189          3.88%          $968,533            3.53%
                                             ==========          ====           ========            ====
</TABLE>


     Time certificates in excess of $100,000 at December 31, 2000 and 1999
amounted to $157,454,000 and $91,351,000, respectively. Brokered deposits
amounted to $45,000,000 in 2000. There were no brokered deposits in 1999.

     A summary of interest expense on deposits for the years ended December 31,
follows:


                                                  2000       1999        1998
                                                 -------    -------     -------
                                                          (IN THOUSANDS)

     Now accounts..............................  $ 1,396    $   772     $   806
     Money market deposit accounts.............    3,017      2,657       2,861
     Savings accounts..........................    7,938      6,770       6,256
     Certificates of deposit...................   28,615     24,142      29,214
                                                 -------    -------     -------
          Total interest expense on deposits...  $40,966    $34,341     $39,137
                                                 =======    =======     =======

     Interest forfeitures resulting from early withdrawals from certificates of
deposit are credited to interest expense on deposits. Interest forfeitures
amounted to $166,000, $118,000 and $172,000 for the years ended December 31,
2000, 1999 and 1998, respectively.

     The average interest rate on time certificates at December 31, 2000, by the
earlier of its repricing or period of maturity, follows:


                                                                 AVERAGE
                                                AMOUNT             RATE
                                               --------          -------
                                                (DOLLARS IN THOUSANDS)
Maturity/repricing in:
     2001...................................   $423,847           5.78%
     2002...................................    110,784           5.89
     2003...................................     30,015           6.16
     2004...................................      3,342           5.36
     2005...................................      1,747           6.00
                                               --------
                                               $569,735           5.82%
                                               ========           ====

Included in the table above are $23,006,000 in variable rate time certificates,
of which 38.9% mature in 2001 and 53.9% mature in 2002. The variable rate
certificates are subject to rate changes on a monthly basis in conjunction with
changes to the prime rate.

                                       55
<PAGE>   62


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

(9) OTHER BORROWINGS

     Other borrowings consist of various short-term borrowings that typically
have a maturity date of 90 days or less. However, FHLB overnight and federal
funds purchased have maturities of one day. In addition, the Banks enter into
sales of securities under agreements to repurchase. These agreements are treated
as financings and the obligations to repurchase securities sold are reflected as
a liability in the consolidated balance sheets and the securities underlying the
agreements remain in the asset accounts. The securities underlying the
agreements are held by third parties as custodian for the Banks. The Banks have
also established overnight corporate customer repurchase agreements whereby
collateral is set aside by the Banks' custodian and the rates paid approximate
short term deposit or market interest rates (see note 3).

     The composition of other borrowings at December 31 follows:


                                                   2000       1999       1998
                                                  -------    -------    -------
                                                          (IN THOUSANDS)

FHLB overnight (see note 10)..................... $    --    $35,000    $    --
Federal funds purchased..........................   1,481      3,822         --
Securities sold under agreements to repurchase...      --     25,525     10,087
Corporate customer repurchase agreements.........  17,460      9,315      6,245
                                                  -------    -------    -------
                                                  $18,941    $73,662    $16,332
                                                  =======    =======    =======

     Information concerning securities sold under agreements to repurchase and
corporate customer repurchase agreements for the years ended December 31,
follows:

                                                     2000     1999      1998
                                                   -------   -------   -------
                                                      (DOLLARS IN THOUSANDS)

     Outstanding at December 31................... $17,460   $34,840   $16,332
     Outstanding collateral:
        Amortized cost............................  22,310    39,824    20,834
        Fair value................................  22,905    39,548    20,785
     Average balance outstanding during the year..  23,593    32,131    11,794
     Maximum outstanding at any month-end.........  45,499    38,852    19,981
     Weighted average rate at year-end............    4.89%     5.15%     4.65%
     Weighted average rate during the year........    5.38%     4.74%     4.90%


     The repurchase agreements outstanding at December 31, 1999 and December 31,
1998 matured within 30 days of year end. The customer repurchase agreements for
each of the three years matured the following day.

     As of December 31, 2000, the Bank has established reverse repurchase lines
of credit with various lenders totaling $310.0 million. These lines would be
subject to the amount of securities available for collateralization purposes.


                                       56
<PAGE>   63

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

(10) FEDERAL HOME LOAN BANK ADVANCES

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

<TABLE>
<CAPTION>

                                                         2000                                   1999
                                       ----------------------------------------         ------------------------
                                                                        WEIGHTED                        WEIGHTED
                                       SCHEDULED      REDEEMED AT       AVERAGE         SCHEDULED        AVERAGE
                                       MATURITY   INITIAL CALL DATE(1)  RATE (2)         MATURITY         RATE
                                       ---------  --------------------  --------        ---------       --------
                                                                   (DOLLARS IN THOUSANDS)

<S>                                     <C>            <C>               <C>             <C>              <C>
     Within 1 year..................... $181,623       $359,623          6.43%           $145,048         5.38%
     Over 1 year to 2 years............   34,610         39,610          6.44              23,590         5.45
     Over 2 years to 3 years...........  100,544         15,544          6.12              14,609         5.94
     Over 3 years to 5 years...........   20,365            365          6.74              20,500         5.62
     Over 5 years......................   80,135          2,135          5.12             101,975         5.15
                                        --------       --------                          --------
                                        $417,277       $417,277          6.12%           $305,722         5.35%
                                        ========       ========          ====            ========         ====
</TABLE>

(1) Callable FHLB advances are shown in the respective periods assuming that
    the callable debt is redeemed at the initial call date while all other
    advances are shown in the periods corresponding to their scheduled maturity
    date.

(2) Weighted average rate based on scheduled maturity dates.

     In accordance with the requirements of the FHLB of Boston, the Banks are
required to maintain qualified collateral, as defined by the FHLB, as collateral
for its advances. This collateral is primarily composed of the Banks' investment
in the FHLB stock and its residential mortgage and investment portfolios not
otherwise pledged (see notes 3, 4, 7 and 9). The Banks have the capacity to
borrow an additional $359.5 million in short term or long term advances as well
as $57.4 million in secured lines of credit from the FHLB of Boston as of
December 31, 2000.

