ANDOVER BANCORP INC, 10-K, 1996-03-20

ANDOVER BANCORP INC
10-K, 1996-03-20
STATE COMMERCIAL BANKS

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-16358

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

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

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

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508)749-2000

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

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

NONE

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

COMMON STOCK, $0.10 PAR VALUE
PREFERRED STOCK PURCHASED RIGHTS
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price for the Registrant's Common
Stock on February 21, 1996 as reported by NASDAQ, was $95,861,469.

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

Class: Common Stock, par value $0.10 per share
Outstanding as of February 21, 1996: 4,236,971 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Andover Bancorp, Inc. Definitive Notice of Annual Meeting
and Proxy Statement for the 1996 Annual Meeting of Shareholders are incorporated
by reference into Part III of Form 10-K.
<PAGE> 2
FORM 10-K
CROSS REFERENCE INDEX

Part I
<TABLE>
<CAPTION>
Annual
Report
Page
<S> <C> <C>
Item 1 Business................................................................ 2

Item 2 Properties.............................................................. 7

Item 3 Legal Proceedings....................................................... 7

Item 4 Submission of Matters to a Vote of Security Holders..................... None

Part II

Item 5 Market for Registrant's Common Equity and Related Stockholder Matters... 8

Item 6 Selected Financial Data................................................. 9

Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 10

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

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

</TABLE>

Part III

The information called for by Part III (Items 10 through 13) is incorporated
herein by reference from Andover's Definitive Notice of Annual Meeting and Proxy
Statement for the 1996 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.

Part IV

<TABLE>
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K

<S> <C> <C>
(a)(1) Financial Statements -
Independent Auditors' Report............................................................. 33

Consolidated Balance Sheets as of December 31, 1995 and 1994............................. 34

Consolidated Statements of Operations for each of the years ended
December 31, 1995, 1994 and 1993......................................................... 35

Consolidated Statements of Changes in Stockholders' Equity
for each of the years ended December 31, 1995, 1994 and 1993............................. 36

Consolidated Statements of Cash Flows for each of the years ended
December 31, 1995, 1994 and 1993......................................................... 37-38
<PAGE> 3
Notes to Consolidated Financial Statements.............................................. 39-61

</TABLE>

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

(b) Reports on Form 8-K. There were no reports filed on Form 8-K
during the three months ended December 31, 1995.

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

Exhibit No. Description of Exhibits

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

3.2 By-laws of Andover, as amended July 21, 1994(incorporated herein
by reference to Exhibit 3.2 to Andover's Form 10-K for the fiscal
year ended December 31, 1994).

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

4.2 Shareholder Rights Agreement between Andover Bancorp, Inc. and
The First National Bank of Boston (incorporated herein by
reference to an Exhibit to Andover's Current Report on Form 8-K
dated February 21, 1989).

4.3 Amendment to Shareholder Rights Agreement between Andover
Bancorp, Inc. and The First National Bank of Boston (incorporated
herein by reference to Exhibit 4.2 to Andover's Current Report on
Form 8-K dated February 12, 1990).

10.2 Special Termination Agreement between Andover, Andover Bank and
Gerald T. Mulligan, dated May 16, 1991, as amended and restated,
December 17, 1992 (incorporated herein by reference to Exhibit
10.2 to Andover's Form 10-K for the fiscal year ended December
31, 1992).

10.3 Special Termination Agreement between Andover, Andover Bank and
Joseph F. Casey, dated December 17, 1992, as amended and
restated, December 23, 1993 (incorporated herein by reference to
Exhibit 10.3 to Andover's Form 10-K for the fiscal year ended
December 31, 1993).

10.4 Special Termination Agreement between Andover, Andover Bank and
James D. Dawson, dated December 17, 1992, as amended and
restated, December 23, 1993 (incorporated herein by reference to
Exhibit 10.4 to Andover's Form 10-K for the fiscal year ended
December 31, 1993).
<PAGE> 4
10.5 Special Termination Agreement between Andover, Andover Bank and
Michael J. Ecker, dated December 17, 1992, as amended and
restated, December 23, 1993 (incorporated herein by reference to
Exhibit 10.5 to Andover's Form 10-K for the fiscal year ended
December 31, 1993).

