<PAGE>










     Present vision. Future sites.












                                                              ABINGTON BANCORP
                                                       1998 annual report

<PAGE>





mission statement

     We will deliver such extraordinary service and value that our employees
     and customers will tell their friends and associates about us.


contents

          1         President's Message

          10        Financial Highlights

          12        Management's Discussion and Analysis

          22        Report of Independent Public Accountants

          23        Consolidated Balance Sheets

          24        Consolidated Statements of Operations

          25        Consolidated Statements of Changes in Stockholders' Equity

          26        Consolidated Statements of Comprehensive Income

          27        Consolidated Statements of Cash Flows

          29        Notes to Consolidated Financial Statements

          51        Stockholder Information

          52        Corporate Information and Bank Directors & Officers

Inside Back Cover   Corporate Profile

Back Cover          Bank Office Locations


<PAGE>





                                                                      [PHOTO]





A MESSAGE FROM THE PRESIDENT 
-------------------------------------------------------------------------------

DEAR FELLOW SHAREHOLDERS:

 I am pleased to report to you that Abington Bancorp made considerable progress
in 1998 toward fulfilling our vision of becoming the provider of choice for a
comprehensive selection of financial services for consumers and businesses. We
believe this transformation, in addition to the strong commitment to customer
service that comes with being a community bank, will place our company in a
strong competitive position and significantly increase the long-term value of
our organization.

 We are confident that the consolidation and convergence taking place in the
financial services industry has created a profitable niche for community banks
offering a wide range of products along with the type of personalized service
that is highly valued by customers yet difficult for larger banks to duplicate.
We believe this customer-oriented approach and the dynamic retail culture we
have developed gives us a great advantage over these larger banks. At the same
time, our ability to successfully and efficiently integrate new products and
services gives us a competitive edge over smaller institutions that may find
this strategy unfeasible.



1
<PAGE>

ONCE AGAIN, HEALTHY DEPOSIT GROWTH
-------------------------------------------------------------------------------

Deposits
reached     $363.9
--------------------------

DEPOSIT GROWTH (DOLLARS IN MILLIONS)
1995:  $33.2
1996:  $20.4
1997:  $24.5
1998:  $39.0

Since the introduction
of High Performance
Checking in 1995,
deposits have grown 
by 47%.


Deposits increased 12% by year-end 1998 over 1997. While this accomplishment is
solid for any bank in this competitive market, it is really secondary to other
underlying accomplishments in this area. Deposit balances can be achieved
through a variety of means, including paying above-market interest rates to
attract deposits. A more valid measurement of a bank's franchise value is
growth of core deposits. We are pleased to have finished in the top 8% among all
Massachusetts banks, including major regional institutions, in total dollars of
growth in this area. This is a remarkable achievement for a bank of our size.
This kind of deposit growth helped reduce our overall cost of deposits to 3.87%
in 1998 from 3.95% in 1997.

In addition to deposit dollar growth, we continued to enjoy tremendous success
in obtaining new checking account relationships in 1998 through the High
Performance Checking program. These accounts grew from 31,000 in 1997 to over
36,000 in 1998, an increase of over 15%. This growth not only provides us with a
solid customer base for cross-selling products and services, but also produced a
16.5% increase in customer service fees for the year.



SOLID EARNINGS DESPITE A CHALLENGING ECONOMY
-------------------------------------------------------------------------------

Net income for 1998 was $4,371,000 or $1.17 per diluted share in 1998, as
compared to $4,378,000 or $1.10 per diluted share in 1997. These results were
affected by falling interest rates and the resulting prepayment environment that
tightened spreads and net interest margins overall. Also impacting 1998 results
was our recent investment in supermarket banking, which decreased 1998 net
income by approximately $.09 per share. Excluding the effect of this investment,
earnings per share would have grown approximately 15% in 1998 over 1997 levels,
which would be considered solid in any interest rate environment.


2
<PAGE>

In 1998, we opened supermarket branches in Randolph and Hanson, giving us three
new branches opened in the 18 months prior to year's end. We are confident our
retail strategies and product lines combined with innovative supermarket banking
methodologies should enhance core earnings and franchise values in future
periods. As evidence of this, our first supermarket branch, opened in Cohasset
in August 1997, continued to exceed our internal financial forecasts as of its
one-year anniversary. This early, measurable success provides us with even
greater optimism that we will enjoy success from these endeavors in future
years.

STEADY LENDING GROWTH
-------------------------------------------------------------------------------

Business Banking 
ended the year at  $60.0 

---------------------------------------
Business Banking (dollars in millions) 

Our business banking 
portfolio grew by 
approximately 28% in 1998.


Our Business Banking division once again posted significant gains in both
commercial loan balances and customer relationships in 1998. Our business
banking portfolio grew 28% to reach approximately $60 million. This growth was
achieved despite strong pricing pressures in our market area for business and
commercial real estate loans. We also obtained more non-transaction-oriented
business loans over the past year. These borrowers are more focused on
developing a business relationship with their bank, which tends to produce more
stable loan balances and provides deposit relationships as well.

 Residential lending also performed extremely well in 1998. Loan originations
grew to approximately $47 million in 1998, compared to $20 million a year ago.
This growth reflected 1998's strong refinance market as well as the on-going
economic expansion occurring in Southeastern Massachusetts thanks, in large
part, to the return of commuter rail service to our region.


Year End
Delinquency Rate .36% 

---------------------------------------
DELINQUENCY RATE

Our delinquency rate 
is one of the lowest 
among 80 Northeastern 
banking companies 
tracked by a leading 
bank analyst firm.


3
<PAGE>

RENEWED VISION 

WE WILL SET OUR SIGHTS ON NEW IDEAS, FOCUS ON OUR TECHNOLOGY AND
CONCENTRATE ON SERVICE.

ASSET QUALITY

With the economic good times we have enjoyed in the United States and our region
over the past few years, credit problems are a distant memory for many of us. We
know, however, that at times like these, the temptation can be great to lower
credit standards to keep loan growth at strong levels. We are pleased to note
that our current asset quality is at a very high level, with non-performing
loans at a near all time low of $731,000 at year's end and delinquencies below
 .5% throughout the year. Our seasoned and experienced lenders have not let
desires for greater loan growth, particularly in the business banking area,
overcome our sound underwriting practices and good credit culture. This type of
discipline is critical to achieving long-term success for our shareholders.


SETTING SIGHTS ON FUTURE VALUE
---------------------------------------

Total 
Supermarket Branches  5 

---------------------------------------
SUPERMARKET BRANCHES 

Supermarket branches in
Randolph and Hanson 
opened in 1998; they will 
be followed in 1999 by 
branches in West Brockton and Canton.

As I've already alluded to, much effort at Abington Bancorp in 1998 was directed
to preparing our organization to compete as a total financial services provider
to mid-market consumers and businesses. In 1999 we plan to open two more
supermarket branches in West Brockton and Canton. When these two branches open,
we will have 12 offices spread throughout Plymouth County and reaching into
Norfolk County. This increases our market penetration considerably from a year
ago.


4
<PAGE>

In addition to this market expansion, Abington Bancorp is embracing the trend
toward alternative service delivery channels. In 1999, we will launch an
interactive, world-class web site that will enable our customers to obtain
product information and enjoy the convenience of banking from their homes or
offices. We are excited about the potential of this new market channel to
support our objectives of enhancing our retail franchise and our business
banking relationships.

We also recently announced the acquisition of a well-established and highly
regarded mortgage company, Old Colony Mortgage, another undertaking conceived in
1998. This acquisition expands our service area as far west as Auburn, MA, and
provides more complete coverage of the South Shore.

Old Colony Mortgage's experienced and quality mortgage company management team
and seasoned production staff, when combined with our mortgage personnel, will
create a formidable mortgage origination network offering a full array of
mortgage-related products to our customers and providing us with even greater
sales opportunities. In addition, this expansion in mortgage banking will
provide us with another source of non-interest income. We anticipate that
production levels in our mortgage area for 1999 will exceed $150 million.

In addition, we have recently introduced Personal Bankers into each branch.
These trained, service-oriented individuals will build upon the success of High
Performance Checking by increasing our ability to cross-sell products and
services to our retail customers, and, when applicable, business products as
well. Our objective is to build an aggressive retail referral program that will
result in new business and strengthen existing customer relationships. We
already enjoy an extremely loyal customer base and are confident that the
increased service provided by the Personal Banker model will strengthen the bond
our customers have with our institution.

These initiatives further support our belief that our future growth will be
driven by a passion for selling. We have taken successful first steps toward
building this "sales culture" with the enormous success of High Performance
Checking and its related cross sales effort along with our early success at
supermarket banking. As we look to the future, we plan on fostering a sales
culture that optimizes the benefit of each and every customer's relationship
with the bank.

5
<PAGE>

RETRAINING IN THE WORKPLACE 

ENHANCING THE KNOWLEDGE AND SKILLS OF OUR WORKFORCE HAS A POSITIVE IMPACT ON OUR
ABILITY TO PREPARE FOR THE FUTURE.


OLD VALUES/NEW PERSPECTIVES

As we make progress in the exciting new directions I've described so far, we
retain a strong dedication to superior levels of service. A major key to
assuring our ability to maintain this focus is enhancing the knowledge and
skills of our workforce. We are working hard through improved training to make
sure we provide that all-important personal touch valued so much by the many
people who still prefer to do business with their local bank.

As we broaden our services and product offering and simultaneously expand our
market reach, the ability of our senior management team to make good strategic
decisions to support this growth is critical to our staying on track toward our
vision. In the second quarter, John R. Sylva, who has 25 years of experience in
retail banking, joined us as Senior Vice President with responsibility for all
consumer banking activities. Also, near year's end we gained a new senior
operations officer as Kevin M. Tierney, Sr., joined us as Executive Vice
President. With nearly 20 years' experience in financial services, Kevin is a
recognized leader in marketing and technology aimed at maximizing efficiency and
supporting aggressive growth and market penetration strategies. These two
additions give our senior management team experience that has already had a
positive impact on our ability to prepare for a new future.

6
<PAGE>

YEAR 2000 PREPAREDNESS
-------------------------------------------------------------------------------

Closely following FDIC guidelines for all United States financial institutions,
Abington Savings Bank focused considerable effort in 1998 to assure that all
issues related to the year 2000 computer problem will be resolved well in
advance of the end of 1999. We are confident that we will be ready to greet the
new millennium with well-tested systems and contingency plans that will provide
uninterrupted service to our customers. Our task force continues to be very
active, and we have a customer awareness program in place to inform and reassure
our customers about our Y2K readiness.


We're well
prepared for  Y2K 

---------------------------------------
READY FOR Y2K

12/97:         Task force established; action plan approved by Board of
               Directors.                                              

12/98:         Assessment completed; testing of mission critical systems
               completed.                                               

06/99:         All systems Y2K ready.

               
               

               
               

7
<PAGE>


SPECIAL RELATIONSHIPS

OUR COMMITMENT TOWARDS OUR COMMUNITY CONTINUES TO GROW...


SUPPORTING OUR COMMUNITY

In 1998 we continued to support the well-being of the communities we serve, with
a special emphasis on providing financial aid and other assistance to
organizations focusing on children. Our special relationship with the Cardinal
Cushing School and Training Center continued to blossom as our third annual St.
Patrick's Day fundraiser raised over $50,000. Among other things, this money was
used to send the graduating class of 22 exceptional children to Disney World.
Also at year's end, I had the great privilege of presenting the school with a
$15,000 donation raised through employee payroll deductions.

Our employees' strong commitment to the Cardinal Cushing students is part of
what makes Abington Savings Bank a special place to work. As we continue our
transformation into a larger, more competitive organization, one reason I am
confident of our ability to retain the community banking values that are the
foundation of our success is the dedication of our work force. Nowhere is this
dedication more obvious than in the energy and enthusiasm our people bring to
our community relations efforts.

I want to thank all members of our team for their hard work in 1998 and renew my
commitment to fostering an organization that sets high performance standards
while also providing appropriate rewards for the people whom achieve and exceed
those expectations. By making this a great place to work, we help ensure that it
is also a great place for our customers to do business.



8
<PAGE>

Finally, I wish to thank the Board of Directors and our staff for their many
efforts in 1998 to safeguard our company's future and well being and to thank
our shareholders and customers for their continued support. Everyone at Abington
Bancorp is dedicated to repaying your loyalty by building an outstanding
financial services organization that enters the new millennium with renewed
strength and vitality. We remain optimistic about the future of community banks
and are confident our organization is well on its way to becoming the premier
provider of financial services in our marketplace.



Respectfully submitted,

/s/ James P. McDonough

James P. McDonough
President and Chief Executive Officer

-------------------------------------------------------------------------------
The Bank considers its principal market area to be Plymouth County,
Massachusetts, primarily Abington, Cohassett,Halifax, Hanson, Holbrook, Hull,
Kingston, Pembroke, Randolph, and Whitman, where it has banking offices.


                              Boston                 [MAP]


Hull
---------------------------------------------

Cohasset
---------------------------------------------

Canton (Opening in `99)
---------------------------------------------

Randolph
---------------------------------------------

Holbrook
---------------------------------------------

Abington
---------------------------------------------

Brockton (Opening in `99)
---------------------------------------------

Whitman
---------------------------------------------

Pembroke
---------------------------------------------

Hanson
---------------------------------------------

Halifax
---------------------------------------------

Kingston
---------------------------------------------


9
<PAGE>


<TABLE>
<CAPTION>
AT DECEMBER 31,                                       1998       1997       1996       1995        1994 
------------------------                            --------   --------   --------   --------   --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>        <C>        <C>        <C>        <C>     
Balance Sheet Data:
Total assets                                        $591,151   $531,986   $486,958   $460,492   $421,833
Total loans, net                                     360,735    330,792    298,970    260,585    235,614
Investment securities (1)                             61,184     47,187     31,950     33,343     28,328
Mortgage-backed securities                           129,700    126,016    131,184    138,937    133,882
Deposits                                             363,953    324,934    300,445    280,070    246,843
Borrowed funds                                       177,128    165,910    147,524    145,609    134,155
Preferred beneficial interest in junior
 subordinated debentures, net (3)                     11,934       --         --         --         --
Stockholders' equity                                  33,060     36,321     33,546     30,561     28,366
Book value per share (2)                                9.88       9.99       8.86       8.11       7.57
</TABLE>


<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                               1998       1997       1996       1995       1994    
------------------------                            --------   --------   --------   --------   --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (2)
<S>                                                 <C>        <C>        <C>        <C>        <C>     
Operating Data:
Interest and dividend income                        $ 38,442   $ 36,297   $ 34,332   $ 31,949   $ 27,082
Interest expense                                      21,585     20,091     19,517     18,222     14,349
                                                    --------   --------   --------   --------   --------
Net interest income                                   16,857     16,206     14,815     13,727     12,733

Provision for possible loan losses                       760        630        480      2,233        610
                                                    --------   --------   --------   --------   --------
Net interest income after
 provision for possible loan losses                   16,097     15,576     14,335     11,494     12,123
                                                    --------   --------   --------   --------   --------
Non-interest income:
 Loan servicing fees                                     469        558        646        713        646
 Customer service fees                                 3,816      3,276      2,412      1,644      1,050
 Gain on sales of securities                           1,731        540        495        181        322
 Gain on sales of loans, net                             492        236        315        453        389
 Write-down of limited partnership                      --         --         --         (110)      --
 Net gain (loss) on sales and write-down
    of other real estate owned                            43        109         67        (92)        (2)
 Other                                                   358        267        242        119         56
                                                    --------   --------   --------   --------   --------
  Total non-interest income                            6,909      4,986      4,177      2,908      2,461
                                                    --------   --------   --------   --------   --------
Non-interest expenses                                 16,267     13,505     12,840     11,955     10,255
                                                    --------   --------   --------   --------   --------
Income before income taxes                             6,739      7,057      5,672      2,447      4,329
Provision for income taxes                             2,368      2,679      2,139      1,018      1,586
                                                    --------   --------   --------   --------   --------
  Net income                                        $  4,371   $  4,378   $  3,533   $  1,429   $  2,743
                                                    --------   --------   --------   --------   --------
                                                    --------   --------   --------   --------   --------
Basic earnings per share                            $   1.25   $   1.18   $    .94   $    .38   $    .73
                                                    --------   --------   --------   --------   --------
                                                    --------   --------   --------   --------   --------
Diluted earnings per share                          $   1.17   $   1.10   $    .89   $    .37   $    .70
                                                    --------   --------   --------   --------   --------
                                                    --------   --------   --------   --------   --------
Dividends per share (4)                             $    .30   $    .20   $    .20   $    .20   $    .20
                                                    --------   --------   --------   --------   --------
                                                    --------   --------   --------   --------   --------
</TABLE>

10
<PAGE>


<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                               1998       1997       1996       1995       1994    
------------------------                             --------   --------   --------   --------   --------
<S>                                                    <C>        <C>        <C>        <C>        <C>  
Selected Ratios:
Return on average total assets                           .79%       .87%       .74%       .33%       .70%
Interest rate spread                                    3.13       3.29       3.14       3.14       3.32
Return on average equity                               12.68      12.59      11.00       4.68       9.23
Dividend payout ratio                                  23.95      16.90      21.34      52.62      27.34
Average equity to average total assets                  6.26       6.94       6.69       7.00       7.61
</TABLE>


(1)  Includes Federal Home Loan Bank stock.
(2)  The Company declared a 2-for-1 stock split in the form of a dividend to
     holders of record on November 14, 1997. All share and per share data have
     been adjusted to reflect this transaction.
(3)  In June 1998, the Company issued $12.6 million of guaranteed preferred
     beneficial interests in junior subordinated debentures.
(4)  Includes a $.10 per share special dividend declared in March 1998.


11
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

Abington Bancorp, Inc. (the "Company"), became the one-bank holding company for
the Abington Savings Bank (the "Bank") on January 31, 1997. The Company's
primary business is serving as the holding company of the Bank. The holding
company did not conduct any business in fiscal 1996. 

The Company's results of operations depend primarily on its net interest income
after provision for possible loan losses, its revenue from other banking
services and non-interest expenses. The Company's net interest income depends
upon the net interest rate spread between the yield on the Company's loan and
investment portfolios and the cost of funds, consisting primarily of interest
expense on deposits and Federal Home Loan Bank advances. The interest rate
spread is affected by the match between the maturities or repricing intervals of
the Company's assets and liabilities, the mix and composition of interest
sensitive assets and liabilities, economic factors influencing general interest
rates, prepayment on loans and mortgage-backed investments, loan demand and
savings flows, as well as the effect of competition for deposits and loans. The
Company's net interest income is also affected by the performance of its loan
portfolio, amortization on accretion of premiums or discounts on purchased loans
or mortgage-backed securities and the level of non-earning assets. Revenues from
loan fees and other banking services depend upon the volume of new transactions
and the market level of prices for competitive products and services.
Non-interest expenses depend upon the efficiency of the Company's internal
operations and general market and economic conditions.