(11) FEDERAL AND STATE INCOME TAXES

     The current and deferred components of income tax expense (benefit) for the
years ended December 31, follow:


                                                2000        1999         1998
                                               ------      -------      -------
                                                        (IN THOUSANDS)
     Current income tax expense:
          Federal............................. $4,605      $ 9,032      $ 8,440
          State...............................    583          861          887
                                               ------      -------      -------
                                                5,188        9,893        9,327
                                               ------      -------      -------
     Deferred income tax expense (benefit):
          Federal.............................    805          280       (1,107)
          State...............................  1,349          114          267
          Change in valuation allowance.......     --           --         (328)
                                               ------      -------      -------
                                                2,154          394       (1,168)
                                               ------      -------      -------

     Total income tax expense................. $7,342      $10,287      $ 8,159
                                               ======      =======      =======

                                       57
<PAGE>   64


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

     The causes of the difference between the total expected income tax expense
computed by applying the Federal statutory rate to income before income taxes
and the reported income tax expense for the years ended December 31, follow:

<TABLE>
<CAPTION>

                                                                 2000           1999            1998
                                                                ------        -------           ------
                                                                         (DOLLARS IN THOUSANDS)

<S>                                                            <C>           <C>               <C>
     Federal income tax expense at statutory rate............. $ 9,633        $10,213          $ 8,941
     Tax effect of:
          State tax, net of federal benefit before valuation
           allowance, excluding state impact of law change....   1,256            634              750
          Adjustment of deferred tax liabilities..............  (2,900)          (440)          (1,100)
          Change in valuation allowance......................       --             --             (328)
          Other, net..........................................    (647)          (120)            (104)
                                                               -------        -------          -------
     Income tax expense ...................................... $ 7,342        $10,287          $ 8,159
                                                               =======        =======          =======
     Effective income tax rate................................    26.7%          35.3%            31.9%
                                                               =======        =======          =======
</TABLE>


     The existing net deductible temporary differences that give rise to the net
deferred income tax asset are expected to reverse in periods in which the
Company will generate net taxable income. At December 31, 2000, the net deferred
tax asset is supported by recoverable income taxes of approximately $16.9
million. 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
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.

The components of the net deferred taxes receivable for the years ended December
31, follow:

                                                                2000      1999
                                                               ------    ------
                                                                (IN THOUSANDS)
Deferred tax assets:
   Allowance for loan losses.................................. $5,090    $4,210
   Unrealized losses on investments available for sale........     --     1,903
   Unrealized losses on writedown of other real estate owned..     55        65
   Deferred benefits..........................................    362       359
   Depreciation...............................................    174       214
   Excess mortgage servicing fees.............................    375       627
   Purchasing accounting adjustments..........................    555        --
   Other......................................................    109        42
                                                               ------    ------
      Gross deferred assets...................................  6,720     7,420
                                                               ------    ------
Deferred tax liabilities:
   Deferred expenses..........................................  1,244     1,624
   Unrealized gains on investments available for sale.........  2,123       ---
   Equipment leases...........................................  2,148       346
   Other......................................................    887       191
                                                               ------    ------
      Gross deferred liabilities..............................  6,402     2,161
                                                               ------    ------
Net deferred income taxes receivable.......................... $  318    $5,259
                                                               ======    ======

(12) STOCKHOLDERS' EQUITY

     Preferred Stock
     In connection with the Company's adoption of a Shareholder Rights Plan on
January 21, 1999, the Company established a series of 100,000 shares of
preferred stock designated as Series B Junior Participating Cumulative Preferred
Stock, par value $0.10 per share ("Series B Stock") and declared a dividend of
one Preferred Stock Purchase Right (the "Right") for each outstanding share of
the Company's Common Stock held of record as of February 16, 1999.


                                       58
<PAGE>   65

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

     Pursuant to the Shareholder Rights Plan, each Right entitles the holder to
purchase a unit consisting of one one-thousandth of a share of Series B Stock,
par value $0.10 per share, at an initial cash exercise price of $130.00 per
unit, subject to adjustment. The Rights are not exercisable and remain attached
to all outstanding shares of Common Stock until the earliest of (i) ten calendar
days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding shares of Common Stock (the date of said
announcement being referred to as the "Stock Acquisition Date"), (ii) ten
business days following the commencement of a tender offer or exchange offer
that could result in a person or group becoming an Acquiring Person or (iii) the
declaration by the Board of Directors that a person is an "Adverse Person", as
such term is defined in the Shareholder Rights Plan.

     In the event that a Stock Acquisition Date occurs or the Board of Directors
determines that a person is an Adverse Person, each holder of a Right will be
entitled to receive upon exercise that number of units of Series B Stock having
a market value of two times the exercise price of the Right. In the event that,
at any time following the Stock Acquisition Date, (i) the Company is acquired in
a merger or other business combination transaction or (ii) 50% or more of the
Company's assets or earning power is sold, each holder of a Right shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a market value equal to two times the exercise price of
the Right. The Rights have no voting or dividend privileges and, until they
become exercisable, have no dilutive effect on the earnings of the Company. The
Rights expire on February 16, 2009.

     The holders of Series B Stock would be entitled to a preference with
respect to dividends and liquidation.

Stock Repurchase Plan
     In October 1998, the Company's Board of Directors approved a common stock
repurchase program authorizing the repurchase of 5%, or 324,141 shares, of the
Company's common stock outstanding. Purchases may be made on the open market or
in private transactions. During 2000, the Company repurchased 177,900 common
shares; 146,241 shares remain eligible for repurchase under the existing 5%
program limitation. Treasury stock held at December 31, 2000, totaled 167,953
shares.

Retained Earnings
     The Company may not declare or pay cash dividends on its common stock if
the effect thereof would cause its net worth to be reduced below regulatory net
worth requirements or if such declaration and payment would otherwise violate
regulatory requirements.

     The Banks are subject to various regulatory capital requirements
administered by 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 Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks' 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 Banks 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 that as of December 31, 2000, the Banks
met all capital adequacy requirements to which they were subject.

     As of December 31, 2000, the most recent notification from the FDIC
categorized the Banks as well capitalized under the prompt corrective action
provisions. To be categorized as well capitalized, the Banks must maintain total
capital risk-based, Tier 1 capital risk-based, and Tier 1 capital leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes would cause a change in the Banks'
categorization.

                                       59
<PAGE>   66


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

     The Company's and the Banks' as reported capital amounts and ratios in
addition to the minimum capital requirements and well capitalized capital
requirements at December 31 follow:

<TABLE>
<CAPTION>

                                                                                            TO BE WELL
                                                                   MINIMUMS              CAPITALIZED UNDER
                                                                 FOR CAPITAL             PROMPT CORRECTIVE
                                      AS REPORTED                 ADEQUACY               ACTION PROVISIONS
                                ----------------------     ------------------------     ----------------------
                                                             (DOLLARS IN THOUSANDS)
                                  AMOUNT         RATIO     AMOUNT             RATIO     AMOUNT           RATIO
                                --------        ------     -------           ------    --------          -----
<S>                             <C>             <C>       <C>                <C>      <C>               <C>
AS OF DECEMBER 31, 2000
Risk-based capital ratios:
Total capital
  Andover Bancorp, Inc......... $156,388         12.9%     $96,866            >8.0%    $121,082          >10.0%
                                                                              -                          -
  Andover Bank.................  135,961         12.2       89,203            >8.0      111,504          >10.0
                                                                              -                          -
  Gloucester Bank and Trust....   10,979         11.4        7,696            >8.0        9,620          >10.0
                                                                              -                          -
Tier 1 capital
  Andover Bancorp, Inc.........  141,748         11.7       48,433            >4.0       72,649           >6.0
                                                                              -                           -
  Andover Bank.................  123,185         11.1       44,601            >4.0       66,902           >6.0
                                                                              -                           -
  Gloucester Bank and Trust....    9,776         10.2        3,848            >4.0        5,772           >6.0
                                                                              -                           -
Leverage capital ratio:
Tier 1 capital
  Andover Bancorp, Inc.........  141,748          8.0       70,605            >4.0       88,256           >5.0
                                                                              -                           -
  Andover Bank.................  123,185          7.5       65,684            >4.0       82,105           >5.0
                                                                              -                           -
  Gloucester Bank and Trust....    9,776          7.6        5,132            >4.0        6,414           >5.0
                                                                              -                           -
AS OF DECEMBER 31, 1999
Risk-based capital ratios:
Total capital
  Andover Bancorp, Inc......... $144,706         14.6%     $79,386            >8.0%     $99,233          >10.0%
                                                                              -                          -
  Andover Bank.................  133,786         13.5       79,312            >8.0       99,140          >10.0
                                                                              -                          -
Tier 1 capital
  Andover Bancorp, Inc.........  133,322         13.4       39,693            >4.0       59,540           >6.0
                                                                              -                           -
  Andover Bank.................  122,402         12.4       39,656            >4.0       59,484           >6.0
                                                                              -                           -
Leverage capital ratio:
Tier 1 capital
  Andover Bancorp, Inc.........  133,322          9.0       59,071            >4.0       73,839           >5.0
                                                                              -                           -
  Andover Bank.................  122,402          8.3       58,849            >4.0       73,561           >5.0
                                                                              -                           -
</TABLE>