10.6 Special Termination Agreement between Andover, Andover Bank and
John R. Heerwagen, dated December 17, 1992, as amended and
restated, December 23, 1993 (incorporated herein by reference to
Exhibit 10.6 to Andover's Form 10-K for the fiscal year ended
December 31, 1993).

10.8 Andover Savings Bank Employees' Stock Ownership Plan and Trust
Agreement and Amendment No. 1 (incorporated herein by reference
to Exhibit 10(c) to Andover's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987).

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

10.10 Special Termination Agreement between Andover Bank and Raymond P.
Smith, dated December 12, 1995.

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

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

11 The computation of per share earnings can be readily determined
from the material contained in the Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.

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

13 Andover Bancorp, Inc. 1995 Annual Report, which, except for those
portions expressly incorporated herein by reference, is furnished
only for the information of the Securities and Exchange
Commission and is not deemed to be filed.

22 The Company has two subsidiaries, Andover Bank and Andover Bank
NH. Andover Bank is a Massachusetts savings bank in stock form
while Andover Bank NH is a New Hampshire guaranty savings bank in
stock form. Both subsidiaries are included in the Consolidated
Financial Statements filed in the Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.

23.1 Consent of KPMG Peat Marwick LLP.
<PAGE> 5
SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

ANDOVER BANCORP, INC.

March 20, 1996 By:/s/ Gerald T. Mulligan
-----------------------------
Gerald T. Mulligan, President
and Chief Executive Officer

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

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Gerald T. Mulligan President, Chief March 20, 1996
- -------------------------------
Gerald T. Mulligan Executive Officer and
Director (Principal
Executive Officer)

/s/ Joseph F. Casey Chief Financial Officer March 20, 1996
- ------------------------------- and Treasurer (Principal
Joseph F. Casey Financial and Accounting
Officer)

/s/ Thomas F. Caffrey Director March 20, 1996
- -------------------------------
Thomas F. Caffrey

/s/ Naomi A. Gardner Director March 20, 1996
- -------------------------------
Naomi A. Gardner

/s/ Cornelius J. McCarthy Director March 20, 1996
- -------------------------------
Cornelius J. McCarthy

/s/ Clifford E. Elias Director March 20, 1996
- -------------------------------
Clifford E. Elias

/s/ Fred P. Shaheen Director March 20, 1996
- -------------------------------
Fred P. Shaheen
</TABLE>
<PAGE> 6
EXHIBITS TO FORM 10-K
Andover Bancorp, Inc.

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

3.2 By-laws of Andover, as amended July 21,
1994 (incorporated herein by reference
to Exhibit 3.2 to Andover's Form 10-K
for the fiscal year ended December 31,
1994). --

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

4.2 Shareholder Rights Agreement between
Andover Bancorp, Inc. and The First
National Bank of Boston (incorporated herein by
reference to an Exhibit to Andover's Current Report
on Form 8-K dated February 21, 1989). --

4.3 Amendment to Shareholder Rights
Agreement between Andover Bancorp, Inc.
and The First National Bank of Boston
(incorporated herein by reference to
Exhibit 4.2 to Andover's Current Report
on Form 8-K dated February 12, 1990). --

10.1 Employment Agreement between Andover,
Andover Bank and Gerald T. Mulligan,
dated May 16, 1991 (incorporated herein
by reference to Exhibit 10.1 to
Andover's Form 10-K for the fiscal
year ended December 31, 1991). --
</TABLE>
<PAGE> 7
<TABLE>
<S> <C> <C>
10.2 Special Termination Agreement between
Andover, Andover Bank and Gerald T.
Mulligan, dated May 16, 1991, as amended
and restated, December 17, 1992
(incorporated herein by reference to
Exhibit 10.2 to Andover's Form 10-K
for the fiscal year ended December 31,
1992). --

10.3 Special Termination Agreement between
Andover, Andover Bank and Joseph F. Casey,
dated December 17, 1992, as amended and
restated, December 23, 1993 (incorporated
herein by reference to Exhibit 10.3 to
Andover's Form 10-K for the fiscal year
ended December 31, 1993). --