In August 1997, the Company opened, in Cohasset, the first of three planned de
novo supermarket branches, with the Randolph and Hanson branches opening in
April and September of 1998, respectively. This expansion into supermarket
banking is consistent with the Company's strategy of controlled growth with a
focus on core retail deposit relationships and will enable the Company to have a
greater regional presence.


FORWARD-LOOKING STATEMENTS

When used in this report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meanings of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company wishes to
caution readers that all forward-looking statements are necessarily speculative
and not to place undue reliance on any such forward-looking statements, which
speak only as of the date made, and to advise readers that various risks and
uncertainties, including regional and national economic conditions, changes in
the real estate 14 market, changes in levels of market interest rates, credit
risks of lending activities, competitive and regulatory factors, and the
so-called Year 2000 issue, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from those anticipated or projected.


NET INTEREST INCOME

Net interest income is affected by the mix and volume of assets and liabilities,
and levels of prepayment primarily on loans and mortgage-backed investments, the
movement and level of interest rates, and interest spread, which is the
difference between the average yield received on earning assets and the average
rate paid on deposits and borrowings. The Company's net interest rate spread was
3.13% and 3.29% for the years ended December 31, 1998 and 1997.

The level of non-accrual loans and other real estate owned also has an impact on
net interest income. At December 31, 1998, the Company had $681,000 in
non-accrual loans and no other real estate owned compared to $622,000 in
non-accrual loans and $265,000 in other real estate owned as of December 31,
1997. 

The table on the following page presents average balances, interest income and
expense and yields earned or rates paid on the major categories of assets and
liabilities for the years indicated.


12
<PAGE>

<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,                                           1998                                   1997
                                                    -----------------------------------   ------------------------------------
                                                     Average                    Yield/     Average                     Yield/ 
                                                     Balance     Interest        Rate      Balance      Interest        Rate  
                                                    ---------   ---------      --------   ---------    ----------     --------
(DOLLARS IN THOUSANDS)
<S>                                              <C>          <C>            <C>        <C>         <C>            <C>
Assets
 Earning assets:
 Federal funds sold                                 $  1,032    $     59         5.72%    $    544     $     34        6.25%
 Other short-term investments                          1,027          55         5.36          221           16        7.24
 Bonds and obligations (2)                            43,034       3,027         7.03       25,025        1,775        7.09
 Equity securities (1)                                13,758         627         4.56       11,987          589        4.91
 Mortgage-backed investments (2)                     126,031       8,393         6.66      132,721        9,045        6.82
 Loans (3)                                           335,871      26,281         7.82      304,925       24,838        8.15
                                                    --------    --------                  --------     --------
  Total earning assets                               520,753      38,442         7.38      475,423       36,297        7.64
                                                    --------    --------                  --------     --------

 Cash and due from banks                              12,407                                 9,786
 Other assets                                         17,435                                16,227
                                                    --------                              --------
   Total assets                                     $550,595                              $501,436                   
                                                    --------                              --------
                                                    --------                              --------
Liabilities and Stockholders' Equity 
 Interest-bearing liabilities:
  NOW deposits                                      $ 43,938    $    652         1.48%    $ 37,256     $    577        1.55%
  Savings deposits                                   102,022       2,281         2.24       97,786        2,168        2.22
  Time deposits                                      157,858       8,818         5.59      145,152        8,312        5.73
                                                    --------    --------                  --------     --------
   Total interest-bearing deposits                   303,818      11,751         3.87      280,194       11,057        3.95

  Short-term borrowings                               42,039       2,279         5.42       45,833        2,557        5.58
  Long-term debt                                     125,521       7,555         6.02      105,950        6,477        6.11
                                                    --------    --------                  --------     --------
   Total interest-bearing liabilities                471,378      21,585         4.58      431,977       20,091        4.65
                                                                --------                               --------


Non-interest-bearing deposits                         37,080                                29,447
                                                    --------                              --------
   Total deposits and
    borrowed funds                                   508,458                     4.25      461,424                     4.35

 Other liabilities                                     7,656                                 5,239
                                                    --------                              --------

 Total liabilities                                   516,114                               466,663
 Stockholders' equity                                 34,481                                34,773
                                                    --------                              --------
   Total liabilities and
    stockholders' equity                            $550,595                              $501,436
                                                    --------                              --------
                                                    --------                              --------
Net interest income                                             $ 16,857                                $ 16,206
                                                                --------                                --------
                                                                --------                                --------
Interest rate spread (4)                                                         3.13%                                 3.29%
                                                                                ------                                 -----
                                                                                ------                                 -----
Net yield on earning assets (5)                                                  3.24%                                 3.41%
                                                                                ------                                 -----
                                                                                ------                                 -----

</TABLE>

<TABLE>
<CAPTION>

Years Ended December 31,                                         1996
                                                    --------------------------------
                                                     Average                 Yield/
                                                     Balance    Interest      Rate
                                                    --------   ---------   ---------
<S>                                                <C>        <C>          <C>
Assets
 Earning assets:
 Federal funds sold                                 $    614   $     37       6.03%
 Other short-term investments                             75          4       5.33
 Bonds and obligations (2)                            23,489      1,512       6.44
 Equity securities (1)                                10,966        556       5.07
 Mortgage-backed investments (2)                     137,166      9,245       6.74
 Loans (3)                                           282,530     22,978       8.13
                                                    --------   --------
  Total earning assets                               454,840     34,332       7.55
                                                    --------   --------
 Cash and due from banks                               8,348
 Other assets                                         16,891
                                                    --------
   Total assets                                     $480,079
                                                    --------
                                                    --------
Liabilities and Stockholders' Equity 
 Interest-bearing liabilities:
  NOW deposits                                      $ 33,392   $    516       1.55%
  Savings deposits                                    95,661      2,287       2.39
  Time deposits                                      136,541      7,939       5.81
                                                    --------   --------
   Total interest-bearing deposits                   265,594     10,742       4.04

  Short-term borrowings                               66,790      3,733       5.59
  Long-term debt                                      84,977      5,042       5.93
                                                    --------   --------
   Total interest-bearing liabilities                417,361     19,517       4.68
                                                               --------


Non-interest-bearing deposits                         25,223
                                                    --------
   Total deposits and
    borrowed funds                                   442,584                  4.41

 Other liabilities                                     5,385
                                                    --------

 Total liabilities                                   447,969
 Stockholders' equity                                 32,110
                                                    --------
   Total liabilities and
    stockholders' equity                         $   480,079
                                                    --------
                                                    --------

Net interest income                                           $  14,815
                                                              ---------
                                                              ---------
Interest rate spread (4)                                                    3.14%
                                                                            -----
                                                                            -----
Net yield on earning assets (5)                                             3.26%
                                                                            -----
                                                                            -----

</TABLE>


(1)  Includes Federal Home Loan Bank stock, investments held for investment and
     available for sale (at amortized cost).
(2)  Includes investments available for sale (at amortized cost).
(3)  Non-accrual loans net of reserve for possible loan losses and loans held
     for sale are included in average loan balances.
(4)  Interest rate spread equals the yield on average earning assets minus the
     yield on average deposits and borrowed funds.
(5)  Net yield on earning assets equals net interest income divided by total
     average earning assets.


13

<PAGE>

RATE/VOLUME ANALYSIS

The following table presents, for the periods indicated, the changes in interest
income and in interest expense attributable to the change in interest rates and
the change in the volume of earning assets and interest-bearing liabilities. The
change attributable to both volume and rate has been allocated proportionately
to the change due to volume and the change due to rate.

<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,                   1998 vs 1997                    1997 vs 1996
(DOLLARS IN THOUSANDS)                  INCREASE (DECREASE)             INCREASE (DECREASE)

                                   Due to     Due to                Due to     Due to
                                   Volume      Rate       Total     Volume      Rate       Total
                                  -------    --------   -------    -------    -------    -------
<S>                             <C>       <C>         <C>        <C>        <C>        <C>
Interest and dividend income:
 Loans                            $ 2,449    $(1,006)   $ 1,443    $ 1,824    $    36    $ 1,860
 Bonds and obligations              1,267        (15)     1,252        103        160        263
 Equity securities                     83        (45)        38         51        (18)        33
 Mortgage-backed
  securities                         (449)      (203)      (652)      (302)       102       (200)
 Federal funds sold                    28         (3)        25         (4)         1         (3)
 Interest-bearing deposits
  in banks                             44         (5)        39         10          2         12
                                  -------    --------   -------    -------    -------    -------
  Total interest and
   dividend income                  3,422     (1,277)     2,145      1,682        283      1,965
                                  -------    --------   -------    -------    -------    -------
Interest expense:
 NOW deposits                         100        (25)        75         60          1         61
 Savings deposits                      95         18        113         50       (169)      (119)
 Time deposits                        714       (208)       506        495       (122)       373
 Short-term borrowings               (207)       (71)      (278)    (1,170)        (6)    (1,176)
 Long-term debt                     1,178       (100)     1,078      1,278        157      1,435
                                  -------    --------   -------    -------    -------    -------
   Total interest expense           1,880       (386)     1,494        713       (139)       574
                                  -------    --------   -------    -------    -------    -------
Net interest income               $ 1,542    $  (891)   $   651    $   969    $   422    $ 1,391
                                  -------    --------   -------    -------    -------    -------
                                  -------    --------   -------    -------    -------    -------

</TABLE>


COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997


GENERAL

Net income for 1998 was $4,371,000 or $1.17 per diluted share compared to a net
income of $4,378,000 or $1.10 per diluted share in 1997, a net decrease of
$7,000 or .2%. Earnings, on a per diluted share basis, increased in 1998 over
1997 as a result of the Company's repurchase of shares under current buy back
plans. The results in 1998, as compared to 1997, include increases in net
interest income, customer service fees and gains on sales of securities and
mortgages offset by an increase in non-interest expense related primarily to
three newly opened supermarket branches, Year 2000 testing expenses and expenses
associated with guaranteed preferred beneficial interest in junior subordinated
debentures ("Trust Preferred Securities").


INTEREST AND DIVIDEND INCOME

Interest and dividend income increased $2,145,000 or 5.9% in 1998 as compared to
1997. The increase was attributable to increases in earning assets, particularly
loans, offset in part by reductions in the yield earned on those assets. The
balance of average earning assets for 1998 was approximately $520,753,000 as
compared to $475,423,000 for 1997, an overall increase of $45,330,000 or 9.5%.
The increase in earning assets was generally due to increases in average loan
balances which were $335,871,000 in 1998, as compared to $304,925,000 in 1997,
an increase of $30,946,000 or 10.2%. This increase was generally caused by
larger volumes of commercial loan originations in 1997 and into 1998 as well as
higher residential loan balances which were the result of the steady volume of
loan originations and purchases throughout 1997 and into 1998. See "Liquidity
and Capital Resources" and "Asset/Liability Management" for further discussion
of the Company's investment strategies.

The average yield earned on loans decreased for 1998 as compared to 1997,
primarily due to the effect of faster prepayments on higher yielding residential
loans and lower rates earned on newer loan originations or purchases over the
past year. Additionally, loan yields were negatively affected by yield
adjustments on loan pools which had been acquired at a premium purchase price,
which was the result of unusually heavy prepayment activity on those pools
associated with the favorable refinancing market which caused an acceleration of
premium amortization. The yield on loans for 1998 was 7.82% as compared to 8.15%
for 1997. Management estimates that, excluding the unusual prepayment
adjustments realized during the first half of 1998, the yield on loans would
have been approximately 7.94% or $400,000 higher than reported. Given the
current relatively low long-term interest rates and relatively

14
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

strong economy, similar yield adjustments could occur in the future. Yields on
loans were positively affected by growth in the Company's commercial loan
portfolio, which has grown to approximately $59,800,000 at December 31, 1998
from $46,900,000 at December 31, 1997, an increase of $12,900,000 or 27.5%.
Commercial loans typically carry a higher yield than residential
mortgages.

Average balances of mortgage-backed investments and investment securities were
$126,031,000 and $43,034,000, respectively, for 1998 as compared to $132,721,000
and $25,025,000, respectively, for 1997. These 20 balances, when combined,
increased by approximately $11,319,000 or 7.2%. The yield on mortgage-backed
investments and investment securities decreased to 6.66% and 7.03%,
respectively, in 1998 as compared to 6.82% and 7.09%, respectively, in 1997. The
declines in these yields reflects the lower interest rate environment for
investment opportunities since mid-1997, as well as the effects of increased
prepayments on the Company's higher yielding securities in the mortgage-backed
investment portfolio, the proceeds of which were invested at lower rates.

INTEREST EXPENSE

Interest expense for 1998 increased $1,494,000 or 7.4% compared to 1997,
generally due to increases in deposit and borrowed fund balances, which was
partially offset by decreases in the average rates paid on deposits and borrowed
funds. The blended weighted average rate paid on deposits and borrowed funds was
4.58% for 1998 as compared to 4.65% for the same period in 1997. The weighted
average rates paid on interest bearing deposits was 3.87% for 1998 as compared
to 3.95% in 1997. The overall cost of deposits has declined in 1998 as compared
to 1997, generally due to the continued success of promotional efforts to
attract core deposits (NOW accounts, demand deposits, savings and money
markets), which typically have a lower cost of funds than time deposits and
borrowings, as well as due to overall declines in the rates paid on time
deposits. The average balance of core and time deposits rose to $183,040,000 and
$157,858,000, respectively, for 1998 as compared to $164,489,000 and
$145,152,000, respectively, in 1997, for increases of 11.3% and 8.8%,
respectively. Additionally, the weighted average rate paid on time deposits
declined to 5.59% for 1998, as compared to 5.73% in 1997. This change reflects
the refinancing of various certificates as they have matured at lower rates than
they had been paying in previous periods and, to a lesser extent, the result of
the generally declining rate environment which has existed over the past year,
although competition for time deposit accounts has kept rates at higher levels
in 1998 as compared to general economic rates. The Company will continue to
closely manage its cost of deposits by continuing to seek methods of acquiring
new core deposits and maintaining its current core deposits while adding time
deposits at reasonable rates in comparison to local markets and other funding
alternatives, including borrowings. The average balances of borrowed funds
increased overall during 1998 as compared to 1997, to $167,560,000 from
$151,783,000, an increase of 10.4%. This increase generally relates to the
funding of certain loan portfolio purchases during 1998. The overall weighted
average rates paid on borrowed funds decreased to approximately 5.87% for 1998
from 5.95% in 1997. This increase was generally due to the Federal Reserve's
decisions to drop the inter-bank borrowing rate by 75 basis points in the latter
portion of 1998. This rate change may have a further positive effect on the
refinancing of borrowed funds in future periods. The Company will continue to
evaluate the use of borrowing as an alternative funding source for asset growth
in future periods. See "Asset/Liability Management" for further discussion of
the competitive market for deposits and overall strategies for uses of borrowed
funds.

NON-INTEREST INCOME

Total non-interest income increased $1,923,000 or 38.6% in 1998 in comparison to
1997. Customer service fees, which were $3,816,000 in 1998 as compared to
$3,276,000 for the same period in 1997, for an increase of $540,000 or 16.5%,
rose primarily due to growth in deposit accounts, primarily NOW and checking
account portfolios. Loan servicing fees and gains on sales of mortgage loans
were $469,000 and $492,000, respectively, in 1998 as compared to $558,000 and
$236,000, respectively, in 1997, a combined increase of $167,000 or 21.0%. This
generally is reflective of the favorable refinancing market for residential
loans in 1998 which has resulted in increased saleable volumes and related gains
on sales as compared to the same period in 1997. Loan servicing fees have
declined as that portfolio has paid down in the current refinance market, as
well as in part due to the fact that the Company has been selling mortgage loans
servicing released since 1996. Gains on sales of securities were $1,731,000 in
1998 as compared to $540,000 for 1997 for an increase of $1,191,000 or 220.6%.
These gains are generally reflective of a consistently strong market for equity
securities.

NON-INTEREST EXPENSE

Non-interest expense for 1998 increased $2,762,000 or 20.5% compared to 1997.
Salaries and employee benefits increased 17.6% or $1,172,000 primarily due to
increases in health insurance costs and staffing levels in the Company's
business banking and retail areas, including the Bank's new supermarket branches
in Cohasset (August 1997), Randolph (April 1998) and Hanson (September 1998).
These increases correspond with the Company's strategic focuses of increasing
business banking relationships and attracting core deposits. Occupancy expenses
increased $259,000 or 10.7% primarily due to increased capital and operating
expenditures related to the supermarket branches, and to the general
inflationary and capital expenditure increases, particularly in technology.
Other non-interest expenses, including trust preferred securities expense, also
increased $1,331,000 or 30.0% for 1998, in comparison to the same period in
1997, generally due to increased costs associated with statement rendering and
item processing as well as other operating costs associated with servicing an
expanded retail customer base. This increased expense also includes
approximately $150,000 of expenses related to the Company's efforts to address
the Year 2000 issue (see "Impact of Year 2000" for further discussion).
Additionally, approximately $586,000 of the aforementioned increase represents
expenses related to Trust Preferred Securities which were issued in June 1998.
See "Liquidity and Capital Resources" for additional discussion of Trust
Preferred Securities.

PROVISION FOR POSSIBLE LOAN LOSS

The provision for possible loan losses was $760,000 in 1998 as compared to
$630,000 for the same period in 1997. This increase of $130,000 primarily
reflects management's estimate of increased risk associated with increases in
the Company's commercial loan portfolios over the past year as compared to
residential real estate loans.

PROVISION FOR INCOME TAXES

The Company's effective income tax rate for 1998 was 35.1% compared to 38.0% for
1997. The lower effective tax rate in comparison to statutory rates for both
periods is reflective of income earned by certain non-bank subsidiaries which
are taxed, for state tax purposes, at lower rates. Additionally, the overall
effective tax rate is influenced by the proportion of income generated by
non-bank subsidiaries. In 1998, a greater portion of income was generated
through non-bank subsidiaries as compared to 1997.


15
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996

GENERAL

Net income for the year ended December 31, 1997 was $4,378,000 or $1.10 per
diluted share compared to $3,533,000 or $.89 per diluted share in 1996, an
increase of $845,000 or 23.9%. The growth in earnings is generally attributable
to increased net interest income, increases in customer service fee revenues
and controlled growth in non-interest expenses.