(13) OTHER INCOME

     Components of other income for the years ended December 31, follow:


                                                    2000       1999       1998
                                                   ------     ------     ------
                                                          (IN THOUSANDS)

 Deposit account service charges and other fees..  $3,031     $2,455     $2,289
 Loan late charges and other fees................     505        502        703
 Rental income...................................     367        316        322
 Gains (losses) on real estate operations, net ..     (40)        (5)        14
 Other...........................................     522        432        577
                                                   ------     ------     ------
                                                   $4,385     $3,700     $3,905
                                                   ======     ======     ======
(14) EMPLOYEE BENEFITS

Pension Plan and Postretirement Benefits Other Than Pensions
     The Company sponsored a non-contributory defined benefit pension plan that
covered all eligible employees. In 1999, the Company elected to terminate the
defined benefit pension plan and to distribute the excess of the assets over the
pension obligation to the employees on a proportionate basis. The expense
incurred for the pension plan until its curtailment was $104,000 and the
curtailment and settlement gains recognized by the Bank totaled $1.6 million in
1999. In addition, Andover Bank provides healthcare and life insurance benefits
(post retirement benefits) for certain retired employees that met the
eligibility requirements at the time of their retirement.

                                       60
<PAGE>   67


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

     The funding status and other components of the pension plan for the year
ended October 31, and the postretirement benefits plan for the years ended
December 31, follow:

                                      PENSION PLAN  POSTRETIREMENT BENEFITS PLAN
                                      ------------ -----------------------------
                                          1998       2000       1999      1998
                                        -------    -------    -------   --------
                                                    (IN THOUSANDS)

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 5,946    $   361   $   360    $   333
Service cost ..........................     702         --        --         --
Interest cost .........................     418         23        25         21
Actuarial loss (gain) .................     536         12        14         42
Benefits paid .........................    (242)       (37)      (38)       (36)
                                        -------    -------   -------    -------
Benefit obligation at end of year ..... $ 7,360    $   359   $   361    $   360
                                        =======    =======   =======    =======

CHANGE IN PLAN ASSETS
Fair value at beginning of year ....... $ 5,194    $    --   $    --    $    --
Actual return on plan assets ..........     426         --        --         --
Company contribution ..................     482         --        --         --
Benefits paid .........................    (242)        --        --         --
                                        -------    -------   -------    -------
Fair value at end of year ............. $ 5,860    $    --   $    --    $    --
                                        =======    =======   =======    =======

RECONCILIATION OF THE FUNDING STATUS
Transition assets ..................... $   168    $    --   $    --    $    --
Deferred gain (loss) ..................    (149)        56        32          7
Prepaid (accrued) expense .............  (1,519)      (415)     (393)      (367)
                                        -------    -------   -------    -------
Funded status ......................... $(1,500)   $  (359)  $  (361)   $  (360)
                                        =======    =======   =======    =======

COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost .......................... $   702    $    --   $    --    $    --
Interest cost .........................     418         23        25         21
Expected return on plan assets ........    (467)        --        --         --
Transition obligation .................     (14)        --        --         --
Actuarial loss (gain) .................       2         --        --         --
                                        -------    -------   -------    -------
Net periodic benefit cost ............. $   641    $    23   $    25    $    21
                                        =======    =======   =======    =======

Assumptions used to develop the net periodic benefit obligation follow:

                                      PENSION PLAN  POSTRETIREMENT BENEFITS PLAN
                                      ------------  ----------------------------
                                           1998      2000     1999       1998
                                          ------    ------   -------    -------

Discount rate............................  6.50%      6.50%    7.00%       6.00%
Rate of increase in compensation levels..  4.75%        --       --          --

Assumptions used to develop the net
 periodic benefit cost follow:

     Discount rate.......................  6.50%      6.50%    7.00%       6.00%
     Rate of increase in compensation
       levels............................  4.75%        --       --          --
     Expected long-term rate of return
       on assets.........................  9.00%        --       --          --


                                       61
<PAGE>   68

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

Stock Option Plans
     The Company has stock options issued under two separate plans for the
benefit of certain officers and non-employee directors. The first plan, the 1986
Stock Option Plan, had 750,000 shares of authorized but unissued common stock.
All but 4,500 shares were granted prior to the Plan's expiration in 1996. A
second plan, the Stock Incentive Plan, was adopted in 1995 with 311,418 shares
of authorized but unissued common stock. The exercise price of any option
granted will be equal to the fair market value of the Common Stock on the date
the option is granted. Stock options are exercisable over various periods
commencing on the date of the grant and in no event later than ten years after
the date of the grant.

     A summary of stock option activity for the years ended December 31,
follows:

<TABLE>
<CAPTION>

                                                  2000                      1999                     1998
                                        -----------------------     ---------------------     --------------------
                                                      WTD. AVG.                 WTD. AVG.                 WTD. AVG.
                                                      EXERCISE                  EXERCISE                  EXERCISE
                                        SHARES          PRICE        SHARES      PRICE        SHARES       PRICE
                                        ------        ---------     -------     ---------     -------     --------
<S>                                     <C>            <C>          <C>          <C>          <C>          <C>
Outstanding at beginning of year....... 563,930        $19.30       512,599      $17.91       505,388      $14.92
     Granted...........................  89,200         33.05        68,050       28.21        69,575       34.50
     Exercised......................... (14,622)        11.47       (14,060)      10.66       (60,114)      11.64
     Forfeited.........................      --            --        (2,659)      25.33        (2,250)      27.67
                                        -------                     -------                   -------
Outstanding at end of year............. 638,508        $21.40       563,930      $19.30       512,599      $17.91
                                        -------                     -------                   =======
Exercisable at end of year............. 626,342        $21.32       557,930      $19.34       495,098      $18.00
                                        =======                     =======                   =======
Shares reserved for future grants......  15,490                     104,690                   170,081
                                        =======                     =======                   =======
</TABLE>

     A summary of options outstanding and exercisable by price range as of
December 31 follows:

<TABLE>
<CAPTION>

                                OPTIONS OUTSTANDING                                         OPTIONS EXERCISABLE
   ----------------------------------------------------------------------------       -------------------------------
                               OUTSTANDING         WTD. AVG.                          EXERCISABLE
      RANGE OF                    AS OF           REMAINING          WTD. AVG.           AS OF            WTD. AVG.
    EXERCISE PRICES             12/31/00      CONTRACTUAL LIFE   EXERCISE PRICE        12/31/00        EXERCISE PRICE
    ---------------            -----------    ----------------   --------------        --------        --------------
<S>         <C>                  <C>                 <C>              <C>               <C>                <C>
  $ 2.1667 -$ 6.7500..........   35,800              1.7              $5.70             35,800             $5.70
  $ 6.7600 -$11.7500..........   62,483              3.6              10.03             62,483             10.03
  $11.7600 -$14.2500..........  147,100              4.2              14.01            147,100             14.01
  $14.2600 -$22.0000..........  120,175              5.4              16.76            117,175             16.81
  $27.2500 -$32.0000..........   88,550              9.0              28.26             79,384             28.19
  $32.0100 -$34.8000..........  184,400              8.4              33.92            184,400             33.92
                                -------                                                -------
                                638,508              6.1             $21.40            626,342            $21.32
                                =======              ===             ======            =======            ======
</TABLE>


     The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:


                                             2000       1999        1998
                                            -------    -------    --------
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income as reported...................   $20,182    $18,885     $17,386
Pro forma net income.....................    19,471     18,393      16,807
Basic earnings per share as reported.....      3.09       2.89        2.68
Basic pro forma earnings per share.......      2.98       2.82        2.59
Diluted earnings per share as reported...      3.01       2.82        2.60
Diluted pro forma earnings per share.....      2.90       2.74        2.51

                                       62
<PAGE>   69


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

     The per share weighted average fair value of stock options granted during
2000, 1999 and 1998 was $9.59, $8.32 and $10.07, respectively, on the date of
grant. These fair values were determined using the Black Scholes option pricing
model with the following weighted average assumptions:

                                        2000       1999         1998
                                        -----      -----        -----

     Expected dividend yield...........  3.50%      3.50%        2.75%
     Risk-free interest rate...........  5.34       6.56         4.87
     Expected volatility............... 30.00      30.00        30.00
     Expected life in years............  6.00       6.50         6.70

Employee Stock Ownership Plan
     The Company maintains an Employee Stock Ownership Plan (the "ESOP") that
covers all employees who meet specified age and length of service requirements.
Contributions are made for the purchase of additional shares of Company stock
and accordingly, a charge to salaries and employee benefits expense is recorded.
In 2000, 13,078 shares of common stock were purchased in the open market at an
average price of $28.70 per share, which when combined with forfeited shares are
allocated to participants proportionately to their gross wages. In 1999 and
1998, 11,566 and 11,552 shares were purchased at an average price of $30.63 and
$32.32 per share, respectively. Contributions by the Banks to the ESOP for
participants for the years ended December 31, 2000 and 1999 and October 31, 1998
were $378,000, $355,000 and $375,000, respectively.

Thrift Incentive Plan
     The Company has an employee tax deferred thrift incentive plan (the
"401(k)") under which individual employee contributions to the plan are matched
within certain limitations by the Banks. All employees who meet specified age
and length of service requirements are eligible to participate in the 401(k)
plan. The amounts matched by the Banks are included in salaries and employee
benefits expense. The amounts matched for the years ended December 31, 2000,
1999 and 1998 were $202,000, $91,000 and $94,000, respectively.

Money Purchase Plan
     As a result of terminating the pension plan in 1999, the Company adopted a
money purchase plan whereby the Company sets aside a certain percentage of each
eligible employee's salary. This retirement plan became effective January 1,
2000 and the contributions totaled $463,000 for the year ended December 31,
2000.

Officers Incentive Compensation Plan
     The Incentive Compensation Plan provides for the payment of bonuses to
officers under certain circumstances based upon the Company's pre-tax earnings
adjusted for gains or losses from sales of assets, targeted returns on assets
and the individual's accomplishment of established goals and objectives. Amounts
are to be allocated to participants as determined by the Company's Compensation
and Option Committee based on the recommendation of the President and subject to
approval by its Board of Directors.

     In 2000, 1999 and 1998 $755,000, $620,000 and $490,000, respectively, was
charged to salaries and employee benefits expense under this plan.

Executive Officer Employment and Termination Agreements
     The Company maintains an employment agreement with its President and Chief
Executive Officer, The employment agreement generally provides for the continued
payment of specified compensation and benefits for specified periods after
termination, unless the termination is for "cause" as defined in the employment
agreement. In addition, the Company has entered into special termination
agreements with its President and Chief Executive Officer and certain other
executives which provide for the payment, under certain circumstances, of
lump-sum amounts upon termination following a "change of control" which is
generally defined to mean a person or group acquiring ownership of 25% or more
of the shares of the Company.

                                       63
<PAGE>   70

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

Employee Special Termination Plan
     The Company established an Employee Special Termination Plan on January 23,
1997. The Plan provides eligible employees with severance pay and medical
benefits in the event of a change in control of the Bank or Company. Generally,
all employees are eligible to participate in the Plan as long as they are not
eligible to receive benefits under any executive termination or employment
agreement. The Plan provides for the payment of lump-sum amounts upon
termination following a change in control, as defined by the Plan.

Deferred Compensation Plan
     The Company has adopted a deferred compensation plan for its directors
whereby a non-employee director can elect to defer earned fees to future years
with benefits commencing at retirement. In 1996, this unfunded plan was amended
to allow the directors to change their deferred compensation account to
equivalent stock units in the Company's common stock, permit distribution upon
retirement to be paid in shares of common stock, or to choose to receive
interest credits based on an equivalent rate on a term certificate of deposit.
The amended deferred compensation plan reserved 75,000 shares of common stock,
of which approximately 44,000 shares remain unallocated. The deferred
compensation attributed to the directors for the years ended December 31, 2000,
1999 and 1998 totaled $147,000, $159,000 and $108,000, respectively. In 2000,
6,208 equivalent stock units were allocated at an average price of $28.24. In
1999 and 1998, 5,553 and 3,295 equivalent stock units were allocated at an
average price of $30.81 and $32.79 per stock unit, respectively.

(15)  FAIR VALUES OF FINANCIAL INSTRUMENTS

     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 assets or liabilities include real estate acquired by
foreclosure, the deferred income tax asset, office properties and equipment,
core deposits and other intangibles. 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. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The estimated fair value amounts
have been determined by using available quoted market information or other
appropriate valuation methodologies.

     The fair value estimates provided are made at a specific point in time,
based on relevant market information and the characteristics of the financial
instrument. The estimates do not provide for any premiums or discounts that
could result from concentrations of ownership of a financial instrument. Because
no active market exists for a portion of the Company's financial instruments,
certain fair value estimates are based on subjective judgments regarding current
economic conditions, risk characteristics of the financial instruments, future
expected loss experience, prepayment assumptions, and other factors. The
resulting estimates involve uncertainties and therefore cannot be determined
with precision. Changes made to any of the underlying assumptions could
significantly affect the estimates.