10.5 Special Termination Agreement between
Andover, Andover Bank and Michael J.
Ecker, dated December 17, 1992, as
amended and restated, December 23, 1993
(incorporated herein by reference to
Exhibit 10.5 to Andover's Form 10-K for
the fiscal year ended December 31, 1993). --

10.6 Special Termination Agreement between
Andover, Andover Bank and John R.
Heerwagen, dated December 17, 1992, as
amended and restated, December 23, 1993
(incorporated herein by reference to
Exhibit 10.6 to Andover's Form 10-K for
the fiscal year ended December 31, 1993). --

10.7 Special Termination Agreement between
Andover, Andover Bank and Octavio C.
Bolivar, dated January 24, 1994
(incorporated herein by reference to
Exhibit 10.7 to Andover's Form 10-K
for the fiscal year ended December 31,
1994). --
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C>
10.8 Andover Savings Bank Employees' Stock
Ownership Plan and Trust Agreement and
Amendment No. 1 (incorporated herein by
reference to Exhibit 10(c) to Andover's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1987). --

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

10.10 Special Termination Agreement between
Andover Bank and Raymond P. Smith, dated
December 12, 1995. 9

10.11 Andover Bancorp, Inc. 1995 Stock
Incentive Plan dated February 16, 1995. 14

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

11 The computation of per share earnings
can be readily determined from the
material contained in the Annual Report
on Form 10-K for the fiscal year ended
December 31, 1995. --

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

13 Andover Bancorp, Inc. 1995 Annual Report
which, except for those portions
expressly incorporated herein by
reference, is furnished only for the
information of the Securities and Exchange
Commission and is not deemed to be filed. 28

22 The Company has two subsidiaries, Andover
Bank and Andover Bank NH. Andover Bank is
a Massachusetts savings bank in stock form
while Andover Bank NH is a New Hampshire
guaranty savings bank in stock form. Both
subsidiaries are included in the
Consolidated Financial Statements filed in
the Annual Report on Form 10-K for the
fiscal year ended December 31, 1995. --

23.1 Consent of KPMG Peat Marwick LLP. 100
</TABLE>

<PAGE> 1
EXHIBIT 10.10

SPECIAL TERMINATION AGREEMENT

AGREEMENT dated as of December 21, 1995, by and between ANDOVER BANK, a
Massachusetts savings bank (the "Bank" or the "Employer"), with its main office
in Andover, Massachusetts, and Raymond P. Smith (the "Executive"), an individual
presently employed by the Bank.

1. Purpose. In order to allow the Executive to consider the
prospect of a Change in Control (as defined in Section 2) in an objective manner
and in consideration of the services rendered and to be rendered by the
Executive to the Employer and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged by the Employer, the Employer is
willing to provide, subject to the terms of this Agreement, certain severance
benefits to protect the Executive from the consequences of a Terminating Event
(as defined in Section 3) occurring subsequent to a Change in Control.

2. Change in Control. A "Change in Control" shall be deemed to
have occurred when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "1934 Act")
becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated
under the 1934 Act), directly or indirectly, of securities of Andover Bancorp,
Inc. (the "Company"), a Delaware corporation and the indirect parent holding
company of the Bank, representing twenty-five percent (25%) or more of the total
number of votes that may be cast for the election of directors of the Company,
and the Board of Directors of the Company has not consented to such event by a
two-thirds vote of all of the members of the Board of Directors of the Company
adopted either prior to such event or within sixty (60) days thereafter,
provided that if at the time such a consent vote is adopted after such event,
the persons who were directors of the Company immediately prior to such event do
not constitute a majority of the Board of Directors of the Company, or of any
successor institution, such vote shall not be deemed to constitute consent for
the purposes of this provision. In addition, a Change in Control shall be deemed
to have occurred if any tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions has occurred and as the result of, or in connection with,
such transaction the persons who were directors of the Company before such
transaction cease to constitute a majority of the Board of Directors of the
Company or of any successor institution.