INTEREST AND DIVIDEND INCOME

Interest and dividend income increased $1,965,000 or 5.7% during 1997 as
compared to 1996. This increase was attributable to increases in earning assets,
particularly loans, and increases in the rates earned on investment securities,
including mortgage-backed investments and loans. The balance of average earning
assets was $475,423,000 in 1997 as compared to $454,840,000 in 1996, an increase
of $20,583,000 or 4.5%. This increase was generally caused by growth in the
Company's commercial loan portfolio in 1997 which had an average balance of
approximately $37,543,000 in 1997 as compared to $22,515,000 in 1996, an
increase of $15,028,000 or 66.7%. This increase is consistent with management's
strategy of diversifying the Company's asset-mix by increasing loan growth,
particularly higher yielding commercial loans. The remaining asset growth was
generated from residential loan purchases and originations partially offset by
decreases in the Company's investment and mortgage-backed securities portfolios.
The combined average balance of investments, including equity and
mortgage-backed securities, decreased to $169,733,000 in 1997, a decrease of
approximately $1,888,000 or 1.1% from 1996 average levels of $171,621,000. See
"Liquidity and Capital Resources" and "Asset/Liability Management" for a further
discussion of the Company's investment strategies. As a result of this strategy,
the average yield on interest earning assets increased in 1997 to 7.64% from
7.55% in 1996. Yields on loans increased slightly to 8.15% in 1997 from 8.13% in
1996. Increases due to greater concentrations of commercial loans generally
offset the declining interest rates on residential mortgage loans
originated/purchased over the second half of 1997 as well as declining yields
on those portfolios as the result of customer refinancings into lower yielding
loans. The yields on investment, excluding equities, and mortgage-backed
securities portfolios in 1997 were 7.09% and 6.82%, respectively, as compared to
6.44% and 6.74%, respectively, in 1996. This increase in yield, despite the
generally declining long-term interest rate environment, was achieved through
the sale of various lower yielding securities held by the Company in its
portfolio of securities available for sale and the acquisition of securities at
higher yields, primarily during the second half of 1996 and the first 9 months
of 1997.

INTEREST EXPENSE

Interest expense in 1997 increased $574,000 or 2.9% as compared to 1996
generally due to increases in deposit balances and higher rates paid on borrowed
funds. This increase was partially offset by decreases in the average rates paid
on deposits. The average balance of core deposits (NOW accounts, savings and
money markets) and time deposits rose to $164,489,000 and $145,152,000,
respectively, in 1997 as compared to $154,276,000 and $136,541,000,
respectively, in 1996 for increases of $10,213,000 or 6.6%, and $8,611,000 or
6.3%, respectively. These increases reflect the success of management's strategy
to attract retail, core deposit relationships and increasing deposit balances.
The overall cost of interest bearing deposits decreased to 3.95% in 1997 from
4.04% in 1996 despite a continued competitive market for deposit relationships.
This is generally attributable to the Company's continued growth in less
expensive core deposit accounts as well as decreases in overall rates paid on
time deposits. While rates paid on time deposits have generally remained flat
for most of 1997, the overall cost has declined due to customers shifting to
shorter-term maturity time deposits.

Average balances of borrowed funds remained flat at $151,783,000 in 1997 as
compared to $151,767,000 in 1996. The overall weighted cost of borrowed funds
increased to 5.95% in 1997 from 5.78% in 1996. This increase in cost of borrowed
funds was generally due to management's decision to extend approximately
$28,000,000 of borrowings from short-term to longer-term maturities at the end
of the first quarter of 1997. This strategy in part offset the trend of growth
in shorter-term maturity time deposits, as noted above, and provided further
protection against potential rising interest rates. See "Asset/Liability
Management" for further discussion of the competitive market for deposits and
overall strategies for uses of borrowed funds.

NON-INTEREST INCOME

Total non-interest income increased $809,000 or 19.4% in 1997 as compared to
1996. Customer service fees, which were $3,276,000 in 1997 as compared to
$2,412,000 in 1996, increased $864,000 or 35.8%. This increase is consistent
with increases in core deposit accounts, particularly NOW and checking accounts.
Non-interest income was also favorably impacted by the sales of various other
real estate owned properties at better than anticipated prices. Income related
to the sales of other real estate owned was $109,000 in 1997 and $67,000 in
1996. 

Gains on securities were $540,000 in 1997, an increase of $45,000 or 9.1% over
1996 levels. These gains were reflective of the strong equity markets
experienced over the past 2 years.

Gains on sales of mortgages and loan servicing income decreased during 1997 to
$236,000 and $558,000, respectively, from $315,000 and $646,000, respectively,
in 1996. This reflects management's decision in 1996 to sell most of its
residential loan production on a servicing released basis, as well as fewer
loans being originated for sale in 1997. The loan servicing income for 1997 was
further negatively impacted by the accelerated amortization of mortgage
servicing rights (approximately $76,000) given the acceleration of estimated
prepayments on the related loan servicing pools.

NON-INTEREST EXPENSE

Non-interest expense for 1997 increased $665,000 or 5.2% over 1996 levels.
Salaries and employee benefits increased 9.6% or $585,000 generally 22 due to
increases in health insurance costs and staffing levels of the Company's
business banking and retail areas, including the Cohasset supermarket branch.
Additionally, costs associated with the Company's employee stock plan and other
incentive compensation expenses increased by approximately $280,000 over 1996
levels as the result of the increase in the Company's stock price during 1997
and also because certain performance-related incentives were met as a result of
the improved financial performance of the Company in 1997.

Occupancy and equipment expenses increased $46,000 or 1.9% primarily due to the
opening of the Cohasset branch and other minor inflationary increases. Other
non-interest expenses increased $34,000 or .8%, primarily as the result of
increased advertising expenses and other costs associated with the Company's
retail banking efforts and the opening of the Cohasset branch.

PROVISION FOR POSSIBLE LOAN LOSS

The provision for possible loan losses was $630,000 for 1997 as compared to
$480,000 for 1996. This increase of $150,000 primarily


16
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

reflects the increased risk associated with increases in the Company's
commercial loan portfolio as compared to residential lending.

PROVISION FOR INCOME TAXES

The Company's effective income tax rate for 1997 was 38.0% compared to 37.7% for
1996. The lower effective tax rate in comparison to statutory rates for both
periods is reflective of the levels of income earned by certain non-bank
subsidiaries which are taxed, for state tax purposes, at lower rates.

ASSET/LIABILITY MANAGEMENT

The objective of asset/liability management is to ensure that liquidity, capital
and market risk are prudently managed. Asset/liability management is governed by
policies reviewed and approved annually by the Company's Board of Directors
(Board). The Board delegates responsibility for asset/liability management to
the corporate Asset/Liability Management Committee (ALCO). ALCO sets strategic
directives that guide the day-to-day asset/liability management activities of
the Company. ALCO also reviews and approves all major funding, capital and
market risk management programs. ALCO is comprised of members of management and
executive management of the Company and the Bank.

Interest rate risk is the sensitivity of income to variations in interest rates
over both short-term and long-term time horizons. The primary objective of
interest rate risk management is to control this risk within limits approved by
the Board and by ALCO. These limits and guidelines reflect the Company's
tolerance for interest rate risk. The Company attempts to control interest rate
risk by identifying potential exposures and developing tactical plans to address
such potential exposures. The Company quantifies its interest rate risk
exposures using sophisticated simulation and valuation models, as well as a more
simple gap analysis. The Company manages its interest rate exposures by
generally using on-balance sheet strategies, which is most easily accomplished
through the management of the durations and rate sensitivities of the Company's
investments, including mortgage-backed securities portfolios, and by extending
or shortening maturities of borrowed funds. Additionally, pricing strategies,
asset sales and, in some cases, hedge strategies are also considered in the
evaluation and management of interest rate risk exposures.

The Company uses simulation analysis to measure the exposure of net interest
income to changes in interest rates over a 1 to 5 year time horizon. Simulation
analysis involves projecting future interest income and expense from the
Company's assets, liabilities and off-balance sheet positions under various
interest rate scenarios.

The Company's limits on interest rate risk specify that if interest rates were
to ramp up or down 200 basis points over a 12 month period, estimated net
interest income for the next 12 months should decline by less than 10%. The
following table reflects the Company's estimated exposure, as a percentage of
estimated net interest income for the next 12 months, which does not materially
differ from the impact on net income, on the above basis: 

<TABLE>
<CAPTION>
RATE CHANGE                ESTIMATED EXPOSURE AS A
(BASIS POINTS)             % OF NET INTEREST INCOME 
--------------             -------------------------
<S>                        <C>
   +200                            4.4% 
   -200                            2.1% 
</TABLE>

The Company uses valuation analysis to provide insight into the potential
exposure of earnings and equity to changes in interest rates based on the
balance sheet position of the Company at a set point in time without regard to
potential future strategic changes. Valuation analysis involves projecting
future cash flows from the Company's assets, liabilities and off-balance sheet
positions and then discounting such cash flows at appropriate interest rates.
The Company's economic value of equity is the estimated net present value of its
assets, liabilities and off-balance sheet positions.The following table reflects
the Company's estimated exposure as a percentage of estimated economic value of
equity assuming an immediate shift in interest rates:

<TABLE>
<CAPTION>
RATE CHANGE                ESTIMATED EXPOSURE AS A
(BASIS POINTS)             % OF ECONOMIC VALUE
--------------             -------------------------
<S>                        <C>
   +200                           (11)%
   -200                           (29)% 
</TABLE>

This estimated exposure from an economic value of equity, in management's
opinion, does not put the Company at undue interest rate risk given evaluations
of other factors including interest rate simulation results and the overall
interest rate gap position as described below.  

Interest rate gap analysis provides a static view of the maturity and repricing
characteristics of the on-balance sheet and off-balance sheet positions. The
interest rate gap analysis is prepared by scheduling all assets, liabilities and
off-balance sheet positions according to scheduled repricing or maturity.
Interest rate gap analysis can be viewed as a short-hand complement to
simulation and valuation analysis.

The Company's limits on interest rate risk specify that rate sensitive assets be
maintained at at least 40% of rate sensitive liabilities at the cumulative
1-year gap, as presented on a basis consistent with methods prescribed by
generally accepted accounting principles. As of December 31, 1998, the Company
was liability sensitive with rate sensitive assets at 44% of rate sensitive
liabilities at the 1-year gap.

The Company's policy is to match, as well as possible, the interest rate
sensitivities of its assets and liabilities. Residential mortgage loans, which
the Company currently originates or purchases for the Company's own portfolio,
are primarily 1-year, 3-year and 5-year adjustable rate mortgages and shorter
term (generally 15-year or seasoned 30-year) fixed rate mortgages. Residential
mortgage loans currently originated by the Company are primarily sold in the
secondary market.

The Company also emphasizes loans with terms to maturity or repricing of 3 years
or less, such as certain adjustable rate residential mortgage loans, commercial
mortgages, business loans, residential construction loans, second mortgages and
home equity loans.

Management desires to expand its interest earning asset base in future periods
primarily through growth in the Company's loan portfolio. Loans comprised
approximately 64.5% of the average interest earning assets in 1998. In the
future, the Company intends to be competitive in the residential mortgage market
but plans to place greater emphasis on consumer and commercial loans. The
Company also has been, and expects to remain, active in pursuing wholesale
opportunities to purchase loans. During 1998 and 1997, the Company acquired
approximately $95,600,000 and $57,800,000, respectively, of residential first
mortgages.

The Company has also used mortgage-backed investments (typically with weighted
average lives of 5 to 7 years) as a vehicle for fixed and adjustable rate
investments and as an overall asset/liability tool. These securities have been
highly liquid given current levels of prepayments in the underlying mortgage
pools and, as a result, have provided the Company with greater reinvestment
flexibility.

The level of the Company's liquid assets and the mix of its investments may
vary, depending upon management's judgment as to market trends, the quality of
specific investment opportunities and the relative attractiveness

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

of their maturities and yields. Management has been aggressively promoting the
Company's core deposit products since the first quarter of 1995, particularly
checking and NOW accounts. The success of this program has favorably impacted
the overall deposit growth to date, despite interest rate and general market
pressures, and has helped the Company to increase its customer base. However,
given the strong performance of money market mutual funds and the equity markets
in general, the Company and many of its peers have begun to see lower levels of
growth in time deposits as compared to prior years as customers reflect their
desire to increase their returns on investment. This pressure has been
exacerbated currently by the historically low long-term economic interest rates.
Management believes that the markets for future time deposit growth,
particularly with terms in excess of 2 years, will remain highly competitive.
Management will continue to evaluate future funding strategies and alternatives
accordingly as well as to continue to focus its efforts on attracting core,
retail deposit relationships.

The Company is also a voluntary member of the Federal Home Loan Bank ("FHLB") of
Boston. This borrowing capacity assists the Company in managing its
asset/liability growth because, at times, the Company considers it more
advantageous to borrow money from the FHLB of Boston than to raise money through
non-core deposits (i.e., certificates of deposit). Borrowed funds totaled
$177,128,000 at December 31, 1998 compared to $165,910,000 at December 31, 1997.
These borrowings are primarily comprised of FHLB of Boston advances and have
primarily funded residential loan originations and purchases as well as
mortgage-backed investments and investment securities.

Additionally, the Company has recently obtained funding through the issuance of
Trust Preferred Securities which carry a higher interest rate than similar FHLB
borrowings, but at the same time are included as capital, without diluting
earnings per share and are tax deductible. See "Liquidity and Capital Resources"
for further discussion.

The following table sets forth maturity and repricing information relating to
interest sensitive assets and liabilities at December 31, 1998. The balance of
such accounts has been allocated among the various periods based upon the terms
and repricing intervals of the particular assets and liabilities. For example,
fixed rate mortgage loans and mortgage-backed securities, regardless of held in
portfolio or available for sale classification, are shown in the table in the
time periods corresponding to projected principal amortization computed based on
their respective weighted average maturities and weighted average rates using
prepayment data available from the secondary mortgage market.

Adjustable rate loans and securities are allocated to the period in which the
rates would be next adjusted. The following table does not reflect partial or
full prepayment of certain types of loans and investment securities prior to
scheduled contractual maturity. Additionally, all securities or borrowings which
are callable at the option of the issuer or lender are reflected in the
following table based upon the likelihood of call options being exercised by the
issuer on certain investments or borrowings in a most likely interest rate
environment. Since regular passbook savings and NOW accounts are subject to
immediate withdrawal, such accounts have been included in the "Other Savings
Accounts" category and are assumed to mature within 6 months. This table does
not include non-interest bearing deposits.  

While this table presents a cumulative negative gap position in the 6 month to 5
year horizon, the Company considers its earning assets to be more sensitive to
interest rate movements than its liabilities. In general, assets are tied to
increases that are immediately impacted by interest rate movements while deposit
rates are generally driven by market area and demand which tend to be less
sensitive to general interest rate changes. In addition, other savings accounts
and money market accounts are substantially stable core deposits, although
subject to rate changes. A substantial core balance in these type of accounts is
anticipated to be maintained over time.


18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS


<TABLE>
<CAPTION>
                                                                 Repricing/Maturity/Internal

AT DECEMBER 31, 1998                 0-6 Mos.     6-12 Mos.      1-2 Yrs.      2-3 Yrs.      3-5 Yrs.     Over 5 Yrs.     Total
--------------------                ---------     ---------     ---------     ---------     ---------     ---------      -------
(DOLLARS IN THOUSANDS)
<S>                                 <C>           <C>           <C>           <C>           <C>           <C>          <C>      
Assets subject to interest rate
 adjustment:
 Short-term investments             $   4,293     $    --       $    --       $    --       $    --       $    --      $   4,293
 Bonds and obligations                 14,424         3,998         8,049         7,071        11,738         2,013       47,293
 Mortgage-backed investments           27,710        16,268        16,076        12,756        21,131        34,165      128,106
 Mortgage loans subject to rate
  review                               26,355        11,719        19,804         5,582        19,588          --         83,048
 Fixed rate mortgage loans             33,561        20,959        42,789        52,096        71,413        41,779      262,597
 Commercial and other loans
  contractual maturity                  9,534         2,771         2,123         1,588         2,151          --         18,167
                                    ---------     ---------     ---------     ---------     ---------     ---------      -------
   Total                              115,877        55,715        88,841        79,093       126,021        77,957      543,504
                                    ---------     ---------     ---------     ---------     ---------     ---------      -------
Liabilities subject to interest
 rate adjustment:
 Money market deposit accounts         14,995          --            --            --            --            --         14,995
 Savings deposits - term
  certificates                         82,006        38,191        31,421         7,465         4,609          --        163,692
 Other savings accounts               141,392          --            --            --            --            --        141,392
 Borrowed funds                        91,628        15,000        23,000        17,000          --          30,500      177,128
                                    ---------     ---------     ---------     ---------     ---------     ---------      -------
   Total                              330,021        53,191        54,421        24,465         4,609        30,500      497,207
                                    ---------     ---------     ---------     ---------     ---------     ---------      -------

Guaranteed preferred beneficial
 interest in junior subordinated
  debentures                             --            --            --            --            --          11,934       11,934
                                    ---------     ---------     ---------     ---------     ---------     ---------      -------

Excess (deficiency) of rate
 sensitive assets over rate
 sensitive liabilities               (214,144)        2,523        34,420        54,628       121,412        35,523       34,363
                                    ---------     ---------     ---------     ---------     ---------     ---------      -------
Cumulative excess (deficiency) of
 rate sensitive assets over rate
 sensitive liabilities (1)          $(214,144)    $(211,620)    $(177,200)    $(122,572)    $  (1,160)    $  34,363
                                    ---------     ---------     ---------     ---------     ---------     ---------
                                    ---------     ---------     ---------     ---------     ---------     ---------

Rate sensitive assets as a
 percent of rate sensitive
  liabilities (cumulative)               35.1%         44.8%         59.5%         73.5%         99.8%       106.7%
</TABLE>


(1)  Cumulative as to the amounts previously repriced or matured. Assets held
     for sale are reflected in the period in which sales are expected to take
     place. Securities classified as available for sale are shown at
     repricing/maturity intervals as if they are to be held to maturity as there
     is no definitive plan of disposition. They are also shown at amortized
     cost.

19
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

Payments and prepayments on the Company's loan and mortgage-backed investment
portfolios, sales of fixed rate residential loans, increases in deposits,
borrowed funds and maturities of various investments comprise the Company's
primary sources of liquidity. The Company is also a voluntary member of the FHLB
of Boston and, as such, is entitled to borrow an amount up to the value of its
qualified collateral that has not been pledged to outside sources. Qualified
collateral generally consists of residential first mortgage loans, securities
issued, insured or guaranteed by the U.S. Government or its agencies, and funds
on deposit at the FHLB of Boston. Short-term advances may be used for any sound
business purpose, while long-term advances may be used only for the purpose of
providing funds to finance housing. At December 31, 1998, the Company had
approximately $121,000,000 in unused borrowing capacity that is contingent upon
the purchase of additional FHLB of Boston stock. Use of this borrowing capacity
is also impacted by capital adequacy considerations.