     Financial instruments actively traded in a secondary market have been
valued at December 31 using quoted available market prices follow:

                                           2000                 1999
                                  ---------------------  ----------------------
                                  CARRYING               CARRYING
                                   AMOUNT    FAIR VALUE   AMOUNT     FAIR VALUE
                                  --------   ---------   --------    ----------
                                                   (IN THOUSANDS)

Assets held for sale............. $  5,037    $  5,103   $  1,494   $   1,494
Investments available for sale...  289,155     289,155    221,370     221,370
Investments held to maturity.....   48,533      49,014     63,752      62,557


                                       64
<PAGE>   71


                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

     The fair values at December 31 of financial instruments with stated
maturities have been estimated by discounting cash flows with a discount rate
approximately equal to the current market rate for similar instruments follow:

<TABLE>
<CAPTION>


                                                      2000                               1999
                                           --------------------------           ------------------------
                                            CARRYING                                          CARRYING
                                             AMOUNT        FAIR VALUE             AMOUNT      FAIR VALUE
                                           ----------      ----------           ----------    ----------
                                                                    (IN THOUSANDS)
<S>                                        <C>             <C>                  <C>           <C>
     Loans receivable, net................ $1,341,541      $1,332,596           $1,121,717    $1,099,568
     Mortgage servicing assets, net.......      9,842          13,030               10,635        11,917
     Certificates of deposit..............    569,735         573,964              474,045       474,086
     Federal Home Loan Bank advances......    417,277         417,576              305,722       305,327
</TABLE>

     The fair values at December 31 of financial instruments with no maturity or
short-term maturities that approximate their carrying amounts follow:

<TABLE>
<CAPTION>


                                                           2000                                1999
                                                  -------------------------            -----------------------
                                                  CARRYING                             CARRYING
                                                   AMOUNT        FAIR VALUE             AMOUNT      FAIR VALUE
                                                  --------       ----------            --------     ----------
                                                                          (IN THOUSANDS)

<S>                                               <C>             <C>                  <C>           <C>
     Cash and due from banks....................  $ 40,256        $ 40,256             $ 26,913      $ 26,913
     Short-term investments.....................    29,300          29,300                1,600         1,600
     Accrued interest receivable................    11,366          11,366                8,236         8,236
     Stock in FHLB..............................    23,366          23,366               17,737        17,737
     Demand deposit accounts....................   145,660         145,660               86,871        86,871
     NOW accounts...............................   151,168         151,168               99,040        99,040
     Savings accounts...........................   246,812         246,812              213,286       213,286
     Money market deposit accounts..............   107,814         107,814               95,291        95,291
     Other borrowings...........................    18,941          18,941               73,662        73,662
     Mortgagors' escrow  accounts...............     3,634           3,634                3,412         3,412
</TABLE>

     The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate fair
value. The fair values for investments available for sale and held to maturity
are based on quoted bid prices received from securities dealers or third party
pricing services. Commitments to originate loans and forward commitments to sell
loans have been considered in the value of assets held for sale. Loans are
estimated by discounting contractual cash flows adjusted for prepayment
estimates and using discount rates approximately equal to current market rates
on loans with similar characteristics and maturities. The incremental credit
risk for non-performing loans has been considered in the determination of the
fair value of loans. Excess servicing is based on the present value of the
estimated cash flows using a current risk rate and taking into consideration
estimated prepayments. Fixed rate certificates and Federal Home Loan Bank
advances are based on the discounted value of contractual cash flows. The
discount rates used are representative of approximate rates currently offered on
instruments with similar remaining maturities. The fair values for cash and
short-term investments approximate their carrying amounts because of the short
maturity of these instruments. The fair values of accrued interest receivable,
variable rate certificates, securities sold under agreements to repurchase and
mortgagors' escrow accounts approximate their carrying amounts because of the
short-term nature of these financial instruments. The fair value of stock in the
Federal Home Loan Bank of Boston equals its carrying amount as reported in the
balance sheet because this stock is redeemable only at par by the FHLB. The fair
values of demand deposit accounts, NOW accounts, regular savings accounts and
money market accounts are equal to their respective carrying amounts since they
are equal to the amounts payable on demand at the reporting date. The majority
of the Company's commitments for unused lines and outstanding standby letters of
credit and unadvanced portions of loans are at floating rates and, therefore,
there is no fair value adjustment.


                                       65
<PAGE>   72



                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

(16) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS

     The condensed financial statements for Andover Bancorp, Inc., referred to
as the "Parent Company" for purposes of this Note only, as of and for the years
ended December 31 follow:

BALANCE SHEETS

                                                            2000         1999
                                                          --------     --------
                                                             (IN THOUSANDS)
     ASSETS
     Cash and interest-bearing deposits in subsidiaries.. $  5,934     $ 10,041
     Investments available for sale, at market...........    3,135          996
     Investment in subsidiaries, at equity...............  144,251      119,269
     Other assets........................................      719           91
                                                          --------     --------
               Total assets.............................. $154,039     $130,397
                                                          ========     ========

     LIABILITIES AND STOCKHOLDERS' EQUITY
     Liabilities:
          Accrued income taxes........................... $    242     $      2
          Accrued expenses...............................      176          132
                                                          --------     --------
               Total liabilities.........................      418          134
                                                          --------     --------
     Total stockholders' equity..........................  153,621      130,263
                                                          --------     --------
               Total liabilities and stockholders'
                equity................................... $154,039     $130,397
                                                          ========     ========

STATEMENTS OF OPERATIONS

                                                       YEARS ENDED DECEMBER 31,
                                                     ---------------------------
                                                       2000     1999       1998
                                                     -------   -------   -------
                                                             (IN THOUSANDS)

Dividends from bank subsidiaries .................   $19,000   $ 7,000   $ 9,500
Interest income from deposits in subsidiaries ....       261       323       166
Dividends on equity securities ...................       161        15         7
                                                     -------   -------   -------
     Total operating income ......................    19,422     7,338     9,673
Non-interest expenses ............................       412       374       402
                                                     -------   -------   -------
Income before income tax expense and
   equity in net income of subsidiaries ..........    19,010     6,964     9,271
Income tax expense ...............................        60        33        48
                                                     -------   -------   -------
Income before equity in net income of subsidiaries    18,950     6,931     9,223
Equity in net income of subsidiaries .............     1,232    11,954     8,163
                                                     -------   -------   -------
Net income .......................................   $20,182   $18,885   $17,386
                                                     =======   =======   =======

     The Parent Company's statements of changes in stockholders' equity are
identical to the consolidated statements of changes in stockholders' equity and
therefore are not presented here.