3. Terminating Event. A "Terminating Event" shall mean (a)
termination by the Employer of the employment of the Executive with the Employer
for any reason other than (i) death, (ii) deliberate dishonesty of the Executive
with respect to the Employer or any its subsidiaries or affiliates, (iii)
conviction of the Executive of a crime involving moral turpitude, (iv) removal,
suspension or prohibition of the Executive from participating in the conduct of
the Employer's affairs by order issued under applicable laws and regulations by
a federal or state banking agency having authority over the Employer, or (v) by
reason of the FDIC's appointment as a conservator or receiver of the Bank
pursuant to applicable laws and regulations or of the Massachusetts
Commissioner's taking possession of the Bank pursuant to applicable laws and
regulations, or (b) resignation of the Executive from the employ of the
Employer, while the
<PAGE> 2
Executive is not receiving payments or benefits from the Employer by reason of
the Executive's disability, subsequent to the occurrence of any of the following
events:

(i) A significant change in the nature or scope of the Executive's
responsibilities, authorities, powers, functions or duties
from the responsibilities, authorities, powers, functions or
duties exercised by the Executive immediately prior to the
Change in Control; or

(ii) A reasonable determination by the Executive that, as a result
of a Change in Control, the Executive is unable to exercise
the responsibilities, authorities, powers, functions or duties
exercised by the Executive immediately prior to such Change in
Control; or

(iii) A decrease in the total annual compensation payable by the
Employer to the Executive other than as a result of a decrease
in compensation payable to the Executive and to all other
executive officers of the Employer on a comparable basis as a
result of the Employer's financial performance; or

(iv) the Employer's requiring the Executive to be based anywhere
other than a location more than 35 miles from Andover,
Massachusetts except for required travel on the Employer's
business to an extent substantially consistent with customary
business travel obligations.

4. Severance Payment. Subject to the provisions of Section 5
below, in the event a Terminating Event occurs within two (2) years after a
Change in Control, the Employer shall pay to the Executive an aggregate amount
equal to (x) three times the "base amount" (as defined in Section 280G(b)(3) of
the Internal Revenue Code of 1986, as amended (the "Code")) applicable to the
Executive, less (y) One Dollar ($1.00), payable in one lump-sum payment on the
date of such termination or resignation.

5. Limitation on Benefits.

(a) It is the intention of the Executive and of the
Employer that no payments by the Employer to or for the benefit of the Executive
under this Agreement and/or any other agreement or plan pursuant to which the
Executive is entitled to receive payments or benefits shall be non-deductible to
the Employer by reason of the operation of Section 280G of the Code relating to
parachute payments. Accordingly, and notwithstanding any other provision of this
Agreement or any such agreement or plan, if by reason of the operation of said
Section 280G, any such payments exceed the amount which can be deducted by the
Employer in the aggregate, such payments shall be reduced to the maximum amount
which can be deducted by the Employer. To the extent that payments exceeding
such maximum deductible amount have been made to or for the benefit of the
Executive, such excess payments shall be refunded to the Employer with interest
thereon at the applicable Federal Rate determined under Section 1274(d) of the
Code, compounded

2
<PAGE> 3
annually, or at such other rate as may be required in order that no such
payments shall be non-deductible to the Employer by reason of the operation of
said Section 280G. To the extent that there is more than one method of reducing
the payments to bring them within the limitations of said Section 280G, the
Executive shall determine which method shall be followed, provided that if the
Executive fails to make such determination within forty-five days after the
Employer has sent him written notice of the need for such reduction, the
Employer may determine the method of such reduction in its sole discretion.

(b) If any dispute between the Employer and the Executive
as to any of the amounts to be determined under this Section 5, or the method of
calculating such amounts, cannot be resolved by the Employer and the Executive,
either the Employer or the Executive after giving three days written notice to
the other, may refer the dispute to a partner in the Boston office of a firm of
independent certified public accountants selected jointly by the Employer and
the Executive. The determination of such partner as to the amount to be
determined under Section 5(a) and the method of calculating such amounts shall
be final and binding on both the Employer and the Executive. The Employer shall
bear the costs of any such determination.

6. Employment Status. This Agreement is not an agreement for the
employment of the Executive and shall confer no rights on the Executive except
as herein expressly provided.