The Company's short-term borrowing position consists primarily of FHLB of Boston
advances with original maturities of approximately 1 to 3 months. The Company
utilizes borrowed funds as a primary vehicle to manage interest rate risk, due
to the ability to easily extend or shorten maturities as needed. This enables
the Company to adjust its cash needs to the increased prepayment activity in its
loan and mortgage-backed investment portfolios, as well as to quickly extend
maturities when the need to further balance the Company's gap position arises.

The Company regularly monitors its asset quality to determine the level of its
loan loss reserves through periodic credit reviews by members of the Company's
Management Credit Committee. The Management Credit Committee, which reports to
the Executive Committee of the Company's Board of Directors, also works on the
collection of non-accrual loans and disposition of real estate acquired by
foreclosure. The allowance for possible loan losses is determined by the
Management Credit Committee after consideration of several key factors
including, without limitation: potential risk in the current portfolio, levels
and types of non-performing assets and delinquency, levels of potential problem
loans on the watched asset reports and the impact that they may have on loan
collateral and repayment. Workout approach and financial condition of borrowers
are also key considerations to the evaluation of non-performing loans.

Non-performing assets were $731,000 at December 31, 1998, compared to $978,000
at December 31, 1997, a decrease of $247,000 or 25.3%. The Company's ratio of
delinquent loans to total loans was .36% at December 31, 1998, as compared to
 .42% at December 31, 1997. Management believes that while delinquency rates and
non-performing assets remain at relatively low levels at December 31, 1998, it
is likely that at some point in the near future some degree of economic slow
down is likely which in turn may result in future increases in problem assets
and loan loss provisions. Management continues to monitor the overall economic
environment and its potential effects on future credit quality on an ongoing
basis.

At December 31, 1998, the Company had outstanding commitments to originate,
purchase and sell residential mortgage loans in the secondary market amounting
to $2,498,000, $26,580,000 and $3,428,000, respectively. The Company also has
outstanding commitments to grant advances under existing home equity lines of
credit amounting to $11,085,000. Unadvanced commitments under outstanding
commercial and construction loans totaled $11,130,000 as of December 31, 1998.
The Company believes it has adequate sources of liquidity to fund these
commitments.

The Company's total stockholders' equity was $33,060,000 or 5.6% of total assets
at December 31, 1998, compared with $36,321,000 or 6.8% of total assets at
December 31, 1997. The decrease in total stockholders' equity of approximately
$3,261,000 or 9.0% primarily resulted from dividends paid and the effect of the
Company's stock repurchase programs, offset in part by earnings of the Company.

As previously discussed, the Company issued $12,650,000 of 8.25% Trust Preferred
Securities in June 1998. Under current regulatory guidelines, trust preferred
securities are allowed to represent up to generally 25% of the Company's Tier 1
capital with any excess amounts available as Tier 2 capital. As of December 31,
1998, approximately $10,686,000 of these securities was included in Tier 1.

Bank regulatory authorities have established a capital measurement tool called
"Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to assets now
constitutes the minimum capital standard for most banking organizations and a
5.00% Tier 1 leverage capital ratio is required for a "well-capitalized"
classification. At December 31, 1998, the Company's Tier 1 leverage capital
ratio was approximately 7.27%. In addition, regulatory authorities have also
implemented risk-based capital guidelines requiring a minimum ratio of Tier 1
capital to risk-weighted assets of 4.00% (6.00% for "well-capitalized") and a
minimum ratio of total capital to risk-weighted assets of 8.00% (10.00% for
"well-capitalized"). At December 31, 1998, the Company's Tier 1 and total
risk-based capital ratios were approximately 12.49% and 13.86%, respectively.
The Company is categorized as "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). The Bank is also
categorized as "well-capitalized" as of December 31, 1998.

IMPACT OF THE YEAR 2000

The Year 2000 problem, which is common to most companies, concerns the inability
of information systems, primarily (but not exclusively) computer software
programs, to properly recognize and process date-sensitive information as the
Year 2000 approaches. The following constitutes the Company's Year 2000
readiness disclosure under the Year 2000 Information and Readiness Disclosure
Act.

The mission critical information systems of the Company are generally processed
in-house using programs or software provided by third party vendors. Thus, the
direct effort to correct Year 2000 issues will generally be undertaken by larger
companies outside of the Company's control. The Company expects that it will
bring its mission critical systems into compliance with Year 2000 generally
through software upgrades and releases, covered primarily through pre-existing
maintenance contracts on such software or, for some limited exceptions, through
the acquisition and installation of compliant alternative solutions. 

Bank regulators have recently issued additional guidance under which they are
assessing Year 2000 readiness. The failure of a financial institution, such as
the Company, to address deficiencies in the Year 2000 management process may
result in enforcement actions which could have a material adverse effect on such
institution, result in the imposition of civil money penalties or result in the
delay (or receipt of an unfavorable or critical evaluation of management of a
financial institution in connection with regulatory review) of applications
seeking to expand the institutions activities or to acquire other entities. 

The Company has had a Year 2000 Task Force (the "Task Force") comprised of
middle and senior management personnel starting in 1997. The managers on this
Task Force

20
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

represent all operating areas of the Company including those who have limited
responsibilities for internal system applications but may have Year 2000
exposure resulting from vendor or correspondent relationships. A formal Year
2000 Action Plan has been developed and was approved by the Board of Directors
in 1997. The Task Force has had regularly scheduled monthly meetings since its
formation with bi-weekly meetings since March 1998 and provides updates to the
full Board of Directors on a monthly basis. The Company also established a Year
2000 Committee in June 1998 comprised of the Chief Executive Officer, Chief
Operations Officer, Director of Management Information Systems and three outside
Directors of the Company. This group has reviewed all Year 2000 plans and the
Company's progress against the detailed plans and objectives established in the
Year 2000 Action Plan. This Committee meets quarterly. The Task Force has
completed an assessment, identifying mission critical systems, and has initiated
formal communications with all third party vendors, including correspondent
financial institutions, to determine the compliance status of all systems
utilized by the Company. Mission critical systems include hardware, software,
program interfaces, operating systems and network. Based upon the results of the
assessment, the Company has not determined a need to replace significant
portions of existing hardware or software systems. As previously stated, many of
the Company's software programs include, have included, or will include future
upgrades which encompass many other functional changes along with Year 2000
modifications. In most cases these upgrades were covered through pre-existing
maintenance contracts which are customarily purchased to cover potential
maintenance or functionality issues on acquired software or systems.

The Company's plan to address the Year 2000 issue was developed along the
five-phase project management process outlined in the Federal Financial
Institutions Examination Council (FFIEC) Year 2000 statement of May 5, 1997 ((i)
awareness; (ii) assessment; (iii) renovation; (iv) validation; and (v)
implementation). The awareness phase has generally been completed. The
assessment phase has consisted of assessing and documenting the Company's
business risk, information systems, and third party vendors, including those who
are not software and hardware or operating system providers.

This phase also included an assessment of the 29 Company's exposure to
additional credit risk as a result of Year 2000 issues with its customers,
particularly for commercial and commercial real estate loans and also for large
depositors. At this point in time, after the completion of such assessment,
management does not believe that there is a material risk or exposure in these
specific areas to credit losses or liquidity problems as a result of Year 2000.
Although credit risk associated with Year 2000 appears to be low for the Company
based upon current assessments, it is not possible to fully evaluate the true
magnitude of increased credit risk associated with Year 2000 at this point in
time. The impact that Year 2000 has on borrowers could result in increases in
problem loans and credit losses in future years. Management will continue,
however, to monitor developments in these areas. The overall assessment phase
has certain elements, including impact of reliance upon outside vendors, which
are currently ongoing. The majority of the assessment phase is otherwise
complete with no critical issues noted.

The validation phase, which includes actual testing of software, hardware,
network, telecom and programming applications, is in process. Thus far, there
have not been any material issues or developments as a result of such testing.
The only testing that remains to be performed is on the internal network. This
testing is expected to be completed by March 31, 1999. 

The Company is also in the process of developing contingency plans to ensure
that critical operations continue in the event that its information systems or
other vendors are unable to achieve Year 2000 requirements. At this point, the
Company has not identified any mission critical vendors who have missed target
dates or appear to be at material risk of not achieving Year 2000 requirements.

The chief components of the Company's Year 2000 expenses are generally relating
to the costs of acquiring testing systems, independent auditors and consultants
to assist the Task Force and management in assessing the adequacy of its plan,
testing of its systems, and propriety of its conclusions and, in some instances,
minor programming for system interfaces and the purchase of non-mission critical
software replacements which were necessitated as a result of management's Year
2000 risk assessment and/or testing. It is estimated that the Company has
directly incurred an additional $150,000 in expenses in 1998 related to Year
2000 and management conservatively estimates that approximately $150,000 to
$250,000 in additional expenses may be incurred in 1999. Costs of the project,
however, are based on current estimates and actual results could vary
significantly from such estimates once detailed testing is completed.

IMPACT OF INFLATION

The Consolidated Financial Statements of the Company and related Financial Data
presented herein have been prepared in accordance with generally accepted
accounting principles which generally require the measurement of financial
condition 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 the Company is
reflected in increased operating costs. Unlike most industrial companies, almost
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 in
the same magnitude as the price of goods and services. 

PROPOSED ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company does not expect that the adoption of this Statement
will have a material impact on the Company's financial position or results of
operation.

21


<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ABINGTON BANCORP, INC.:

We have audited the accompanying consolidated balance sheets of Abington
Bancorp, Inc. and subsidiaries ("the Company") as of December 31, 1998 and
1997, and the related statements of operations, changes in stockholders' equity,
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. 

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Abington Bancorp, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP

Arthur Andersen LLP
Boston, Massachusetts
January 13, 1999




22
<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,                                               1998         1997
------------                                             ---------    ---------
(Dollars in thousands)
<S>                                                      <C>          <C>      
ASSETS
Cash and due from banks (Note 18)                        $  15,424    $  13,312
Short-term investments                                       4,293          163
                                                         ---------    ---------
 Total cash and cash equivalents                            19,717       13,475
                                                         ---------    ---------
Loans held for sale (Note 6)                                 3,901        1,332
Securities (Notes 1, 4, 9 and 10):
 Held for investment - at cost (fair value
  of $64,129 in 1997)                                         --         64,021
 Available for sale - at fair value                        181,346      101,031
                                                         ---------    ---------
 Total securities                                          181,346      165,052
                                                         ---------    ---------
Loans (Notes 6, 9 and 10)                                  360,665      332,677
 Less: Allowance for possible loan losses                   (3,077)      (2,280)
   Unearned income                                            (754)        (937)
                                                         ---------    ---------
   Loans, net                                              356,834      329,460
                                                         ---------    ---------
Federal Home Loan Bank stock                                 9,538        8,151
Banking premises and equipment, net (Note 7)                 8,328        6,294
Other real estate owned, net (Note 6)                         --            265
Intangible assets (Notes 1 and 2)                            2,789        3,284
Other assets (Notes 11 and 20)                               8,698        4,673
                                                         ---------    ---------
                                                         $ 591,151    $ 531,986
                                                         ---------    ---------
                                                         ---------    ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8)                                        $ 363,953    $ 324,934
Short-term borrowings (Note 9)                              66,628       55,910
Long-term debt (Note 10)                                   110,500      110,000
Accrued taxes and expenses (Notes 11 and 14)                 3,286        3,337
Other liabilities                                            1,790        1,484
                                                         ---------    ---------
Total liabilities                                          546,157      495,665
                                                         ---------    ---------

Guaranteed preferred beneficial interests in the
 Company's junior subordinated debentures (Note 2)          11,934         --

Commitments and contingencies (Note 12)


Stockholders' equity (Notes 3, 4, 13, 16, 17, and 19):
 Serial preferred stock, $.10 par value, 3,000,000
  shares authorized; none issued                              --           --
Common stock, $.10 par value, 12,000,000 shares
  authorized; 4,795,000 shares issued in 1998
  and 4,676,000 shares issued in 1997                          480          468
Additional paid-in capital                                  21,830       21,094
Retained earnings                                           23,182       19,858
                                                         ---------    ---------
                                                            45,492       41,420

Treasury stock - 1,448,000 and 1,039,000 shares
  in 1998 and 1997, at cost                                (13,283)      (5,931)
Compensation plans                                            (114)        (231)
Net unrealized gain on available for sale
 securities, net of taxes                                      965        1,063
                                                         ---------    ---------
Total stockholders' equity                                  33,060       36,321
                                                         ---------    ---------
                                                         $ 591,151    $ 531,986
                                                         ---------    ---------
                                                         ---------    ---------
</TABLE>


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

23
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                  1998          1997        1996
------------------------                                ---------    ---------    ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>          <C>          <C>       
Interest and dividend income:
 Interest and fees on loans (Notes 1, 5 and 6)         $   26,281   $   24,838   $   22,978
 Interest on mortgage-backed investments                    8,393        9,045        9,245
 Interest on bonds and obligations                          3,027        1,775        1,512
 Dividend income                                              627          589          556
 Interest on short-term investments                           114           50           41
                                                        ---------    ---------    ---------
  Total interest and dividend income                       38,442       36,297       34,332
                                                        ---------    ---------    ---------
Interest expense:
 Interest on deposits (Note 8)                             11,751       11,057       10,742
 Interest on short-term borrowings (Note 9)                 2,279        2,557        3,733
 Interest on long-term debt (Note 10)                       7,555        6,477        5,042
                                                        ---------    ---------    ---------
  Total interest expense                                   21,585       20,091       19,517
                                                        ---------    ---------    ---------

Net interest income                                        16,857       16,206       14,815
Provision for possible loan losses (Note 6)                   760          630          480
                                                        ---------    ---------    ---------
Net interest income, after provision for
 possible loan losses                                      16,097       15,576       14,335
                                                        ---------    ---------    ---------

Non-interest income:
 Loan servicing fees (Note 6)                                 469          558          646
 Other customer service fees                                3,816        3,276        2,412
 Gain on sales of securities, net                           1,731          540          495
 Gain on sales of mortgage loans, net                         492          236          315
 Net gain on sales and write-down of other
  real estate owned                                            43          109           67
 Other                                                        358          267          242
                                                        ---------    ---------    ---------
  Total non-interest income                                 6,909        4,986        4,177
                                                        ---------    ---------    ---------
Non-interest expense:
 Salaries and employee benefits (Notes 12, 14 and 17)       7,832        6,660        6,075
 Occupancy and equipment expenses (Notes 7 and 12)          2,679        2,420        2,374
 Trust preferred securities expense (Note 2)                  586         --           --
 Other non-interest expenses (Note 15)                      5,170        4,425        4,391
                                                        ---------    ---------    ---------
  Total non-interest expense                               16,267       13,505       12,840
                                                        ---------    ---------    ---------
Income before income taxes                                  6,739        7,057        5,672
Provision for income taxes (Note 11)                        2,368        2,679        2,139
                                                        ---------    ---------    ---------
Net income                                             $    4,371   $    4,378   $    3,533
                                                        ---------    ---------    ---------
                                                        ---------    ---------    ---------
Earnings per share (Note 1):
 Basic -
  Net income per share                                 $     1.25   $     1.18   $      .94
                                                        ---------    ---------    ---------
                                                        ---------    ---------    ---------
Weighted average common shares                          3,491,000    3,716,000    3,774,000
                                                        ---------    ---------    ---------
                                                        ---------    ---------    ---------
 Diluted -
  Net income per share                                 $     1.17   $     1.10   $      .89
                                                        ---------    ---------    ---------
                                                        ---------    ---------    ---------
Weighted average common shares
 and share equivalents                                  3,722,000    3,966,000    3,964,000
                                                        ---------    ---------    ---------
                                                        ---------    ---------    ---------
</TABLE>

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


24
<PAGE>



<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY

                                                                                               Net
                                                                                             Unrealized      
                                                                                            Gain (Loss)     
                                                          Additional                        on Available            
                                                 Common    Paid-in    Retained    Treasury    for Sale   Compensation    
(DOLLARS IN THOUSANDS)                           Stock     Capital    Earnings     Stock     Securities     Plans       Total 
----------------------                          --------   --------   --------    --------    --------    --------    --------
<S>                                             <C>       <C>         <C>         <C>       <C>          <C>          <C>     
Balance at December 31, 1995                    $    466   $ 20,811   $ 13,442    $ (3,703)   $    (62)   $   (393)   $ 30,561
Net income                                          --         --        3,533        --          --          --         3,533
Issuance of stock                                      1        112       --          --          --          --           113
Amortization of unearned compensation -
 ESOP                                               --         --         --          --          --            81          81
Dividends declared ($.20 per share)                 --         --         (754)       --          --          --          (754)
Change in market value on
 available for sale securities, net of taxes        --         --         --          --            12        --            12
                                                --------   --------   --------    --------    --------    --------    --------
Balance at December 31, 1996                    $    467   $ 20,923   $ 16,221    $ (3,703)   $    (50)   $   (312)   $ 33,546




Net income                                          --         --        4,378        --          --          --         4,378
Issuance of stock                                      1        171       --          --          --          --           172
Amortization of unearned compensation -
 ESOP                                               --         --         --          --          --            81          81
Dividends declared ($.20 per share)                 --         --         (741)       --          --          --          (741)
Repurchase of common stock                          --         --         --        (2,228)       --          --        (2,228)
Change in market value on
 available for sale securities, net of taxes        --         --         --          --         1,113        --         1,113
                                                --------   --------   --------    --------    --------    --------    --------
Balance at December 31, 1997                    $    468   $ 21,094   $ 19,858    $ (5,931)   $  1,063    $   (231)   $ 36,321


Net income                                          --         --        4,371        --          --          --         4,371
Issuance of stock                                     12        736       --          --          --          --           748
Amortization of unearned compensation -
 ESOP                                               --         --         --          --          --            81          81
Obligation related to directors'
 deferred stock plan                                --         --         --          --          --            36          36
Dividends declared ($.30 per share)                 --         --       (1,047)       --          --          --        (1,047)
Repurchase of common stock                          --         --         --        (7,352)       --          --        (7,352)
Effect of reclassification of securities from
 held-to-maturity to available for sale,
   net of taxes                                     --         --         --          --           245        --           245
Change in market value on
 available for sale securities, net of taxes        --         --         --          --          (343)       --          (343)
                                                --------   --------   --------    --------    --------    --------    --------
Balance at December 31, 1998                    $    480   $ 21,830   $ 23,182    $(13,283)   $    965    $   (114)   $ 33,060
                                                --------   --------   --------    --------    --------    --------    --------
                                                --------   --------   --------    --------    --------    --------    --------