                                       66

<PAGE>   73

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                          YEARS ENDED DECEMBER 31,
                                                                     --------------------------------
                                                                       2000        1999        1998
                                                                     --------    --------    --------
                                                                             (IN THOUSANDS)
<S>                                                                  <C>         <C>         <C>
Cash flows from operating activities:
     Net income ..................................................   $ 20,182    $ 18,885    $ 17,386
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Equity in undistributed net income of subsidiaries ..........     (1,232)    (11,954)     (8,163)
     (Increase) decrease in other assets .........................       (388)        (75)        163
     Increase (decrease) in other liabilities ....................         44         (22)          3
                                                                     --------    --------    --------
          Net cash provided by operating activities ..............     18,606       6,834       9,389
                                                                     --------    --------    --------
     Purchases of investments available for sale .................     (1,630)       (703)       (191)
     Investments in subsidiary ...................................       (750)         --          --
                                                                     --------    --------    --------
          Net cash used by investing activities ..................     (2,380)       (703)       (191)
                                                                     --------    --------    --------
Cash flows from financing activities:
     Stock options exercised .....................................        258         239       1,023
     Treasury stock purchased ....................................     (4,718)         --          --
     Cash disbursed for acquired institution .....................     (9,413)         --          --
     Dividends paid to stockholders ..............................     (6,460)     (5,677)     (4,484)
                                                                     --------    --------    --------
          Net cash used by financing activities ..................    (20,333)     (5,438)     (3,461)
                                                                     --------    --------    --------
Net increase (decrease) in cash and interest-bearing
   deposit in subsidiaries .......................................     (4,107)        693       5,737
Cash and interest-bearing deposits in subsidiaries at
   beginning of year .............................................     10,041       9,348       3,611
                                                                     --------    --------    --------
Cash and interest bearing deposits in subsidiaries at
   end of year ...................................................   $  5,934    $ 10,041    $  9,348
                                                                     ========    ========    ========

Supplemental cash flow information: Cash paid during the year for:
          Income taxes ...........................................   $     60    $     33    $     48
</TABLE>

(17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS AND
CONTINGENCIES

     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
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to originate loans, standby letters of
credit, recourse arrangements on assets sold, and forward commitments to sell
loans. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the Consolidated
Balance Sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.

     The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements 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. For forward commitments to sell loans and mortgage-backed
securities, the contract or notional amounts do not represent exposure to credit
loss. The Company monitors the credit risk of its forward commitments through
credit approvals, limits, and monitoring procedures.

                                       67
<PAGE>   74

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

Financial instruments with off-balance sheet credit risk at December 31 follow:

                                                                 CONTRACT OR
                                                               NOTIONAL AMOUNT

                                                                2000      1999
                                                               -------  -------
                                                                (IN THOUSANDS)

Commitments to originate loans................................ $55,226  $53,694
Unadvanced lines of home equity and reserve lines of credit...  95,255   79,382
Unadvanced lines on commercial loans..........................  35,837   22,369
Unadvanced portions of construction and land loans............  46,662   26,510
Standby letters of credit.....................................   3,924    3,226
Loans sold with recourse......................................     811    1,170
Forward commitments to sell loans and mortgage-backed
  securities..................................................   4,017    1,000

     Commitments to originate loans, unused lines of credit, and unadvanced
portions of 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 a portion of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies but may include accounts
receivable, inventory, equipment and real estate. Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance by a
customer to a third party. The credit risk in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.

     The Company has retained credit risk on certain residential mortgage loans
sold with recourse prior to June, 1990. Accordingly, the Company has retained
the risk of loss resulting from any foreclosures on such loans.

     Forward commitments to sell loans or mortgage-backed securities are
contracts which the Company enters into for the purpose of reducing the interest
rate risk associated with originating loans for sale. In order to fulfill a
forward commitment, the Company typically exchanges its current production of
loans for mortgage-backed securities through FNMA or FHLMC which are then
delivered to a national securities firm at a future date at prices or yields
specified by the contracts. Risks may arise from the possible inability of the
Company to originate loans to fulfill these contracts, in which case the Company
would normally purchase securities in the open market to deliver against the
contract. Unrealized gains and losses on contracts used for the Company's closed
loans and pipeline of loans expected to close are considered in adjusting
carrying values of the loans held for sale to the lower of cost or market.

    As a nonmember of the Federal Reserve System, the Company is required to
maintain certain reserve requirements or vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement, included
in "Cash and due from banks", was $2,453,000 and $992,000 at December 31, 2000
and 1999, respectively.

    A number of legal claims against the Company arising in the normal course
of business were outstanding at December 31, 2000. Management, after reviewing
these claims with legal counsel, is of the opinion that the resolution of these
claims will not have a material effect on the Company's financial position.

(18) ACQUISITION

     On July 1, 2000, the Company consummated its acquisition of GBT Bancorp and
its wholly-owned subsidiary, Gloucester Bank & Trust Company. Under the terms of
the merger agreement, Andover issued 298,386 new shares of its common stock and
$8.1 million in cash to the GBT Bancorp shareholders. The transaction was
accounted for as a purchase and resulted in goodwill totaling $9.0 million.
Goodwill will be amortized straight line over 15 years. As of June 30, 2000,
before purchase accounting adjustments, Gloucester had $132.6 million in assets,
of which investments available for sale totaled $26.3 million, loans totaled
$91.7 million, deposits totaled $107.4 million and FHLB advances totaled $16.8
million. Loans were comprised primarily of commercial real estate loans,
residential

                                       68
<PAGE>   75

                     ANDOVER BANCORP, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 2000, 1999 and 1998

real estate and commercial loans totaling $40.0 million, $22.4 million and $9.3
million, respectively. The effect of the acquisition on the Company's
consolidated financial statements as if this acquisition had occurred at the
beginning of the year 2000 is not material.

(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     Quarterly earnings per share is calculated by dividing quarterly net income
by the average shares outstanding each quarter. Therefore, the sum of the
quarters may not equal the net earnings per common share for the year. A
discussion of the difference between basic and diluted earnings per share is
presented in footnote 1.
     Summaries of consolidated operating results on a quarterly basis for the
years ended December 31, follow:

<TABLE>
<CAPTION>

                                                                        2000 QUARTERS
                                                     ----------------------------------------------------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                      FIRST         SECOND          THIRD          FOURTH
                                                     -------       -------         -------        -------
<S>                                                 <C>           <C>             <C>            <C>
Interest and dividend income.......................  $26,775       $28,388         $32,530        $32,854
Interest expense...................................   14,269        15,651          18,335         18,589
                                                     -------       -------         -------        -------
Net interest and dividend income...................   12,506        12,737          14,195         14,265
Provision for loan losses..........................      200           400             450            450
Non-interest income (loss).........................    1,289         1,397            (672) (a)     1,515
Non-interest expense...............................    6,419         6,200           8,062          7,527
                                                     -------       -------         -------        -------
Income before income tax expense (benefit).........    7,176         7,534           5,011          7,803
Income tax expense (benefit).......................    2,620         2,751            (215) (b)     2,186 (b)
                                                     -------       -------         -------        -------
Net income.........................................  $ 4,556       $ 4,783         $ 5,226        $ 5,617
                                                     =======       =======         =======        =======

Basic earnings per common share....................  $  0.71       $  0.75         $  0.78        $  0.84
                                                     =======       =======         =======        =======

Diluted earnings per common share..................  $  0.69       $  0.73         $  0.76        $  0.82
                                                     =======       =======         =======        =======

Dividends declared per share.......................  $  0.24       $  0.24         $  0.24        $  0.27
                                                     =======       =======         =======        =======
</TABLE>