7. Term. This Agreement shall take effect on the date first above
written, and shall terminate upon the earlier of (a) the termination by the
Employer of the employment of the Executive as a result of the occurrence of any
of the events enumerated in Section 3(a)(i)-(v) of this Agreement, (b) the
resignation or termination of the Executive for any reason prior to a Change in
Control, or (c) the resignation of the Executive after a Change in Control for
any reason other than the occurrence of any of the events enumerated in Section
3(b)(i)-(iv) of this Agreement.

8. Withholding. All payments made by the Employer under this
Agreement shall be net of any tax or other amounts required to be withheld by
the Employer under applicable law.

9. Arbitration of Disputes. Any controversy or claim arising out
of or relating to this Agreement or the breach thereof shall be settled by
arbitration in accordance with the laws of the Commonwealth of Massachusetts by
three arbitrators, one of whom shall be appointed by the Employer, one by the
Executive and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 9. Judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. In the event that it shall be necessary
or desirable for the Executive to retain legal counsel and/or incur other costs
and expenses in connection with the enforcement of any or all of the Executive's
rights under this Agreement, the Employer shall pay (or the

3
<PAGE> 4
Executive shall be entitled to recover from the Employer, as the case may be),
the Executive's reasonable attorneys' fees and other reasonable costs and
expenses in connection with the enforcement of said rights (including the
enforcement of any arbitration award in court) regardless of the final outcome,
unless and to the extent the arbitrators shall determine that under the
circumstances recovery by the Executive of all or a part of any such fees and
costs and expenses would be unjust. This provision shall not apply to Section
5(b), except in the event that the Employer and the Executive cannot agree on
the selection of the accounting partner described in said section.

10. Assignment; Successors and Assigns, etc. Neither the Employer
nor the Executive may make any assignment of this Agreement or any interest
herein, by operation of law or otherwise, without the prior written consent of
the other party. This Agreement shall inure to the benefit of and be binding
upon the Employer and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns. In the event of the Executive's
death prior to the completion by the Employer of all payments due to the
Executive under this Agreement, the Employer shall continue such payments to the
Executive's beneficiary designated in writing to the Employer prior to the
Executive's death (or to the Executive's estate, if the Executive fails to make
such designation).

11. Enforceability. Notwithstanding anything to the contrary
herein, no payments shall be made under this Agreement if such payments are
prohibited by order of a federal or state banking agency having authority over
the Employer or by applicable laws or regulations. If any portion or provision
of this Agreement shall to any extent be declared illegal or unenforceable by a
court of competent jurisdiction, then the remainder of this Agreement, or the
application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby,
and each portion and provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.

12. Election of Remedies. An election by the Executive to resign
after a Change in Control under the provisions of this Agreement shall not
constitute a breach by the Executive of any employment agreement between the
Employer and the Executive and shall be deemed a voluntary termination of
employment by the Executive for the purpose of interpreting the provisions of
the Employer's benefit plans, programs or policies. Nothing in this Agreement
shall be construed to limit the rights of the Executive under any employment
agreement the Executive may then have with the Employer, provided, however, that
if there is a Terminating Event under Section 3 hereof, the Executive may elect
either to receive the severance payment provided under Section 4 or such
termination benefits as the Executive may have under any such employment
agreement, but may not elect to receive both.

13. Waiver. No waiver of any provison hereof shall be effective
unless made in writing and signed by the waiving party. The failure of any party
to require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this

4
<PAGE> 5
Agreement, shall not prevent any subsequent enforcement of such term or
obligation or be deemed a waiver of any subsequent breach.

14. Notices. Any notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if in writing
and delivered in person or sent by registered or certified mail, postage
prepaid, to the Executive at the last address the Executive has filed in writing
with the Employer at its main offices attention of the Secretary.

15. Amendment. This Agreement may be amended or modified only by a
written instrument signed by the Executive and by a duly authorized
representative of the Employer.

16. Governing Law. This is a Massachusetts contract and shall be
construed under and be governed in all respects by the laws of the Commonwealth
of Massachusetts.

IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Employer and the Executive as of the date first above written.

ANDOVER BANK

By: Gerald T. Mulligan
_____________________
Title: President

Raymond P. Smith
_____________________
Executive

<PAGE> 1
EXHIBIT 10.11

ANDOVER BANCORP, INC.