</TABLE>

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


25

<PAGE>


<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31,                                      1998     1997     1996
                                                             ------   ------   -------
(Dollars in thousands)
<S>                                                        <C>       <C>      <C>
Net income, as reported                                      $4,371   $4,378   $3,533
Unrealized gains on securities, net of taxes                    782    1,448      320
Less: Reclassification adjustment for securities gains
 included in net income, net of taxes                         1,125      335      308
                                                             ------   ------   -------
Comprehensive income before transfers of
 held-to-maturity securities                                  4,028    5,491    3,545

Add: Net unrealized gains on securities transferred
 from held-to-maturity to available for sale, net of taxes      245       --       --
                                                             ------   ------   -------
Comprehensive income                                         $4,273   $5,491   $3,545
                                                             ------   ------   -------
                                                             ------   ------   -------

</TABLE>


26
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                        1998              1997         1996
------------------------                                      ---------         ---------    ---------
(DOLLARS IN THOUSANDS)
<S>                                                           <C>               <C>          <C>      
Cash flows from operating activities:
 Net income                                                   $   4,371         $   4,378    $   3,533
 Adjustments to reconcile net income to net cash
  from operating activities:
  Provision for possible loan losses                                760               630          480
  Net gain on sales and write-down of other real
   estate owned and investment in limited partnership               (43)             (109)         (67)
  Amortization, accretion and depreciation, net                   1,800             1,798        1,784
  Provision for (prepaid) deferred taxes                            (66)             (166)         131
  Gain on sales of securities, net                               (1,731)             (495)
  Gain on sales of mortgage loans, net                             (492)             (236)        (315)
  Loans originated for sale in the secondary market             (34,481)          (17,688)     (18,344)
  Proceeds from sales of loans                                   32,404            19,768       18,440
  Other, net                                                     (3,505)           (1,101)       1,922
                                                              ---------         ---------    ---------
Net cash (used in) provided by operating activities                (983)            6,734        7,069
                                                              ---------         ---------    ---------
Cash flows from investing activities:
 Purchase of held for investment securities                      (2,844)           (8,968)      (3,633)
 Proceeds from principal payments received
  and redemptions of held for investment securities               5,562             8,571        8,734
 Proceeds from sales of available for sale securities            74,624            32,126       36,665
 Proceeds from principal payments on and maturities
  of available for sale securities                               49,979            19,041       15,517
 Purchase of available for sale securities                     (142,019)          (58,323)     (47,244)
 Loans originated/purchased, net of amortization and payoffs    (28,134)          (34,721)     (41,746)
 Proceeds from sales of loans held in portfolio                      --                --        3,038
 Purchases of FHLB stock                                         (1,387)             (248)        (504)
 Purchase of banking premises and equipment and
  improvements to other real estate owned                        (3,269)           (1,192)        (972)
 Proceeds from sales of other real estate owned                     308               769          564
 Investments and advances made to low income housing
  limited partnerships                                               --                --          (40)
                                                              ---------         ---------    ---------
Net cash used in investing activities                           (47,180)          (42,945)     (29,621)
                                                              ---------         ---------    ---------
Cash flows from financing activities:

 Net increase in deposits                                        39,019            24,489       20,375
 Net increase (decrease) in borrowings with
  maturities of 3 months or less                                (14,282)           19,739       11,363
 Proceeds from issuance of short-term borrowings
  with maturities in excess of 3 months                          45,000            20,000       37,000
 Principal payments on short-term borrowings with
  maturities in excess of 3 months                              (20,000)          (47,000)     (46,500)
 Proceeds from issuance of long-term debt                        50,000            49,500       37,000
 Principal payments on long-term debt                           (49,500)          (23,853)     (36,948)
 Net proceeds on issuance of guaranteed preferred
   beneficial interests in junior subordinated debentures        11,915              --           --
 Payment of cash dividends                                       (1,062)             (741)        (754)
 Purchase of treasury stock                                      (7,352)           (2,228)        --
 Proceeds from the exercise of stock options                        667                72          113
                                                              ---------         ---------    ---------
 Net cash provided by financing activities                       54,405            39,978       21,649
                                                              ---------         ---------    ---------
 Net increase (decrease) in cash and cash equivalents             6,242             3,767         (903)
 Cash and cash equivalents at beginning of year                  13,475             9,708       10,611
                                                              ---------         ---------    ---------
 Cash and cash equivalents at end of year                     $  19,717         $  13,475    $   9,708
                                                              ---------         ---------    ---------
                                                              ---------         ---------    ---------
</TABLE>


27
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                         1998      1997      1996
------------------------                        -------   -------   -------
(DOLLARS IN THOUSANDS)
<S>                                             <C>       <C>       <C>    
Supplemental cash flow information:

Interest paid on deposits                       $11,718   $11,063   $10,741
Interest paid on borrowed funds                   9,807     8,935     8,891
Income taxes paid                                 3,154     3,717       379
Transfers of loans to other real estate owned      --         425        62
Transfers of securities to available for sale
from held for investment                         61,232      --        --
</TABLE>


28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION

The consolidated financial statements include the accounts of Abington Bancorp,
Inc. (the "Company") and its wholly-owned subsidiaries, Abington Savings Bank
(the "Bank") and Abington Bancorp Capital Trust (See Note 2). The Bank also
includes its wholly-owned subsidiaries, Holt Park Place Development Corporation
and Norroway Pond Development Corporation, each typically owning properties
being marketed for sale, ABBK Corporation, which invested in real estate limited
partnerships and was dissolved in January 1997, and Abington Securities
Corporation, which invests primarily in obligations of the United States
Government and its agencies and equity securities.

Abington Bancorp, Inc. was reestablished as the Bank's holding company on
January 31, 1997. Previously, the Company's predecessor, also known as Abington
Bancorp, Inc., had served as the Bank's holding company from February 1988 until
its dissolution in December 1992. The Company's primary business is serving as
the holding company of the Bank.

On January 31, 1997, in connection with the holding company formation, each
share of the Bank's common stock previously outstanding was converted
automatically into one share of common stock of the Company, and the Bank became
a wholly-owned subsidiary of the Company. This 37 reorganization had no impact
on the consolidated financial statements. All significant intercompany balances
and transactions have been eliminated in consolidation.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Operating results in the future could vary from the amounts derived from
management's estimates and assumptions. 

RECLASSIFICATIONS

Certain amounts in the 1997 and 1996 consolidated financial statements have been
reclassified to conform to the 1998 presentation. 

CASH EQUIVALENTS

Cash equivalents include amounts due from banks, short-term investments with
original maturities of less than 3 months and federal funds sold on a daily
basis. 

SECURITIES

Investment securities are classified in 1 of 3 categories and are accounted for
as follows:

-    Debt securities that the Company has the positive intent and ability to
     hold to maturity are classified as "held for investment" securities and
     reported at amortized cost.

-    Debt and equity securities that are bought and held principally for the
     purpose of selling them in the near term are classified as "trading
     securities" and reported at fair value, with unrealized gains and losses
     included in earnings.

-    Debt and equity securities not classified as either held for investment or
     trading are classified as "available for sale" and reported at fair value
     with unrealized gains and losses excluded from earnings and reported in a
     separate component of stockholders' equity, net of applicable income tax
     effects.

The Company had no securities classified as trading securities at December 31,
1998 and 1997.

Mortgage-backed investments, held for investment, are stated at amortized cost
reduced by principal payments with discounts and premiums being recognized in
income by the interest method over the expected maturity of the investments.

Gains and losses on the disposition of securities are computed using the
specific identification method. Unrealized losses which are deemed to be other
than temporary declines in value are charged to operations.

As of June 30, 1998, the Company elected to transfer the balance of its
securities classified as held for investment to available for sale in accordance
with the guidelines set forth by Statement of Financial Accounting Standards
(SFAS) No. 115. This decision was made by the Board of Directors and management
of the Company after a review of its policies and practices of accounting for
investments in light of recent economic changes and given potential
opportunities from an asset/liability management perspective. At the time of
transfer there had been no sales or transfers of securities which would
otherwise necessitate this broad reclassification. However, the reclassification
was made as of June 30, 1998 to more accurately reflect the Company's change in
intention with respect to securities previously classified as held for
investment. Under Securities Exchange Commission guidelines, this
reclassification prohibits the Company from classifying securities as held for
investment for a period of at least 2 years. 

LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio consists of mortgage loans in the
southeastern Massachusetts area. The ability of the Company's debtors to honor
their contracts is generally dependent upon the stability of real estate market
and the general economic conditions in the Company's market area.

Of the total loan portfolio at December 31, 1998, approximately 34% represent
owner-occupied first mortgages located throughout the United States. In the
purchased loan portfolio, the Company owns approximately $33,000,000 and
$18,000,000 of loans collateralized by residential properties located in
California and Rhode Island, respectively. No other concentrations in any other
states, except for Massachusetts, exceed 3% of total 38 loans.

Loan origination and commitment fees and certain direct loan origination costs,
as defined, are deferred and amortized as a yield adjustment over the
contractual life of the related loans under the interest method. Premiums and
discounts on purchased residential loans are also amortized as a yield
adjustment by the interest method over the estimated duration of the
investments. Unearned discounts are amortized under the interest method over the
term of the related loans. All other interest on loans is recognized on a simple
interest basis.

Interest on loans is generally not accrued when the principal or interest on the
loan becomes delinquent in excess of 90 days, and/or in the judgment of
management the collectibility of the principal or interest becomes doubtful.
When a loan is placed on a non-accrual status, all interest previously accrued
but not collected is reversed against interest income in the current period.
Interest income is subsequently recognized only to the extent cash payments are
received.

The allowance for possible loan losses is based on management's evaluation of
the 

29
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

level of the allowance required in relation to the estimated loss exposure in
the loan portfolio. Procedures employed in considering the allowance
requirements include, among other factors, management's ongoing review of
individual loans, trends in levels of watched or criticized assets, an
evaluation of results of examinations by regulatory authorities and analyses of
historical trends in charge-offs and delinquencies. Loans are charged-off to the
allowance for loan losses when, in the opinion of management, such loans are
deemed to be uncollectible. The allowance is an estimate, and ultimate losses
may vary from current estimates. As adjustments become necessary, they are
reported in earnings during the periods in which they become known.

The allowance for possible loan losses as of December 31, 1998 is based on
management's estimate of the amount required to absorb losses in the loan
portfolio based on known current circumstances and real estate market
conditions. Additionally, management assesses the risk of increased, inherent
but unidentified losses which may exist through evaluation of watched asset
report trends and migration analysis, the results of which are reflected in
current reserves. However, some degree of uncertainty exists as to future trends
in the local economy and real estate market which, if there is significant
deterioration, could result in the Company experiencing increases in
non-performing loans, additional provisions for loan losses and increased lost
interest income on non-accrual loans.

Funds for lending are partially derived from selling participating and whole
interests in mortgage loans. Loans designated as held for sale are accounted for
at the lower of their aggregate cost or market value. Gains or losses on sales
of loans are recognized at the time of the sale and are adjusted when the
average interest rate on the loans sold, after normal servicing fees, differs
from the agreed yield to the buyer.

MORTGAGE SERVICING RIGHTS

On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement, which was superseded in June 1996 upon the
issuance of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," requires the recognition of a
separate asset for the rights to service mortgage loans for others regardless of
how those servicing rights were created. SFAS No. 125 impacts the Company to the
extent fixed rate loan originations having terms in excess of 15 years are sold
in the secondary mortgage market with servicing of the related loan retained by
the Company. In such cases, the Company is required to allocate a portion of the
cost of the loan to the mortgage servicing rights based on the relative fair
values of such servicing rights and the loan. The value of such servicing rights
is to be periodically assessed for impairment based on the fair value of those
rights. During 1996, the Company capitalized approximately $103,000 of mortgage
servicing rights which resulted in a corresponding increase in gains on sales of
mortgages. No mortgage servicing rights were capitalized in 1997 nor 1998 as
substantially all loan sales on the secondary market were made on a servicing
released basis. All previously capitalized mortgage servicing rights were
written-off in 1997 as the result of higher than anticipated prepayment
experience on the related loan portfolios.

OTHER REAL ESTATE OWNED

Real estate acquired by foreclosure and acquired by deed in lieu of foreclosure
are classified as other real estate owned and initially recorded at the lower of
cost or fair value less estimated selling costs. In the event subsequent
declines in value are identified, other real estate owned is adjusted to fair
market value through a charge to non-interest income.

The fair value for these assets is based on periodic analysis of the real estate
by management. Factors considered include, but are not limited to, general
economic and market conditions, geographic location, the composition of the real
estate holdings and property conditions.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF

The management of the Company reviews long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment is deemed to exist, long-lived assets and certain
identifiable intangibles are reported at the lower of the carrying amount or
fair value 39 less cost to sell.

BANKING PREMISES AND EQUIPMENT

Land is carried at cost. Buildings, leasehold improvements and equipment are
carried at cost less accumulated depreciation computed on the straight-line
method over the estimated useful lives of the assets, or the terms of the
leases, if shorter. The cost of maintenance and repairs are expensed as
incurred; major expenditures for betterments are capitalized and depreciated.

INVESTMENT IN REAL ESTATE LIMITED PARTNERSHIP

The Company has investments in a real estate limited partnership which is
accounted for on the cost recovery method and have been substantially
written-off as of December 31, 1998. The carrying value of this investment and
related deferred tax assets is periodically evaluated by management as to its
expected future recoverability and write-downs are recorded once an impairment
in value is identified and quantified.

INTANGIBLE ASSETS

Core deposit intangibles are being amortized on a straight-line basis over their
estimated lives of 7 to 10 years. Goodwill is being amortized on a straight-line
basis over 10 to 15 years. The carrying value of these assets is periodically
evaluated by management as to their expected future recoverability. To date no
write-downs have been recognized.

INCOME TAXES

Tax assets and liabilities are reflected at currently enacted income tax rates.
As changes in tax laws and rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.


EARNINGS PER SHARE

In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share." The only reconciling difference between the Company's computation of
basic and diluted earnings per share is the diluitive effect of stock options
issued and unexercised (see Note 16 for stock options). Additionally, on October
30, 1997, the Board of Directors of Abington Bancorp, Inc. approved a split of
its common stock on a 2-for-1 basis in the form of a stock dividend payable on
December 12, 1997, to share-holders of record as of November 14, 1997. All share
and per share data presented in these consolidated financial statements has been
retroactively restated for this event.

COMPREHENSIVE INCOME

In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses).
Components of comprehensive income are net income and all other non-owner
changes in equity; unrealized gains and losses on debt and equity securities in
the case of the Company. This

30
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

statement requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement 13. Stockholders' Equity
and (b) display the accumulated balance of other comprehensive income separate
from retained earnings and additional paid-in capital in the equity section of
a statement of financial position.

STOCK BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock-based compensation plans (Note 16). Accordingly, no accounting
recognition is given to options granted at fair market value until they are
exercised. Upon exercise, net proceeds, including tax benefits realized, if any,
are credited to equity.

Effective in 1995, the Company adopted the disclosure option of SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
their employee stock compensation plans. This statement requires that entities
which do not choose to account for stock-based compensation as prescribed by
this statement shall continue to account for these plans under APB 25 and
disclose the pro forma effects on earnings and earnings per 14. Employee Benefit
Plan share as if SFAS No. 123 had been adopted.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
expect that the adoption of this Statement will have a material impact on the
Company's financial position or results of operation.

2. GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE COMPANY'S JUNIOR SUBORDINATED
DEBENTURES (TRUST PREFERRED SECURITIES)

In May 1998, the Company formed a Delaware business trust, Abington Bancorp
Capital Trust (the "Trust"). All of the common securities of this special
purpose Trust are owned by the Company; the Trust exists solely to issue capital
securities. For financial reporting purposes, the Trust is reported as a
subsidiary and is consolidated into the financial statements of Abington
Bancorp, Inc. and subsidiaries. The capital securities are presented as a
separate line item on the consolidated balance sheet as a guaranteed preferred
beneficial interest in the Company's Junior Subordinated Debentures (trust
preferred securities). The Trust has issued trust preferred securities and
invested the net proceeds in junior subordinated deferrable interest debentures
(subordinated debentures) issued to the Trust by the Company. The subordinated
debentures are the sole assets of the Trust. The Company has the right to defer
payment of interest on the subordinated debentures at any time, or from time to
time, for periods not exceeding 5 years. If interest payments on the
subordinated debentures  are deferred, the distributions on the trust preferred
securities are also deferred. Interest on the subordinated debentures is
cumulative. The Company, through guarantees and agreements, has fully and
unconditionally guaranteed all of the Trust's obligations under the trust
preferred securities.

The Federal Reserve Bank has accorded the trust preferred securities Tier 1
capital status. The ability to apply Tier 1 capital treatment, as well as to
deduct the expense of the subordinated debentures for income tax purposes,
provided the Company with a cost-effective way to raise regulatory capital. The
trust preferred securities are not included as a component of total
shareholders' equity on the consolidated balance sheet.

The 8.25% trust preferred securities pay quarterly distributions which 
commenced on the last day of September 1998. The Trust issued 1,265,000 
shares of $10 per share liquidation value per preferred security at a total 
cost of approximately $735,000 which has been deferred and is netted against 
the outstanding value of the trust preferred securities on the accompanying 
balance sheet. The offering costs are being amortized over the anticipated 
life of the trust preferred securities, which will mature on June 30, 2029. 
Distributions, including those accrued and accumulated, of $325,000 relating 
to these trust preferred securities is reflected as minority interest in 
non-interest expense.

The maturity date may be shortened to a date not earlier than 2003 if certain
conditions are met, including obtaining approval from the Board of Governors of
the Federal Reserve System. The redemption price of the trust preferred
securities would equal the liquidation value of each security.

31
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. REGULATORY MATTERS


The Company and the Bank are subject to various regulatory requirements
administered by the federal banking agencies.

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes as of December 31,
1998, that the Company and the Bank met all capital adequacy requirements to
which they are subject. 

As of December 31, 1998, the most recent notification from the FDIC categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the institution's category. To be
considered well-capitalized under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and
total risk-based capital ratios as set forth in the table below.