<TABLE>
<CAPTION>

                                                                        2000 QUARTERS
                                                     ----------------------------------------------------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                      FIRST         SECOND          THIRD          FOURTH
                                                     -------       -------         -------        -------
<S>                                                <C>           <C>             <C>            <C>
Interest and dividend income....................... $ 24,265       $ 24,577       $ 25,354       $ 25,814
Interest expense...................................   12,828         12,816         13,496         13,561
                                                    --------       --------       --------       --------
Net interest and dividend income...................   11,437         11,761         11,858         12,253
Provision (credit) for loan losses.................       --             --             --            400
Non-interest income................................    1,196          1,159            623 (d)      1,262
Non-interest expense...............................    5,221 (c)      5,444          5,719          5,593 (c)
                                                    --------       --------       --------       --------
Income before income tax expense...................    7,412          7,476          6,762          7,522
Income tax expense.................................    2,620          2,727          2,240          2,700
                                                    --------       --------       --------       --------
Net income......................................... $  4,792       $  4,749       $  4,522       $  4,822
                                                    ========       ========       ========       ========

Basic earnings per common share.................... $   0.73       $   0.73       $   0.69       $   0.74
                                                    ========       ========       ========       ========

Diluted earnings per common share.................. $   0.71       $   0.71       $   0.67       $   0.72
                                                    ========       ========       ========       ========

Dividends declared per share....................... $   0.21       $   0.21       $   0.21       $   0.24
                                                    ========       ========       ========       ========
</TABLE>

(a) Includes losses of $2.1 million realized from a balance sheet restructuring.
(b) Includes tax benefits of $2.2 million and $750,000 in the third and fourth
    quarters of 2000, respectively.
(c) Includes a pre-tax gain of $1.1 million and $500,000 in the first and
    fourth quarters of 1999, respectively, due to the curtailment and settlement
    of the defined benefit plan.
(d) Includes losses on sales of investment available for sale of $385,000.

                                       69
<PAGE>   76


                                   FORM 10-K
                              CROSS REFERENCE INDEX

<TABLE>
<CAPTION>
                                     PART 1
<S>       <C>                                                                                      <C>
Item 1    Business..............................................................................       3

Item 2    Properties............................................................................   11-12

Item 3    Legal Proceedings.....................................................................      12

Item 4    Submission of Matters to a Vote of Security Holders...................................      12

                                     PART II

Item 5    Market for Registrant's Common Equity and Related Stockholder Matters.................      13

Item 6    Selected Consolidated Financial Data..................................................      14

Item 7    Management's Discussion and Analysis of Financial Condition and
          Results of Operations.................................................................      15

Item 7A   Quantitative and Qualitative Disclosures About Market Risk............................      37

Item 8    Financial Statements and Supplementary Data......................................... (See Item
                                                                                               14 below)

Item 9    Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure........................................................... Non-Applicable
</TABLE>

                                    PART III

The information called for by Part III (Items 10 through 13) is incorporated
herein by reference from Andover's Definitive Notice of Annual Meeting and Proxy
Statement for the 2001 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.

                                     PART IV
<TABLE>
<CAPTION>
<S>       <C>                                                                                      <C>
Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1)    Financial Statements-
             Independent Auditors' Report.......................................................      39

             Consolidated Balance Sheets as of December 31, 2000 and 1999.......................      40

             Consolidated Statements of Operations for each of the years ended
             December 31, 2000, 1999 and 1998...................................................      41

             Consolidated Statements of Changes in Stockholders' Equity
             for each of the years ended December 31, 2000, 1999 and 1998.......................      42

             Consolidated Statements of Cash Flows for each of the years ended
             December 31, 2000, 1999 and 1998...................................................   43-44

             Notes to Consolidated Financial Statements.........................................   45-69

</TABLE>

                                       70
<PAGE>   77

<TABLE>
<CAPTION>
<S>       <C>                                                                                        <C>
(2)       All financial statement schedules are omitted because they are
          not applicable, the data is not significant, or the required
          information is shown elsewhere in this report.

(b)       Reports  on Form 8-K.  There  were no reports  filed on Form 8-K
          during the three months ended December 31, 2000.

(c)       List of Exhibits

          Exhibits to the Form 10-K have been included only with the
          copies of the Form 10-K filed with the SEC. Upon request to
          Shareholder Relations, Andover Bancorp, Inc., 61 Main Street,
          Andover, Massachusetts 01810, copies of the individual
          exhibits will be furnished upon payment of a reasonable fee.
</TABLE>


EXHIBIT NO.       DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
<S>              <C>
2.1               Agreement and Plan of Merger by and between Andover Bancorp,
                  Inc. and GBT Bancorp, dated January 26, 2000 (incorporated
                  herein by reference to Exhibit 2.1 to Andover's Current Report
                  on Form 8-K filed February 9, 2000).

3.1               Restated Certificate of Incorporation of Andover (incorporated
                  herein by reference to Exhibit 3.1 to Post-Effective Amendment
                  No. 1 to Andover's Registration Statement on Form S-4 No.
                  33-11891 filed on March 5, 1987).

3.2               By-laws of Andover, as amended and restated, January 23, 1997
                  (incorporated herein by reference to Exhibit 3.2 to Andover's
                  Form 10-K for the fiscal year ended December 31, 1996).

4.1               Specimen of Andover Bancorp, Inc. common stock certificate
                  (incorporated herein by reference to Exhibit 4 to Andover's
                  Registration Statement on Form S-4, Registration No. 33-11891,
                  filed on February 11, 1987).

4.2               Shareholder Rights Agreement between Andover Bancorp, Inc. and
                  BankBoston (incorporated herein by reference to an Exhibit to
                  Andover's Current Report on Form 8-A filed January 22, 1999).

10.1              Employment Agreement between Andover, Andover Bank and Gerald
                  T. Mulligan, dated May 16, 1991 (incorporated herein by
                  reference to Exhibit 10.1 to Andover's Form 10-K for the
                  fiscal year ended December 31, 1999).

10.2              Special Termination Agreement between Andover, Andover Bank
                  and Gerald T. Mulligan, dated May 16, 1991, as amended and
                  restated through January 23, 1997 (incorporated herein by
                  reference to Exhibit 10.2 to Andover's Form 10-K for the
                  fiscal year ended December 31, 1996).

10.3              Special Termination Agreement between Andover, Andover Bank
                  and Joseph F. Casey, dated December 17, 1992, as amended and
                  restated through January 23, 1997 (incorporated herein by
                  reference to Exhibit 10.3 to Andover's Form 10-K for the
                  fiscal year ended December 31, 1996).

10.4              Special Termination Agreement between Andover, Andover Bank
                  and Michael J. Ecker, dated December 17, 1992, as amended and
                  restated through January 23, 1997 (incorporated herein by
                  reference to Exhibit 10.4 to Andover's Form 10-K for the
                  fiscal year ended December 31, 1996).

10.5              Special Termination Agreement between Andover, Andover Bank
                  and John R. Heerwagen, dated December 17, 1992, as amended and
                  restated through January 23, 1997 (incorporated herein by
                  reference to Exhibit 10.5 to Andover's Form 10-K for the
                  fiscal year ended December 31, 1996).
</TABLE>

                                       71
<PAGE>   78

<TABLE>
<CAPTION>

<S>               <C>
10.6              Special Termination Agreement between Andover, Andover Bank
                  and Octavio C. Bolivar dated January 24, 1994, as amended and
                  restated, January 23, 1997 (incorporated herein by reference
                  to Exhibit 10.6 to Andover's Form 10-K for the fiscal year
                  ended December 31, 1996).