1995 STOCK INCENTIVE PLAN

1. PURPOSE

The name of the plan is the Andover Bancorp, Inc. 1995 Stock Incentive
Plan (the "Plan"). The purpose of the Plan is to encourage and enable the
directors, officers, employees and other key persons of Andover Bancorp, Inc.
(the "Corporation") or its Subsidiaries (as hereinafter defined), upon whose
judgment, initiative and efforts the Corporation largely depends for the
successful conduct of its business, to acquire a proprietary interest in the
Corporation. It is anticipated that providing such persons with a direct stake
in the Corporation's welfare will assure a closer identification of their
interests with those of the Corporation, thereby stimulating their efforts on
the Corporation's behalf and strengthening their desire to remain with the
Corporation. The Corporation intends that this purpose will be effected by the
granting of "incentive stock options" ("Incentive Options") as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
nonqualified stock options ("Non-qualified Options" and together with the
Incentive Options, the "Options"), stock appreciation rights and, in certain
cases, awards of shares of the Corporation's Common Stock, par value $.10 per
share (the "Common Stock") under the Plan. The term "Optionees" as used herein
means the persons to whom options are granted pursuant to the terms of the Plan.
The term "Subsidiaries" includes Andover Bank (the "Bank") and any other banking
institution, corporation or entity in which stock or other securities possessing
fifty percent (50%) or more of the total combined voting power of all classes of
securities is owned directly or indirectly by the Corporation.

2. OPTIONS TO BE GRANTED AND ADMINISTRATION

(a) Options granted under the Plan may be either Incentive Options
or Non-qualified Options.

(b) The Plan shall be administered by a committee (the
"Committee") of not less than two directors of the Corporation appointed by the
Board of Directors of the Corporation. It is the intention of the Corporation
that each member of the Committee shall be a "disinterested person" as that term
is defined and interpreted pursuant to Rule 16b-3 or any successor rule thereto
promulgated under the Securities Exchange Act of 1934, as amended (the "1934
Act") and an "outside director" within the meaning of Section 162(m) of the Code
and the regulations promulgated thereunder. Action by the Committee shall
require the affirmative vote of a majority of all its members.

(i) To determine from time to time the options or stock
appreciation rights to be granted to eligible persons (except
non-employee directors) under the Plan and to prescribe the terms and
provisions (which need not be identical) of each option or stock
appreciation rights granted under the Plan to such persons;

(ii) To construe and interpret the Plan and options and
stock appreciation rights granted thereunder and to establish, amend
and revoke rules and regulations for administration of the Plan. In
this connection, the Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan, or in any option
agreement, in the manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective. All decisions and
determinations by the Committee in the exercise of this power shall be
final and binding upon the Corporation and Optionees; and

<PAGE> 2
(iii) Generally, to exercise such powers and to perform
such acts as are deemed necessary or expedient to promote the best
interests of the Corporation with respect to the Plan.

3. STOCK

(a) The stock subject to the options granted under the Plan and
available for award pursuant to the terms hereof may be shares of the
Corporation's authorized but unissued Common Stock, or shares of Common Stock
reacquired by the Corporation. Options may be granted and awards of shares of
Common Stock may be made under the Plan for up to such aggregate number of
shares of Common Stock as shall equal four and nine-tenths percent (4.9%) of the
greater of (i) the total number of shares of Common Stock outstanding as of the
date of adoption of the Plan or (ii) the total number of shares of Common Stock
outstanding as of December 31, 1995; provided, however, that the maximum number
of shares of Common Stock for which Incentive Options may be granted under the
Plan shall not exceed 225,000 shares of Common Stock (which number is subject to
adjustment as provided in Section 10 hereof).

(b) Whenever any outstanding option under the Plan expires, is
canceled or is otherwise terminated (other than by exercise), the shares of
Common Stock allocable to the unexercised portion of such option may again be
the subject of options under the Plan, except for options surrendered as
provided in Section 8 hereof.

(c) No more than 75,000 options or stock appreciation rights may
be granted to any one individual participant during one calendar year.

4. DIRECTORS' FORMULA OPTION GRANTS

Options shall be granted under this Section 4 only to members of the
Board of Directors of the Corporation and the Bank who are not officers or
full-time employees of the Corporation or any of its Subsidiaries (each, an
"Eligible Director").