<TABLE>
<CAPTION>
                                                                                                   TO BE WELL-
                                                                                                 CAPITALIZED UNDER
                                                                               FOR CAPITAL       PROMPT CORRECTIVE
                                                       ACTUAL               ADEQUACY PURPOSES    ACTION PROVISIONS
                                                AMOUNT          RATIO    AMOUNT         RATIO    AMOUNT      RATIO
<S>                                             <C>             <C>      <C>            <C>      <C>         <C>
(DOLLARS IN THOUSANDS)

As of December 31, 1998:

Company

  Total Capital (to risk-weighted assets)       $44,399         13.86%   $25,633         8.00%       N/A            N/A
  Tier 1 capital (to risk-weighted assets)      $40,004         12.49%   $12,817         4.00%       N/A            N/A
  Tier 1 capital (to average assets)            $40,004          7.27%   $22,024         4.00%       N/A            N/A

Bank

  Total Capital (to risk-weighted assets)       $36,792         11.56%   $25,460         8.00%   $31,825         10.00%
  Tier 1 capital (to risk-weighted assets)      $33,715         10.59%   $12,730         4.00%   $19,095          6.00%
  Tier 1 capital (to average assets)            $33,715          5.95%   $22,668         4.00%   $28,335          5.00%


As of December 31, 1997:

Company

  Total Capital (to risk-weighted assets)       $34,254         13.02%   $21,053         8.00%       N/A            N/A
  Tier 1 capital (to risk-weighted assets)      $31,974         12.15%   $10,526         4.00%       N/A            N/A
  Tier 1 capital (to average assets)            $31,974          6.01%   $21,279         4.00%       N/A            N/A

Bank

  Total Capital (to risk-weighted assets)       $32,982         12.54%   $21,047         8.00%   $26,309         10.00%
  Tier 1 capital (to risk-weighted assets)      $30,702         11.67%   $10,524         4.00%   $15,785          6.00%
  Tier 1 capital (to average assets)            $30,702          5.72%   $21,279         4.00%   $26,845          5.00%
</TABLE>


32
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. SECURITIES

The amortized cost and fair value of securities classified as held for
investment at December 31, 1997 is as follows:


<TABLE>
<CAPTION>
                                                       GROSS           GROSS
                                        AMORTIZED    UNREALIZED      UNREALIZED       FAIR
                                          COST          GAINS          LOSSES         VALUE
<S>                                     <C>            <C>            <C>            <C>    
AT DECEMBER 31,                                                1997
(DOLLARS IN THOUSANDS)

Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation                    $16,502        $    62        $   197        $16,367
Federal National
Mortgage Association                     28,624            358            212         28,770
 Government National
    Mortgage Association                  1,434              4           --            1,438
Other                                    17,461            147             54         17,554
                                        -------        -------        -------        -------
Total mortgage-backed securities        $64,021        $   571        $   463        $64,129
                                        -------        -------        -------        -------
                                        -------        -------        -------        -------
</TABLE>


The amortized cost and fair value of securities classified as available for sale
at December 31, 1998 and 1997 are as follows:


<TABLE>
<CAPTION>
                                              GROSS       GROSS                                  GROSS       GROSS
                               AMORTIZED   UNREALIZED   UNREALIZED     FAIR      AMORTIZED    UNREALIZED   UNREALIZED     FAIR
                                  COST        GAINS       LOSSES       VALUE        COST         GAINS       LOSSES       VALUE

AT DECEMBER 31,                                      1998                                              1997
(DOLLARS IN THOUSANDS)
<S>                            <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>     
Investment securities:
U.S. Government obligations    $    652     $     23     $   --       $    675     $    683     $   --       $   --       $    683
Federal agency obligations       25,842          204           92       25,954       30,112          143           48       30,207
Other bonds and obligations      20,799          303          881       20,221        3,095           28            3        3,120
                               --------     --------     --------     --------     --------     --------     --------     --------
Total investment securities      47,293          530          973       46,850       33,890          171           51       34,010
                               --------     --------     --------     --------     --------     --------     --------     --------
Marketable equity securities      4,339          727          270        4,796        4,137          996          106        5,027

Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation             14,540          125           36       14,629       12,906          186           30       13,062
Federal National
Mortgage Association             45,527          818           22       46,323       29,660          586           71       30,175
 Government National
Mortgage Association             22,943          172           81       23,034        9,476         --             44        9,432
 Other                           45,096          890          272       45,714        9,235           90         --          9,325
                               --------     --------     --------     --------     --------     --------     --------     --------
Total mortgage-backed 
securities                      128,106        2,005          411      129,700       61,277          862          145       61,994
                               --------     --------     --------     --------     --------     --------     --------     --------
                               $179,738     $  3,262     $  1,654     $181,346     $ 99,304     $  2,029     $    302     $101,031
                               --------     --------     --------     --------     --------     --------     --------     --------
                               --------     --------     --------     --------     --------     --------     --------     --------
</TABLE>

The fair value and amortized cost of investments and mortgage-backed securities,
respectively, at December 31, 1998 by contractual maturity follows. Expected
maturities or cash flows from securities will differ from contractual maturities
because the issuer may have the right to call or repay obligations with or
without call or prepayment penalties. Projected payments and prepayments for
mortgage-backed securities have not been considered for purposes of this
presentation.


33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
INVESTMENT SECURITIES       AMORTIZED COST  % TO TOTAL  FAIR VALUE
(DOLLARS IN THOUSANDS)
<S>                         <C>             <C>         <C>
Within 1 year                 $  --                     $  --
Over 1 year to 5 years          4,726          10.0       4,803
Over 5 years to 10 years       21,842          46.2      21,929
Over 10 years                  20,725          43.8      20,118
                              -------         -----     -------
                              $47,293         100.0%    $46,850
                              -------         -----     -------
                              -------         -----     -------
</TABLE>

<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES        AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
                                 AMORTIZED        FAIR
                                   COST          VALUE
<S>                             <C>             <C>
Within 1 year                   $   --          $   --
Over 1 year to 5 years             5,968           5,998
Over 5 years to 10 years           5,157           5,295
Over 10 years                    116,981         118,407
                                --------        --------
                                $128,106        $129,700
                                --------        --------
                                --------        --------
</TABLE>

Gross gains on sales of marketable equity securities were $1,591,000, $687,000
and $407,000 for 1998, 1997 and 1996, respectively. There were losses of
$118,000 on sales of equity securities in 1998. There were no losses on sales
of equity securities in 1997 or 1996.

Gross gains on sales of investment securities were $12,000, $0 and $30,000 for
1998, 1997 and 1996, respectively. Gross losses on sales of investment
securities were $0, $54,000 and $54,000 for 1998, 1997 and 1996, respectively.

Proceeds from sales of mortgage-backed investments classified as available for
sale during 1998, 1997 and 1996 were $58,011,000, $26,402,000 and $17,082,000,
respectively. Gross gains of $324,000, $142,000 and $130,000 in 1998, 1997 and
1996, respectively, were realized on those sales. Gross losses of $78,000,
$235,000 and $18,000 were realized in 1998, 1997 and 1996, respectively.

A U.S. agency obligation security with a carrying value of $1,098,000 was
pledged to collateralize treasury, tax and loan obligations.

All agency and mortgage-backed securities also serve as collateral for FHLB
borrowings as part of a blanket collateral agreement as further described in
Note 9.


5. INTEREST RATE SWAP AGREEMENT

To help manage interest rate sensitivity on the Company's adjustable rate
mortgage loan portfolio, the Company entered into an interest rate swap
agreement in July 1994 for a period of 36 months with an international
investment banking firm. Under this agreement, the Company received a fixed rate
of interest of 5.35% on the notional amount and paid interest based on the 6
month floating LIBOR rate on the notional amount which reset semi-annually
(February and August). The notional amount of this swap was initially
$15,000,000. This amount amortized at a rate consistent with the amortization
and prepayment of a reference pool of residential mortgages as specified in the
agreement. In addition to the fixed rate of interest, the Company also received
$300,000 in cash upon execution of this agreement. This amount was accreted to
income over the life of the agreement at a rate consistent with the
aforementioned reference pool of mortgages. The resulting yield received by the
Company, including the impact of the accretion, was approximately 6.25% in 1997.
This agreement expired on August 15, 1997.

Net interest income (expense) associated with this swap was recognized based on
the accrual method. The net interest income recognized by the Bank during 1997
and 1996 as a result of this agreement was $34,000 and $77,000, respectively.


34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. LOANS AND OTHER REAL ESTATE OWNED

A summary of the loan portfolio follows:

<TABLE>
<CAPTION>
DECEMBER 31,                                              1998              1997
(DOLLARS IN THOUSANDS) 
<S>                                                    <C>               <C>
Mortgage loans:
Residential                                            $ 270,887         $ 249,165
Second mortgages and home equity                          20,339            20,392
Construction                                               7,109             7,681
Commercial                                                50,493            39,341
                                                       ---------         ---------
                                                         348,828           316,579
Less: Due to borrowers on incomplete loans                (2,557)           (2,166)
 Net deferred loan fees                                     (626)             (813)
                                                       ---------         ---------
Total mortgage loans                                     345,645           313,600
Commercial loans:
Unsecured lines of credit                                    211               245
Secured and unsecured                                      9,262             7,399
                                                       ---------         ---------
                                                           9,473             7,644
Net deferred loan fees                                      (127)             (124)
                                                       ---------         ---------

Total commercial loans                                     9,346             7,520
Other loans:
Indirect automobile                                          158             1,263
Personal                                                   1,393             1,562
Education                                                     62               423
Passbook and other secured                                 6,951             8,323
Home improvement                                             257               381
                                                       ---------         ---------
Total other loans                                          8,821            11,952
                                                       ---------         ---------
Total loans                                              363,812           333,072
Less allowance for possible loan losses                   (3,077)           (2,280)
                                                       ---------         ---------
Loans and loans held for sale, net                     $ 360,735         $ 330,792
                                                       ---------         ---------
                                                       ---------         ---------
</TABLE>


Included in residential real estate mortgages at December 31, 1998 and 1997,
respectively, are approximately $3,901,000 and $1,332,000 of loans held for
sale. At December 31, 1998 and 1997, the estimated market values of loans held
for sale was in excess of their carrying value. The Company was servicing
mortgage loans sold under non-recourse agreements amounting to approximately
$153,145,000 and $208,073,000 at December 31, 1998 and 1997, respectively. 

In the ordinary course of business, the Company has granted loans to certain of
its officers and directors and their affiliates. All transactions are on
substantially the same terms as those prevailing at the same time for
individuals not affiliated with the Bank and do not involve more than the normal
risk of collectibility. The total amount of such loans which exceeded $60,000 in
aggregate amount to any related party amounted to $1,216,000 at December 31,
1998, and $1,714,000 at December 31, 1997. During the year ended December 31,
1998, total principal additions were $213,000 and total principal reductions
were $711,000.

The following analysis summarizes the Company's non-performing assets at
December 31, 1998 and 1997.


35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
  YEARS ENDED DECEMBER 31,                                                 1998        1997
(DOLLARS IN THOUSANDS)
<S>                                                                        <C>         <C>
Impaired loans or loans accounted for on a non-accrual basis               $681        $622
Accruing loans past due 90 days or more as to principal or interest          50          91
                                                                           ----        ----
  Total non-performing loans                                                731         713
Other real estate owned, net                                                --          265
                                                                           ----        ----
  Total non-performing assets                                              $731        $978
                                                                           ----        ----
                                                                           ----        ----
</TABLE>

Impaired loans totaling $77,000 and $293,000 at December 31, 1998 and 1997,
respectively, required an allocation of $20,000 and $45,000, respectively, of
the allowance for possible loan losses. The remaining impaired loans did not
require any allocation of the reserve for possible loan losses. The average
balance of impaired loans was approximately $622,000 and $966,000in 1998 and
1997, respectively. The total amount of interest income recognized on impaired
loans during 1998 and 1997 was approximately $55,000 and $50,000, respectively,
which approximated the amount of cash received for interest during those
periods. The Company has no commitments to lend additional funds to borrowers
whose loans have been deemed to be impaired. An analysis of the allowance for
possible loan losses follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,              1998            1997
(DOLLARS IN THOUSANDS)
<S>                                 <C>             <C>
Balance at beginning of year        $ 2,280         $ 1,811
Provision                               760             630
Recoveries                              261             205
                                    -------         -------
                                      3,301           2,646
Loans charged-off                      (224)           (366)
                                    -------         -------
Balance at end of year              $ 3,077         $ 2,280
                                    -------         -------
                                    -------         -------
</TABLE>

7. BANKING PREMISES AND EQUIPMENT

A summary of the cost and accumulated depreciation of banking premises and
equipment and their estimated useful lives is as follows:

<TABLE>
<CAPTION>
 DECEMBER 31,                            1998                  1997     ESTIMATED USEFUL LIVES
(DOLLARS IN THOUSANDS)
<S>                                  <C>                     <C>        <C>
Banking premises:
 Land                                $  1,971                $   671
 Buildings and improvements             5,345                  5,000        10-25 years
 Leasehold improvements                   883                    637        10-15 years
 Equipment                              9,597                  8,219        3-10 years
                                      -------                -------
                                       17,796                 14,527

Less accumulated depreciation          (9,468)                (8,233)
                                      -------                -------
                                      $ 8,328                $ 6,294
                                      -------                -------
                                      -------                -------
</TABLE>

Depreciation expense for the years ended December 31, 1998, 1997 and 1996
amounted to $1,235,000, $1,243,000 and $1,154,000, respectively.

                                       36
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 8. DEPOSITS


  A summary of deposit balances, by type, is as follows:

<TABLE>
<CAPTION>
  DECEMBER 31,                                      1998              1997

(DOLLARS IN THOUSANDS)

<S>                                                <C>           <C>      
Non-interest NOW                                   $  43,874     $  33,925
NOW                                                   50,569        41,278
Other savings                                         90,823        81,923
Money market deposits                                 14,995        15,477
                                                  ----------     ----------     
 Total non-certificate accounts                      200,261       172,603
Term certificate accounts                            131,305       125,661
Certificates of deposit greater than $100             32,387        26,670          
                                                  ----------     ----------     
 Total certificate accounts                          163,692       152,331   
                                                  ----------     ----------                              
  Total deposits                                    $363,953      $324,934
                                                  ----------     ----------     
                                                  ----------     ----------     
</TABLE>

A summary of certificate accounts by maturity is as follows:

<TABLE>
<CAPTION>
  DECEMBER 31,                             1998                                                 1997

 (DOLLARS IN THOUSANDS)
                                                  WEIGHTED                                            WEIGHTED
                                 AMOUNT          AVERAGE RATE                         AMOUNT          AVERAGE RATE
                                 ------          ------------                         ------          ------------

<S>                             <C>              <C>                                 <C>                <C> 
Within 1 year                   $119,064             5.24%                           $102,681            5.53%
Over 1 year to 3 years            38,886             5.82                              43,846            6.26
Over 3 years to 5 years            5,742             5.25                               5,804            5.67 
                                --------                                             --------
                                $163,692             5.38%                           $152,331            5.74%
                                --------                                             --------
                                --------                                             --------
</TABLE>

9. SHORT-TERM BORROWINGS

Short-term borrowings consist primarily of Federal Home Loan Bank advances with
original maturities of 1 year or less. All borrowings from the Federal Home
Loan Bank of Boston are secured under a blanket lien by certain qualified
collateral defined principally as 85% to 90% of the carrying value of U.S.
Government and agency obligations, including mortgage-backed securities, and 75%
of the carrying value of residential mortgage loans. Information relating to
activity and rates paid under these borrowing agreements is presented below:

<TABLE>
<CAPTION>
  YEARS ENDED DECEMBER 31,                                         1998              1997             1996

 (DOLLARS IN THOUSANDS)

<S>                                                                <C>              <C>               <C>    
Maximum amount of borrowings outstanding during the year           $83,778          $94,506           $78,300
Average month-end borrowings outstanding during the year           $42,039          $45,833           $66,790
Average interest rate during the year                                5.42%            5.58%             5.59%
Unused line of credit at Federal Home Loan Bank of Boston          $ 9,733          $ 4,780           $ 8,767
Amount outstanding at end of year                                  $66,628          $55,910           $63,171
Weighted average interest rate at end of year                        5.09%            5.68%             5.68%
</TABLE>

                                       37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. LONG-TERM DEBT

A summary of long-term debt, consisting of FHLB advances with an
original maturity of greater than 1 year is as follows:

<TABLE>
<CAPTION>
   MATURITY DATE                    INTEREST RATE           DECEMBER 31, 1998      DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<S>                                 <C>                     <C>                    <C>      
February 4, 1998                      5.30%                          $      -            $   4,500
July 20, 1998                         5.78                                  -                5,000
September 30, 1998                    6.22                                  -                5,000
November 9, 1998                      5.80                                  -               15,000
November 13, 1998                     5.90                                  -                5,000
May 4, 1999*                          5.05                              5,000                5,000
May 13, 1999                          6.38                              4,000                4,000
September 16, 1999                    6.66                              5,000                5,000
October 20, 1999                      6.06                              5,000                5,000
November 1, 1999                      6.23                              5,000                5,000
February 24, 2000**                   5.79                             16,000               16,000
March 6, 2000                         6.51                              4,000                4,000
March 20, 2000                        6.61                              5,000                5,000
April 11, 2000                        6.82                              4,000                4,000
September 14, 2000                    5.15                              5,000                    -
October 20, 2000                      6.21                              5,000                5,000
March 6, 2001                         6.66                              4,000                4,000
March 19, 2001                        6.77                              5,000                5,000
April 11, 2001                        6.98                              4,000                4,000
May 14, 2001                          6.74                              4,000                4,000
January 8, 2008***                    4.99                             15,000                    -
September 2, 2008****                 4.99                              5,000                    -
December 9, 2017                      5.66                                500                  500
July 27, 2017+                        4.99                             10,000                    -                                
                                                                     --------            -----------
                                                                     $110,500              $110,000                        
                                                                     --------            -----------
                                                                     --------            -----------
</TABLE>

    *  LIBOR Roating advance with a monthly reset
   **  Variable rate advance with quarterly resets, with prepayment 
       option at reset dates without penalty
  ***  Option advance; callable quarterly at FHLB option commencing 
       January 8, 1999
 ****  Option advance; callable quarterly at FHLB option commencing 
       September 1, 1999
    +  Option advance; callable quarterly at FHLB option commencing 
       July 28, 1999


11. INCOME TAXES

The provision for income taxes consists of the following: 

<TABLE>
<CAPTION>
  YEARS ENDED DECEMBER 31,                       1998              1997              1996

(DOLLARS IN THOUSANDS)


<S>                                           <C>               <C>             <C>                
Current:  Federal                             $2,325            $2,509          $1,704             
          State                                  109               336             304                                              
                                              ------            ------          ------
 
                                               2,434             2,845          2,008
Deferred: Federal                               (49)             (121)            110            
          State                                 (17)              (45)             21                                               
                                              ------            ------          ------
                                                (66)             (166)            131                       
                                              ------            ------          ------

Total                                         $2,368            $2,679          $2,139                       
                                              ------            ------          ------
                                              ------            ------          ------
</TABLE>

The reason for the differences between the effective tax rates and the statutory
tax rates are summarized as follows:

<TABLE>
<CAPTION>
  YEARS ENDED DECEMBER 31,                           1998              1997              1996

<S>                                                 <C>               <C>               <C>  
Statutory rate                                       34.0%             34.0%             34.0%
State taxes, net of federal benefit                    .9               2.7               3.8
Effect of amortization of non-deductible goodwill      .6                .6                .7
Other, net                                            (.4)               .7               (.8)
                                                    ------            ------            ------
                                                     35.1%             38.0%             37.7%
                                                    ------            ------            ------
                                                    ------            ------            ------
</TABLE>

                                        38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The components of net deferred taxes as recorded as of December 31, 1998 and
1997 are as follows (assets/(liabilities)):

<TABLE>
<CAPTION>
  YEARS ENDED DECEMBER 31,                                       1998              1997

(DOLLARS IN THOUSANDS)

<S>                                                            <C>              <C>      
Loan loss reserves                                              $1,179            $   827
Loan fee income                                                      -                 40
Dividends on deposits not yet deducted  
 for tax purposes                                                   34                 74
Pension expense                                                    159                 94
Equity in partnership losses                                   (1,474)            (1,391)
Core deposit intangible                                          (168)              (312)
Other, net                                                        (40)                 76
                                                              ---------          ---------

                                                                 (310)              (492)
Deferred tax liabilities applicable to unrealized
 losses on securities                                            (658)              (597)                             
                                                              ---------          ---------
Net deferred tax liabilities included 
 in other liabilities
                                                                $(968)           $(1,089) 
                                                              ---------          ---------
                                                              ---------          ---------

</TABLE>

In August of 1996, Congress passed the Small Business Job Protection Act of
1996. Included in this bill was the repeal of IRC Section 593, which allowed
thrift institutions special provisions in calculating bad debt deductions for
income tax purposes. Thrift institutions now will be viewed as commercial banks
for income tax purposes. The repeal is effective for tax years beginning after
December 31, 1995.