10.7              Special Termination Agreement between Andover, Andover Bank
                  and Raymond P. Smith, dated December 12, 1995, as amended and
                  restated, January 23, 1997 (incorporated herein by reference
                  to Exhibit 10.9 to Andover's Form 10-K for the fiscal year
                  ended December 31, 1996).

10.8              Employment Agreement between Andover, Gloucester Bank & Trust
                  Company and David L. Marsh, dated July 1, 2000 (incorporated
                  herein by reference to Exhibit 10.1 to Andover's Form 10-Q for
                  the fiscal quarter ended June 30, 2000).

10.9              Andover Bancorp, Inc. Stock Option Plan dated May 8, 1986, as
                  amended May 22, 1986, January 29, 1987, and November 2, 1987
                  (incorporated herein be reference to Exhibit 10.8 to Andover's
                  Form 10-K for the fiscal years ended December 31, 1999).

10.10             Andover Bancorp, Inc. 1995 Stock Incentive Plan, dated
                  February 16, 1995.

10.11             Deferred Compensation Plan for Directors of Andover Bancorp,
                  Inc. and its Subsidiaries, effective July 1, 1993, as amended
                  and restated, February 22, 1996.

10.12             Andover Bancorp, Inc. Special Termination Plan, effective
                  January 23, 1997 (incorporated herein by reference to Exhibit
                  10.12 to Andover's Form 10-K for the fiscal year ended
                  December 31, 1996).

10.13             Stock Option Agreement, dated January 26, 2000, by and between
                  Andover Bancorp, Inc. and GBT Bancorp (incorporated herein by
                  reference to Exhibit 10.1 to Andover's Current Report on Form
                  8-K filed February 9, 2000).

11                The computation of per share earnings can be readily
                  determined from the material contained in the Annual Report on
                  Form 10-K for the fiscal year ended December 31, 2000.

12                As the Company does not have any debt securities registered
                  under Section 12 of the Securities Act of 1933, no ratio of
                  earnings to fixed charges appears in this Annual Report on
                  Form 10-K.

13                Andover Bancorp, Inc. 2000 Annual Report, which, except for
                  those portions expressly incorporated herein by reference, is
                  furnished only for the information of the Securities and
                  Exchange Commission and is not deemed to be filed.

21                The Company has two subsidiaries, Andover Bank and Gloucester
                  Bank & Trust. Andover Bank is a Massachusetts savings bank in
                  stock form while Gloucester Bank & Trust Company is a
                  Massachusetts-chartered trust company. Both subsidiaries are
                  included in the Consolidated Financial Statements filed in the
                  Annual Report on Form 10-K for the fiscal year ended December
                  31, 2000. Gloucester Bank & Trust Company's results are
                  reflected after July 1, 2000.

23.1              Consent of KPMG LLP.

</TABLE>


                                       72
<PAGE>   79
SHAREHOLDER INFORMATION

TRANSFER AGENT AND REGISTRAR - EQUISERVE LP

Our Transfer Agent is responsible for our shareholder records, issuance of stock
certificates, distribution of our dividend and the IRS Form 1099-DIV and
administration of our dividend reinvestment and stock purchase program. Your
requests as shareholders, concerning these matters, are most efficiently
answered by corresponding directly with EquiServe LP at the following address:

EquiServe Limited Partnership
c/o Shareholder Services Department
PO Box 8040
Boston, MA 02266-8040
800.730.4001
equiserve.com

DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN/GENERAL INFORMATION

Shareholders may obtain a brochure containing a detailed description of the Plan
or other general shareholder information by corresponding directly with Andover
Bancorp, Inc. at the following address:

Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
978.749.2216
andoverbank.com

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

KPMG LLP
99 High Street
Boston, MA 02110

FORM 10-K

An additional copy of Andover's 2000 Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission pursuant to the Securities and
Exchange Act of 1934, may be obtained without charge by contacting:

Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
978.749.2216
andoverbank.com

FDIC COMPLIANCE

A copy of this report is being made available to the public on request as
required by the Federal Deposit Insurance Corporation ("FDIC"). The contents of
this report have not been reviewed or confirmed for accuracy or relevance by the
FDIC. A copy of Management's Report on the effectiveness of the Company's
internal control over financial reporting, and the Independent Accountants'
Report of KPMG LLP thereon, may be obtained without charge by contacting:

Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
978.749.2216
andoverbank.com

ANNUAL MEETING

The Annual Meeting of the Shareholders of Andover Bancorp, Inc. will be held at
10 a.m. on April 26, 2001 at the Andover Town House, 20 Main Street, Andover,
Massachusetts.

STOCK LISTING

[logo "ANDB - NASDAQ - LISTED"]

Andover's Common Stock trades on The NASDAQ Stock Market(R) under the symbol
"ANDB".

DIRECTORS
ANDOVER BANCORP, INC. AND ANDOVER BANK

John P. Bachini
Thomas F. Caffrey
Paul J. Donahue, Sr.
Clifford E. Elias
John E. Fenton, Jr.
Naomi A. Gardner
Frank D. Goldstein
Cornelius J. McCarthy
Gerald T. Mulligan
Irving E. Rogers, III
Robert J. Scribner
Fred P. Shaheen

DIRECTORS
GLOUCESTER BANK & TRUST CO.

Charles J. Ciaramitaro
Francis J. Elliott, Jr.
Kenneth W. Gleason
David L. Marsh
Gerald T. Mulligan
Stephen R. Parkhurst
Donald E. Sudbay, Jr.
<PAGE>   80
ANDOVER BANCORP, INC.

ANDOVER BANK

Member FDIC
-----------
Member DIF

MAIN OFFICE:
61 Main Street
Andover, MA 01810

BRANCH OFFICES:
159 River Road
Andover, MA 01810

450 Essex Street
Lawrence, MA 01840

305 South Broadway
Lawrence, MA 01843

547 Broadway
Methuen, MA 01844

228 Haverhill Street
Methuen, MA 01844

91 Pleasant Valley Street
Methuen, MA 01844

108 Main Street
North Andover, MA 01845

995 Main Street
Tewksbury, MA 01876

2345 Main Street
Tewksbury, MA 01876

35 Manchester Road
Derry, NH 03038

62 Nashua Road
Londonderry, NH 03053

130 Main Street
Salem, NH 03079

GLOUCESTER BANK & TRUST
Member FDIC

MAIN OFFICE:
2 Harbor Loop
Gloucester, MA 01930

224 Washington Street
Gloucester, MA 01930

1-888-281-6270
gloucesterbank.com


ANDOVER CAPITAL GROUP, INC.
35 Main Street
Andover, MA 01810
1-800-222-5522


AB INSURANCE SERVICES
229 Andover Street
Wilmington, MA 01887
1-800-335-0335

TELEPHONE SALES & SERVICE CENTER

1-800-2CALL-AB

andoverbank.com

0685-AR-01