(a) Awards. An option under which a total of 500 shares of Common
Stock may be acquired shall be granted, commencing with the 1995 Annual Meeting
of Stockholders, on the Friday following the annual meeting of the stockholders
of the Corporation to each Eligible Director who is an incumbent member of the
Board on that date. In the event the aggregate number of shares of Common Stock
authorized to be awarded under this Section 4 is insufficient to make such
awards in full, each Eligible Director shall be awarded options to acquire a
pro-rated portion of the available shares.

(b) Limitations on Awards. Notwithstanding the foregoing
provisions of this Section 4, no Eligible Director shall be eligible to receive
any option under this Section 4, if at the date of grant of such option such
person beneficially owns in excess of ten percent of the outstanding Common
Stock of the Corporation. No Eligible Director shall receive any option or other
award under this Plan except as provided under this Section 4.

(c) Expiration. Notwithstanding any other provision of the Plan or
of any option agreement, each option granted under this Section 4 shall expire
on the tenth anniversary of the date on which the option was granted, or, if
earlier, on the date the Optionee ceases to be a director of the Corporation for
any reason other than death, permanent disability or resignation.

Andover Bancorp, Inc. 1995 Stock Incentive Plan
<PAGE> 3
(d) Exercise.

(i) Each option shall be exercisable, in whole or in
part, and in one or more installments, at any time after six months
from the date the option is granted, but not later than the date the
option expires.

(ii) In the event of death, permanent disability, or
resignation, the option may be exercised by the Optionee (or, if he is
not living, by his heirs, legatees or legal representatives) during its
specified term within one year of the date of death, disability or
resignation.

(iii) In the event of a Change in Control of the
Corporation (as defined in Section 7(d) below), all options outstanding
as of the date of such Change in Control shall become immediately
exercisable.

(e) Limitations on Amendment. The provisions of this Section 4
shall not be amended more than once in any six-month period, other than to
comport with changes in the Code.

5. ELIGIBILITY FOR DISCRETIONARY OPTION GRANTS

(a) Incentive Options may be granted only to officers and other
full-time employees of the Corporation or its Subsidiaries, including members of
the Board of Directors who are also employees of the Corporation or its
Subsidiaries. Non-qualified Options may be granted to officers and other
full-time employees of the Corporation, consultants or other key persons of the
Corporation or its Subsidiaries other than Eligible Directors.

(b) No person shall be eligible to receive any option under this
Section 5 of the Plan, if at the date of grant such person beneficially owns in
excess of ten percent of the outstanding Common Stock of the Corporation.

(c) No person shall be eligible to receive Incentive Options to
the extent that the aggregate fair market value (determined as of the time the
option is granted) of the stock with respect to which incentive stock options
are exercisable for the first time by such individual (under all such plans of
the individual's employer corporation and its parent and subsidiary corporations
under Section 424 of the Code) during any calendar year shall exceed $100,000.
Any option granted in excess of the foregoing limitations shall be designated as
being a Non-qualified Option.

6. TERMS OF THE DISCRETIONARY OPTION AGREEMENTS

Each option granted pursuant to Section 5 shall be the subject of an
option agreement containing such provisions as the Committee shall from time to
time deem appropriate. Option agreements need not be identical, but each option
agreement by appropriate language shall include the substance of all of the
following provisions:

(a) Expiration. Notwithstanding any other provision of the Plan or
of any option agreement, each option shall expire on the date specified in the
option agreement, which date shall not be later than the tenth anniversary of
the date on which the option was granted.

Andover Bancorp, Inc. 1995 Stock Incentive Plan
<PAGE> 4
(b) Vesting, Exercise and Termination of Employment.

(i) Each option shall become vested and exercisable in
such installments (which need not be equal) and at such times as
designated by the Committee. To the extent not exercised, installments
shall accumulate and be exercisable, in whole or in part, at any time
after becoming exercisable, but not later than the date the option
expires. Each option and stock appreciation right shall provide that it
may not be exercised, except as provided in Sections 6(b)(ii), 10(b)
and 11, in whole or in part, until at least six months following the
date of grant.