One effect of this legislative change is to suspend the Bank's bad debt reserve
for income tax purposes as of its base year (October 31, 1988). Any bad debt
reserve in excess of the base year amount is subject to recapture over a 6 year
time period. The suspended (i.e., base year) amount is subject to recapture upon
the occurrence of certain events, such as complete or partial redemption of the
Bank's stock or if the Bank ceases to qualify as a bank for income tax purposes.

At December 31, 1998, the Bank's surplus includes approximately $1,960,000 of
bad debt deductions for which income taxes have not been provided. As the Bank
does not intend to use the reserve for purposes other than to absorb loan
losses, deferred taxes of approximately $820,000 have not been provided on this
amount.

12. COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial statements.

LITIGATION

The Company is a defendant in various legal claims incident to its business,
none of which is believed by management, based on the advice of legal counsel,
to be material to the consolidated financial statements.

SPECIAL TERMINATION AGREEMENTS

The Company has entered into Special Termination Agreements with five officers
which provide for a lump-sum severance payment within a 3 year period following
a "change in control," as defined in the agreements.

LOAN AND GENERAL COMMITMENTS

The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments principally include commitments to extend credit and
advance funds on outstanding lines of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract amounts or unpaid principal
balance of those instruments reflect the extent of involvement the Company has
in these particular classes of financial instruments.

The Company's exposure to credit loss is represented by the contractual amount
or unpaid principal balance of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
financial instruments reflected on the balance sheet. Financial instruments
which represent credit risk at December 31, 1998 and 1997 are as follows:

                                      39
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




<TABLE>
<CAPTION>
   AT DECEMBER 31,                                                 1998              1997

(DOLLARS IN THOUSANDS)

<S>                                                             <C>                <C>
Contract amount of:
 Commitments to grant loans                                     $11,071            $  8,359 
 Commitments to sell loans                                        3,428               1,415         
 Unadvanced funds on home equity lines of credit                 11,085              11,230
 Unadvanced funds on other lines of credit                          499               2,242  
 Commitments to advance funds under 
  construction loan agreements                                    2,557               2,166 
Commitments to purchase loans                                    26,580 
</TABLE>


Commitments to grant loans are agreements to lend to a customer as long
as 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. The commitments for lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis.  

LEASE COMMITMENTS

Pursuant to the terms of non-cancelable lease agreements in effect, future
minimum rent commitments for the next 5 years and thereafter are as follows at
December 31, 1998:

<TABLE>
<CAPTION>
  YEAR                                         AMOUNT

(DOLLARS IN THOUSANDS)

<S>                                           <C>  
1999                                           $ 360
2000                                             316
2001                                             262
2002                                             274
2003                                             290
2004 and thereafter                            2,029
                                              -------
                                              $3,531
                                              -------
                                              -------
</TABLE>

Certain leases also contain renewal options (up to 10 years) and real estate tax
escalation clauses. Rent expense for the years ended December 31, 1998, 1997 and
1996 amounted to approximately $338,000, $238,000 and $235,000, respectively.

13. STOCKHOLDERS' EQUITY

At the time of the conversion from mutual to stock form in 1986, the Bank
established a liquidation account in the amount of $7,478,000. In accordance
with Massachusetts statutes, the liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts in
the Bank after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their qualifying
deposit. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation of
the Bank, each eligible account holder will be entitled to receive a
distribution in an amount equal to their current adjusted liquidation account
balances to the extent that funds are available.

Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Company. The total amount of dividends
which may be paid at any date is generally limited to the undivided profits of
the Company. Undivided profits at the Company totaled $23,182,000 at 
December 31, 1998. Additionally, future dividends, if any, will depend on the 
earnings of the Company and its subsidiary, its need for funds, its financial 
condition, and other factors, including applicable government regulations. 
(See Note 3.)


14. EMPLOYEE BENEFIT PLAN

The Company provides basic pension benefits for eligible employees through the
Savings Bank's Employees Retirement Associations ("SBERA") Pension Plan. Each
employee reaching the age of 21 and having completed at least 1,000 hours of
service in a consecutive 12 month period beginning with such employee's date of
employment automatically becomes a participant in the pension plan. All
participants are fully vested after being credited with 3 years of service or at
age 62, if earlier. Employees are also able to participate in a contributory
plan administered by SBERA based on the same eligibility requirements. The
Company has no obligation to contribute to this plan. Net periodic pension
expense for the plan years ended October 31, 1998, 1997 and 1996, consisted of
the following:





                                      40


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                1998         1997


(DOLLARS IN THOUSANDS)

<S>                                                     <C>         <C>    
Benefit obligation at beginning of year                 $3,172      $2,527 
Service cost                                               350         247 
Interest cost                                              215         190 
Actuarial loss (gain)                                     (87)         409 
Benefits paid                                            (149)       (201)  
                                                        -------     --------
 Benefit obligation at end of year                      $3,501      $3,172
                                                        -------     --------
                                                        -------     --------

Value of vested benefits                                $2,168      $1,896 
Accumulated benefit obligation                          $2,212      $1,965   


Change in plan assets:   
 Fair value of plan assets at beginning of year         $3,214      $2,709 
 Actuarial return on plan assets                           264         484 
 Contributions                                             323         222 
 Benefits paid                                           (149)       (201)  
                                                        -------     -------

  Fair value of plan assets at end of year              $3,652      $3,214
                                                        -------     -------
                                                        -------     -------


 Funding status:   
  Transition liability/(asset)                          $  (80)     $ (86) 
  Deferred loss/(gain)                                    (449)      (396)
  Accrued/(prepaid) expense                                378         440                                                    
                                                        -------     -------
  

Net amount recognized                                   $ (151)     $ (42)
                                                        -------     --------
                                                        -------     --------
                                                                                                 
</TABLE>



<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                                1998         1997        1996


(DOLLARS IN THOUSANDS)

<S>                                                    <C>           <C>         <C> 
Components of net periodic benefit cost:   
 Service cost                                           $350         $247         $247 
 Interest cost                                           215          190          180 
 Expected return on plan assets                        (278)        (217)        (347) 
 Amortization of prior service cost                      (6)          (7)          (7) 
 Recognized net actuarial gain/loss                     (23)         (23)          158
                                                     --------      -------       -------
  Net periodic benefit cost                             $258         $190         $231
                                                     --------      -------       -------
                                                     --------      -------       -------
Weighted average assumptions:   
 Discount rate                                         7.00%        7.25%        7.50%
 Expected return on plan assets                        8.50%        8.00%        8.00%
 Rate of compensation increase                         5.50%        6.00%        6.00%
</TABLE>
   
                                      41


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Bank has adopted a management incentive plan (the "Plan") whereby all
officers and supervisors are eligible to receive a bonus, proportionate to their
respective salary, if the Bank meets or exceeds certain base standards of
profitability and net worth levels for its fiscal year. The structure of the
Plan is reviewed on an annual basis by the Board of Directors. The incentive
bonus expense in 1998, 1997 and 1996 was  approximately $204,000, $310,000 and
$175,000, respectively.

15. OTHER NON-INTEREST EXPENSE

Other non-interest expense consisted of the following:


<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                    


(DOLLARS IN THOUSANDS)

<S>                                                         <C>               <C>          <C>    
Professional services                                       $1,317            $1,144       $1,252 
Item processing and statement rendering                        395               368          371 
Advertising                                                    874               746          647 
Deposit insurance                                               65                67           16 
Real estate in foreclosure and other real estate owned          56                86          169 
Amortization of intangible assets                              495               387          423 
Other                                                        1,968             1,627        1,513
                                                            -------          --------      --------
                                                            $5,170            $4,425       $4,391 
                                                            -------          --------      --------
                                                            -------          --------      --------
</TABLE>

Professional services include amounts paid for legal services, audits and
regulatory examinations.


16. STOCK OPTION PLAN

The Bank adopted a stock option plan, the 1986 Incentive and Nonqualified Stock
Option Plan (the "1986 Stock Option Plan"), in connection with its conversion
from mutual to stock form in 1986. On the effective date of the Holding Company
Plan, the 1986 Stock Option Plan became the Stock Option Plan of the Company. By
its terms, the 1986 Stock Option Plan has expired, and new options may no longer
be granted. The Company has adopted the Abington Bancorp, Inc. 1997 Incentive
and Nonqualified Stock Option Plan ("the 1997 Stock Option Plan") to replace the
1986 Stock Option Plan.  

The 1997 Stock Option Plan authorizes the grant of (i) options to purchase 
common stock intended to qualify as incentive stock options ("Incentive 
Options") as defined in Section 422 of the Code, and (ii) options that do not 
so qualify ("Nonqualified Options"). Up to 300,000 shares of common stock 
(subject to adjustment upon certain changes in the capitalization of the 
Company) may be issued pursuant to awards granted under the 1997 Stock Option 
Plan. The 1997 Stock Option Plan is administered by the Company's 
Compensation Committee (the "Compensation Committee"). The Compensation 
Committee recommends to the full Board of Directors the individuals to whom 
awards are granted and determines the terms of each award, subject to the 
provisions of the 1997 Stock Option Plan. Incentive Options may be granted 
under the 1997 Stock Option Plan only to officers and other employees of the 
Company or its subsidiary. Nonqualified Options may be granted under the 1997 
Stock Option Plan to officers or other employees of the Company or its 
subsidiaries, and to members of the Board of Directors and consultants or 
other persons who render services to the Company.  

Each option shall expire on the date specified in the option
agreement, which date shall not, in the case of an Incentive Option, extend for
more than 10 years from the date of grant (5 years in the case of an optionee
who owns stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company or any subsidiary
("greater-than-ten-percent-stockholder")). The exercise price of each option
shall be determined by the Compensation Committee at the time the option is
granted, provided, however, that the option price of any Incentive Option
granted under the 1997 Stock Option Plan must be at least equal to the fair
market value of the common stock on the date of grant (110% of fair market value
in the case of a greater-than-ten-percent-stockholder). The aggregate fair
market value (determined at the time of grant) of shares issuable pursuant to
Incentive Options which first become exercisable by an employee or officer in
any calendar year may not exceed one hundred thousand dollars ($100,000).
Options are non-transferable except by will or by the laws of descent or
distribution and are exercisable, during the optionee's lifetime, only by the
optionee.  

Options generally may not be exercised (i) after termination of the
optionee's employment with the Company or any of its subsidiaries, or
directorship with the Company, for cause or by reason of such optionee's
voluntary resignation, (ii) 30 days after termination of the optionee's
employment with the Company or its subsidiary, or directorship with the Company,
without cause or by reason of retirement in accordance with the Company's (or
the applicable subsidiary's) retirement policies, (iii) 90 days after
termination of the optionee's employment with the Company  or its subsidiary, or
directorship with the  Company, by reason of disability, and (iv)  180 days
after termination of the optionee's employment with the Company, its subsidiary,
or directorship with the Company, by reason of death. In all cases, however, the
Board has the discretion to extend the exercise date. Payment of the exercise
price of the shares subject to the option may be made (i) in cash in an amount,
or by check, bank draft or postal or express money order payable in an amount,
equal to the aggregate exercise price for such shares, (ii) with the consent of
the Compensation Committee, in the form of shares of common stock having a fair
market value equal to the exercise price of such shares, (iii) with the consent
of the Compensation Committee, by reducing the number of 


                                       42 


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


option shares otherwise issuable to the optionee upon exercise of the option by
a number of shares having a fair market value equal to the aggregate exercise
price of such shares, (iv) with the consent of the Compensation Committee, by
delivering such other consideration that is acceptable to the Compensation
Committee and that has a fair market value, as determined by the Compensation
Committee, equal to the aggregate exercise price of such shares, including any
broker-directed cashless exercise/resale procedure adopted by the Compensation
Committee, or (v) with the consent of the Compensation Committee, any
combination of the foregoing. 

At the discretion of the Company, options granted
under the 1997 Stock Option Plan may include a so-called "reload" feature
pursuant to which an optionee exercising an option by the delivery of a number
of shares of common stock would automatically be granted an additional option
(with an exercise price equal to the fair market value of the common stock on
the date the additional option is granted and with the same expiration date as
the original option being exercised, and with such other terms as the
Compensation Committee may provide) to purchase that number of shares of common
stock equal to the number delivered to exercise the original option. 

In the event of a change of control, as defined in the 1997 Stock Option Plan,
(i) the time for exercise of all unexercised and unexpired awards will be
automatically accelerated, effective as of the effective time of the change of
control (or such earlier date as may be specified by the Board) and (ii) after
the effective time of the change of control, all unexercised awards will remain
outstanding and will be exercisable in full for shares of common stock or, if
applicable, for shares of such securities, cash or property as the holders of
shares of common stock received in connection with the change of control. 

The per share exercise prices of the options granted by the 1986 and 1997 Option
Plan range from $1.50 to $20.75 and equaled the fair market value of the shares
on the date the options were granted. Stock Option activity for the years ended
December 31, 1998, 1997 and 1996 is as follows: 

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                          1998                            1997                           1996

                                         NUMBER OF    WEIGHTED AVG.       NUMBER OF   WEIGHTED AVG.       NUMBER OF  WEIGHTED AVG.  
                                           OPTIONS    EXERCISE PRICE         OPTIONS   EXERCISE PRICE        OPTIONS  Exercise Price

<S>                                   <C>               <C>                <C>            <C>               <C>         <C>
  Outstanding at beginning of year         430,024          $5.59           398,824        $4.40            367,824     $3.92 
  Granted                                   85,000          19.02            46,500        15.50             50,500      8.50 
  Exercised                              (119,624)           5.58          (15,300)         4.75           (19,000)      5.93 
  Canceled                                (24,000)          19.00               -             -               (500)      8.03 
                                         ---------        -------         ----------     ---------         --------   --------

Outstanding at end of year                371,400           $7.80           430,024        $5.59            398,824     $4.40 
                                         ---------        -------         ----------     ---------         --------   --------
                                         ---------        -------         ----------     ---------         --------   --------

Exercisable at end of year                309,050           $5.53           430,024        $5.59            358,324     $4.12 
                                         ---------        -------         ----------     ---------         --------   --------
                                         ---------        -------         ----------     ---------         --------   --------

Option price per share               $1.50-$20.75                      $1.50-$15.50                     $1.50-$8.50
Weighted average fair value of      
 options granted during the year            $6.39                             $5.09                           $3.35
</TABLE>


In conjunction with the Company's aforementioned Stock Option Plans, the Company
adopted a Long Term Performance Incentive Plan to encourage executive management
and members of the Board of Directors to build long-term shareholder value. The
plan was a 3 year program which provided a mechanism for granting options under
the Company's Stock Option Plan. Options to purchase approximately 40,500 to
46,500 shares of common stock for each of the 1995, 1996 and 1997 fiscal years
were granted to members of the Board of Directors and certain principal
officers. All options granted under this plan are included in the preceding
table. The options are granted based on achievement of strategic goals such as
acquisitions and asset purchases. The exercise price would be at least equaled
to the fair market value of the common stock on the date of grant. The options
become exercisable upon a change of control of the Company or after the average
market price of the common stock exceeds 120-140% of the exercise price for
periods of 5 to 180 days depending on the qualifications set for each issuance.
As of December 31, 1998, all but 44,000 of the previously issued options under
this plan were exercisable.

All options granted become fully vested no later than at the end of the ninth
year after issuance. The maximum amount of options which can become exercisable
in any 1 year is limited to $100,000 based on grant prices except in the event
of a change of control, in which case all options become exercisable.

As discussed in Note 1, the Bank applies APB 25 in accounting for its
stock-based compensation plans under which no compensation cost has been
recognized. Had compensation cost for awards in 1998, 1997 and 1996 under the
Bank's stock-based compensation plans been determined based on the fair value at
the grant dates consistent with the method set forth under SFAS No. 123, the
effect on the Bank's net income and earnings per share would have been as
follows:


                                       43



<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                                     1998         1997            1996

(DOLLARS IN THOUSANDS, EXCEPT IN SHARE AMOUNTS)

<S>                                                <C>           <C>             <C>
Net income:  
 As reported                                       $4,371        $4,378          $3,533  
 Pro forma                                          4,213         4,236           3,428  

Earnings per share:  
 As reported -
       Basic                                         1.25          1.18            .94
       Diluted                                       1.17          1.10            .89

  Pro forma -
       Basic                                         1.21          1.14            .91
       Diluted                                       1.13          1.07            .86
</TABLE>

The initial impact of applying SFAS No. 123 on pro forma net income may not be
indicative of future amounts when the method  prescribed by SFAS No. 123 will
apply to all outstanding awards because compensation expense for options granted
prior to January 1, 1995 is not reflected in the pro forma amounts above.

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

<TABLE>
<CAPTION>

                            1998      1997      1996 
<S>                       <C>       <C>       <C>    
Expected volatility       21.10%    21.10%    34.05% 
Risk-free interest rate    5.75%     6.17%     5.71% 
Term of options            7.0 yrs.  7.0 yrs.  9.2 yrs.
Expected dividend yield    1.20%     1.40%     2.35% 
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


17. EMPLOYEE STOCK OWNERSHIP PLAN

The Company has established an Employee Stock Ownership Plan ("ESOP") which is
being funded by the Company's contributions made in cash (which generally will
be invested in common stock) or common stock. Benefits may be paid in shares of
common stock or in cash, subject to the employees' right to demand shares.

In November 1993, the Company loaned the ESOP $570,000 to acquire additional
shares for participants on the open market. The loan is to be repaid over 7
years with principal and interest (at a rate equal to 85% of the prevailing
prime rate) payable quarterly. The loan is secured by the unallocated shares
acquired by the ESOP.

The Company's ESOP expense for the years ended December 31, 1998, 1997 and 1996
amounted to $161,000, $181,000 and $81,000, respectively.

In the event that the stock price of the Company fluctuates materially at the
point that shares vest with participants from the cost of shares acquired by the
ESOP (at prices which range from $5.63 - $6.13 per share), the Company's
statement of operations could be adversely (if increasing stock price) or
favorably (decreasing stock price) affected. However, in all instances there
will be no negative impact on the Company's capital. During 1998 and 1997, the
impact of the stock price market value in excess of original cost increased the
Company's ESOP expense by $80,000 and $100,000, respectively, in addition to
normal amortization expense associated with the participants' earn out of the
shares allocated. There was no material impact related to changes in the market
price in 1996 and 1995.

18. RESTRICTION ON CASH AND DUE FROM BANKS

At December 31, 1998 and 1997, cash and due from banks included $5,486,000 
and $3,618,000, respectively, to satisfy the reserve requirements of the 
Federal Reserve Bank.

19. STOCK REPURCHASE PROGRAM

On March 27, 1997, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 10% (375,000 shares) of its currently
outstanding common stock from time to time at prevailing market prices. On
February 24, 1998, the Company announced that its Board of Directors had
authorized the Company an additional 10% (347,000) of its outstanding common
stock, as adjusted for amounts remaining to be repurchased as under the March
1997 plan. On March 25, 1999, the Board of Directors had authorized the Company
an additional 10% (320,000) of its outstanding common stock, as adjusted for
amounts remaining to be repurchased under the February 24, 1998 plan. As of
February 25, 1999, there were approximately 147,000 shares still authorized to
be repurchased under the prior plan. The Board delegated to the discretion of
the Company's senior management the authority to determine the timing of the
repurchase program's commencement, subsequent purchases and the prices at which
the repurchases will be made.


                                       44 


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


20. SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM


The Bank has a supplemental executive retirement plan with a single participant.
Under this arrangement, the individual is entitled to receive monthly benefits
for approximately 18 years in amounts specified in the contract. Benefits
commence upon retirement date which is deemed to be the age of sixty-five. If
death occurs during employment at the Bank, the individual designated as
beneficiary will receive a distribution equal to 3 times the annual salary of
the executive, as determined under the plan. The key employee vests in the
rights under the supplemental retirement plan ratably over a 5 year period,
which entitles this individual to the vested portion of the amount accrued by
the Bank under the plan. This right is only exercisable in the event the
executive terminates employment from the Bank prior to retirement age. In March
1998, the Bank also purchased a single life annuity insurance policy. The
contract was purchased at a cost of $2,863,184. The cash surrender value is
earning a rate of return, with a guaranteed minimum rate of 4%. In addition, the
Bank has entered into a split dollar agreement with the executive, which
requires that any death benefit be shared between the Bank and the designated
beneficiary, based on a predetermined schedule. The amounts due to the
beneficiary under the Plan are reduced to the extent death benefits under the
insurance contract are remitted to such beneficiary. The obligation under the
plan is being accrued over the expected employment period, through age 65. The
current year charge was $70,795, all of which was reflected as compensation
expense in 1998. As of March 1998, the insurance contract had earned interest
income totaling $101,250 resulting in a December 31, 1998 cash surrender value
of $2,964,434.

21. DEFERRED STOCK COMPENSATION PLAN

In 1998, the Company adopted a Deferred Stock Compensation Plan for directors
(the "Plan") which, for these directors who elected to participate, would, in
lieu of current cash payments, elect to defer their compensation for attendance
at various meetings of the Board of Directors to retirement or some future point
in time to be determined. Furthermore, the deferral is eligible to be paid only
in shares of the Company's common stock, the units earned of which are
predetermined based upon a fixed 3 year Board meeting fee schedule which was
established as of July 1, 1998, divided by the stock price of the Company's
common shares at the close of business on July 1, 1998. This price was $18.75
per share. The shares as earned are placed in a Rabbi Trust (the "Trust") which
is administered by an Independent Trustee. The voting for these shares is
controlled by the Independent Trustee although for accounting purposes the
shares are reflected as treasury shares until such time as the shares are
distributed. The expense associated with this plan is based upon the market
value of the shares of stock earned on the date of the respective meeting. There
are currently 7 directors who participate in the Directors Plan. The amount of
expense associated with this plan for 1998 was $36,000 which has been reflected
as salaries expense with the corresponding liability pertaining to stock earned
and not yet distributed is $36,000 which is reflected in stockholders' equity. A
total of 100,000 shares has been registered for the Directors Plan. There have
been approximately 2,400 shares earned and deferred as of December 31, 1998. 

22. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS


The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value. Fair value estimates which were derived from discounted cash flows or
broker quotes cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in  immediate settlement of the instrument.

CASH, FEDERAL FUNDS SOLD AND SHORT-TERM  INVESTMENTS

For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.  

INVESTMENT SECURITIES, ASSETS HELD FOR SALE AND MORTGAGE-BACKED
INVESTMENTS

For investment securities, assets held for sale (typically loans) and
mortgage-backed derivative investments, fair values are based on quoted market
prices or dealer quotes.  

LOANS

For certain homogeneous categories of loans, such as residential mortgages, home
equity and indirect automobile loans, fair value is estimated using the quoted
market prices for securities backed by similar loans adjusted for differences in
loan characteristics or dealer quotes. The fair value of other types of loans
was estimated by discounting anticipated future cash flows using current rates
at which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.  

DEPOSIT LIABILITIES

The fair value of non-certificate deposit accounts is the amount payable on
demand  at the reporting date. The fair value of fixed maturity certificates of
deposit is estimated  by discounting the anticipated future cash payments using
the rates currently offered for deposits of similar remaining maturities.

SHORT-TERM AND LONG-TERM BORROWINGS

The fair value of borrowings was determined by discounting the anticipated
future cash payments by using the rates currently available to the Company for
debt with similar terms and remaining maturities.

COMMITMENTS TO  EXTEND CREDIT/SELL LOANS

The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of customers. For fixed rate loan
commitments and obligations to deliver fixed rate loans, fair value also
considers the difference between committed rates and current levels of interest
rates.

VALUES NOT DETERMINED

SFAS No. 107 excludes certain financial instruments from its disclosure
requirements including, among others, real estate included in banking premises
and equipment, the intangible value of the Bank's portfolio of loans serviced
(both for itself and for others) and related servicing network and the
intangible value inherent in the Bank's deposit relationships (i.e., core
deposits). Accordingly, the aggregate fair value amounts presented are not
intended to represent the underlying value of the Bank.  

The carrying amount and estimated fair values of the Bank's financial
instruments at December 31, 1998 and 1997 are represented as follows:


                                      45

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
AT DECEMBER 31,                                         1998                                             1997

(DOLLARS IN THOUSANDS)

                                             CARRYING                                       CARRYING
                                          OR NOTIONAL              FAIR                   OR NOTIONAL               FAIR
                                               AMOUNT             VALUE                      AMOUNT                 VALUE
<S>                                      <C>                   <C>                       <C>                      <C>    
Financial instrument assets:   
 Cash and cash equivalents                 $  19,717           $  19,717                 $     13,475             $ 13,475  
 Securities                                  181,346             181,346                      165,052              165,160  
 Loans, including held for sale, net         360,735             383,736                      330,792              343,984  
 Mortgage servicing rights                         -                   -                           26                   26  

Financial instrument liabilities:   
 Deposits                                   $363,953           $ 366,011                 $    324,934             $327,563 
 Short-term borrowings                        66,628              66,920                       55,910               55,934 
 Long-term debt                              110,500             110,058                      110,000              109,241 
 
Off-balance sheet financial instruments:   

 Commitments to grant loans                $  11,071        $     11,071                 $      8,359             $  8,359  
 Commitments to sell loans                     3,428               3,428                        1,415                1,415  
 Unadvanced funds on home equity 
   lines of credit                            11,085              11,085                       11,230               11,230  
Commitments to advance funds under  
 construction loan agreements                  2,557               2,557                        2,242                2,242  
Unadvanced funds on other lines of  
credit                                           499                 499                        2,166                2,166  
Commitments to purchase loans                 26,580              26,580                            -                    -
</TABLE>


23.  BUSINESS SEGMENTS


On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting operating segments of a
business enterprise. The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. Operating segments are
components of an enterprise which are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is the President and
Chief Executive Officer. The adoption of SFAS No. 131 did not have a material
effect on the Company's primary financial statements, but did result in the
disclosure of segment information contained herein. The Company has identified
its reportable operating business segment as Community Banking based on products
and services provided to the customer.  

The Company's community banking business segments consist of commercial banking
and retail banking. The community banking business segments derive their
revenues from a wide range of banking services, including lending activities,
acceptance of demand, saving and time deposits, investment management, mortgage
lending and sales, as well as servicing income from investors.

Non-reportable operating segments of the Company's operations which do not have
similar characteristics to the community banking operations and do not meet the
quantitative thresholds requiring disclosure are included in the Other category
in the disclosure of business segments below. These non-reportable segments
include Parent Company financial information and the Trust (Note 24).
Consolidation adjustments are also included in the Other category. 

The accounting policies used in the disclosure of business segments are the same
as those described in the summary of significant accounting policies. The
consolidation adjustments reflects certain eliminations of inter-segment
revenue, cash and Parent Company investments in subsidiaries. 


46 

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                      BUSINESS SEGMENTS
RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION               COMMUNITY BANKING          OTHER     CONSOLIDATED

(DOLLARS IN THOUSANDS)


<S>                                                                         <C>              <C>        <C>        
December 31, 1998:    

 Securities, available for sale and held to maturity                        $181,346         $    -     $181,346 
 Net loans                                                                   360,735              -      360,735 
 Net assets                                                                  591,011            140      591,151 
 Total deposits                                                              363,953              -      363,953 
 Total borrowings                                                            177,128              -      177,128 
 Total liabilities                                                          $545,382         $  775     $546,157  
 Total interest income                                                      $ 38,442         $    -     $ 38,442 
 Total interest expense                                                       21,585              -       21,585 
 Net interest income                                                          16,857              -       16,857 
 Provisions for possible loan losses                                             760              -          760 
 Total non-interest income                                                     6,909              -        6,909 
 Total non-interest expense                                                   15,328            939       16,267 
 Net income                                                                 $  5,032         $(661)     $  4,371


December 31, 1997:    
 Securities, available for sale and held to maturity                        $165,052         $   -      $165,052 
 Net loans                                                                   330,792             -       330,792 
 Net assets                                                                  531,770           216       531,986 
 Total deposits                                                              324,934             -       324,934 
 Total borrowings                                                            165,910             -       165,910 
 Total liabilities                                                          $494,820         $ 845      $495,665  

 Total interest income                                                       $36,297         $   -      $ 36,297 
 Total interest expense                                                       20,091             -        20,091 
 Net interest income                                                          16,206             -        16,206 
 Provisions for possible loan losses                                             630             -           630 
 Total non-interest income                                                     4,986             -         4,986 
 Total non-interest expense                                                   13,198           307        13,505 
 Net income                                                                  $ 4,600         $(222)     $  4,378


December 31, 1996:    
 Securities, available for sale and held to maturity                        $155,231         $   -      $155,231 
 Net loans                                                                   298,970             -       298,970 
 Net assets                                                                  486,958             -       486,958 
 Total deposits                                                              300,445             -       300,445 
 Total borrowings                                                            147,524             -       147,524 
 Total liabilities                                                          $453,412         $   -      $453,412  

 Total interest income                                                       $34,332         $   -      $ 34,332 
 Total interest expense                                                       19,517             -        19,517 
 Net interest income                                                          14,185             -        14,815 
 Provisions for possible loan losses                                             480             -           480 
 Total non-interest income                                                     4,177             -         4,177 
 Total non-interest expense                                                   12,840             -        12,840 
 Net income                                                                  $ 3,533         $   -       $ 3,533
</TABLE>

47

<PAGE>

<TABLE>
<CAPTION>

STATEMENTS OF INCOME                                    TWELVE MONTHS DECEMBER 31, 1998       ELEVEN MONTHS DECEMBER 31, 1997

(DOLLARS IN THOUSANDS)

<S>                                                     <C>                                   <C>
Operating income:
  Dividends from Bank                                                $2,500                               $4,000
  Interest income                                                       102                                   13
                                                                     ------                               ------
    Total operating income                                            2,602                                4,013

  Operating expenses                                                    223                                  307
  Interest expense                                                      716                                   --
                                                                     ------                               ------
Income before income taxes and equity in
  undistributed earnings of subsidiaries                              1,663                                3,706
Income tax benefit                                                     (278)                                 (85)
                                                                     ------                               ------
Income before equity in undistributed earnings
  of subsidiaries                                                     1,941                                3,791
Equity in undistributed earnings of Bank and Trust                    2,430                                  233
                                                                     ------                               ------
Net income                                                           $4,371                               $4,024
                                                                     ------                               ------
                                                                     ------                               ------
</TABLE>

<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS                                TWELVE MONTHS DECEMBER 31, 1998       ELEVEN MONTHS DECEMBER 31, 1997

(DOLLARS IN THOUSANDS)

<S>                                                     <C>                                   <C>
Cash flows from operating activities:
  Net income                                                         $4,371                               $4,024
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Equity in undistributed earnings of bank
      subsidiaries                                                   (2,430)                                (233)
  Other, net                                                           (477)                                  59
                                                                     ------                               ------
    Net cash provided by operating activities                         1,464                                3,850

Cash flows from financing activities:
  Proceeds from issuance of treasury and common
    stock                                                               667                                   72
  Proceeds from issuance of junior subordinated
    deferrable interest debentures                                   12,650                                   --
  Dividends on common stock                                          (1,062)                                (559)
  Repurchase of common stock                                         (7,352)                              (2,228)
                                                                     ------                               ------
    Net cash provided by (used in) financing activities                4,903                               (2,715)

Net increase in cash and cash equivalents                             6,367                                1,135
Cash and cash equivalents at beginning of year                        1,186                                   51
                                                                     ------                               ------
Cash and cash equivalents at end of year                             $7,553                               $1,186
                                                                     ------                               ------
                                                                     ------                               ------
</TABLE>

<PAGE>

STOCKHOLDER INFORMATION

STOCK MARKET DATA

The common stock of the Company is currently listed on the NASDAQ National 
Market System (NMS) under the symbol "ABBK.'' The table below sets forth the 
range of high and low sales prices for the stock for the quarters indicated. 
Market quotations reflect inter-dealer prices, without retail mark-up, 
mark-down or commission, and may not necessarily represent actual 
transactions.

Transactions through January 31, 1997 are for the common stock of the Bank. 
Transactions on and after that date are for the common stock of the Company.

<TABLE>
<CAPTION>
                                        PRICE HIGH          PRICE LOW          DIVIDENDS DECLARED
<S>                                     <C>                 <C>                <C>
1999
1st quarter (through March 5, 1999)       15 1/8              12 3/4                  $.05

1998
4th quarter                                   17                  12                  $.05
3rd quarter                               19 1/2              12 1/2                  $.05
2nd quarter                               22 3/4              17 1/2                  $.05
1st quarter                               22 1/2              18 3/4                  $.15

1997
4th quarter                               23 1/2              15 5/8                  $.05
3rd quarter                                   17              12 3/4                  $.05
2nd quarter                                   13              10 1/4                  $.05
1st quarter                               11 5/8               9 1/2                  $.05

1996
4th quarter                               10 7/8              9 7/16                  $.05
3rd quarter                                    9               7 3/4                  $.05
2nd quarter                                8 1/8               7 1/4                  $.05
1st quarter                                8 7/8             7 23/32                  $.05
</TABLE>

As of March 5, 1999, the Company had approximately 803 stockholders of record 
who held 3,347,300 outstanding shares of the Company's common stock. The 
number of stockholders indicated does not reflect the number of persons or 
entities who hold their common stock in nominee or "street" name through 
various brokerage firms. If all such persons are included, the Company 
believes there are approximately 1,100 beneficial owners of common stock.

ANNUAL REPORT ON FORM 10-K

A copy of the Company's Annual Report on Form 10-K for the year ended 
December 31, 1998 as filed with the Securities Exchange Commission, is 
available to stockholders without charge upon written request to:

Investor Relations
Abington Bancorp, Inc.
536 Washington Street
Abington, MA 02351

INQUIRIES

Robert M. Lallo
Senior Vice President,
Chief Financial Officer and Treasurer
Abington Bancorp, Inc.

<PAGE>

bank office locations




Abington
533 Washington Street
Abington, MA  02351

Cohasset
Shaw's Supermarket
Route 3A
Cohasset, MA  02025

Halifax
319 Monponsett Street
Halifax, MA  02338

Hanson
Shaw's Supermarket
Route 58/14
Hanson, MA  02341

Holbrook 
778 South Franklin Street
Holbrook, MA  02343

Hull
523 Nantasket Avenue 
Hull, MA  02045

Kingston
157 Summer Street 
Kingston, MA  02364

Pembroke
175 Center Street
Pembroke, MA  02359

Randolph
Shaw's Supermarket
121 Memorial Parkway
Randolph, MA  02368

Whitman
584 Washington Street 
Whitman, MA  02382

Administrative Office
538 Bedford Street
Abington, MA  02351