(ii) In the event of a Change in Control of the
Corporation (as defined in Section 7(d) below), all options outstanding
as of the date of such Change in Control shall become immediately
exercisable in full, notwithstanding any vesting or other provisions of
the option agreement.

(iii) The Committee may in its discretion specify, at the
time an option is granted under the Plan or otherwise, a period or
periods within which such option may be exercised following retirement
of the Optionee or termination of the Optionee's employment with the
Corporation or its Subsidiaries for any reason.

7. RULES GOVERNING OPTIONS

(a) Minimum Shares Exercisable. The minimum number of shares with
respect to which an option may be exercised at any one time shall be 100 shares,
or such lesser number as is subject to exercise under the option at the time.

(b) Purchase Price. The purchase price per share of Common Stock
under each option shall be the fair market value of the Common Stock on the date
the option is granted. For the purposes of the Plan, the fair market value of
the Common Stock on such date shall be determined in good faith by the
Committee; provided, however, that (i) if the Common Stock is admitted to
quotation on the National Association of Securities Dealers Automated Quotation
("NASDAQ") System on the date the option is granted, the fair market value shall
not be less than the average of the highest bid and lowest asked prices for the
Common Stock on NASDAQ reported for such date, or (ii) if the Common Stock is
admitted to trading on a national securities exchange or the NASDAQ National
Market on the date the option is granted, the fair market value shall not be
less than the closing price reported for the Common Stock on such exchange or
market for such date or, if no sales were reported, for the last date preceding
such date for which a sale was reported.

(c) Rights of Optionees. No Optionee shall be deemed for any
purpose to be the owner of any shares of Common Stock subject to any option
unless and until (i) the option shall have been exercised pursuant to the terms
thereof, (ii) the Corporation shall have issued and delivered the shares to the
Optionee, and (iii) the Optionee's name shall have been entered as a stockholder
of record on the books of the Corporation. Thereupon, the Optionee shall have
full voting, dividend and other ownership rights with respect to such shares of
Common Stock.

(d) Change in Control. For purposes of the Plan, a "Change in
Control" shall be deemed to have occurred in either of the following events: (i)
if there has occurred a change in control which the Corporation would be
required to report in response to Item 1 of Form 8-K promulgated under the 1934
Act, or, if such regulation is no longer in effect, any regulations promulgated
by the Securities and Exchange Commission pursuant to the 1934 Act which are
intended to serve similar purposes or (ii) when any "person" (as such term is
used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial

Andover Bancorp, Inc. 1995 Stock Incentive Plan
<PAGE> 5
owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act),
directly or indirectly, of securities of the Corporation or the Bank
representing twenty-five percent (25%) or more of the total number of votes that
may be cast for the election of directors of the Corporation, and in the case of
either (i) or (ii) above, the Board of Directors of the Corporation has not
consented to such event by a two-thirds vote of all of the members of the Board
of Directors then in office adopted prior to such event. In addition, a Change
in Control shall be deemed to have occurred if, as the result of, or in
connection with, any tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, persons who were directors of the Corporation before
such transaction cease to constitute a majority of the Board of Directors of the
Corporation or of any successor institution.

(e) Transfer. No options or stock appreciation rights shall be
transferable by the Optionee other than by will or by the laws of descent and
distribution. Options and stock appreciation rights may be exercised during the
Optionee's lifetime only by the Optionee, his or her guardian or legal
representative.

(f) Subject to compliance with the Plan and the option agreement,
any option granted under the Plan may be exercised by the Optionee by delivering
to the Corporation on any business day a written notice specifying the number of
shares of Common Stock the Optionee then desires to purchase (the "Notice").

(g) Payment for the shares of Common Stock purchased pursuant to
the exercise of an option shall be made either (i) in cash, check or other
instrument acceptable to the Corporation equal to the option price for the
number of shares specified in the Notice (the "Total Option Price"), or (ii) if
authorized by the applicable option agreement, in shares of Common Stock of the
Corporation having a fair market value on the date of exercise, determined as
provided in Section 7(b) hereof, equal to or less than the Total Option Price,
plus cash in an amount equal to the excess, if any, of the Total Option Price
over the fair market value of such shares of Common Stock. In addition, payment
for the shares of Common Stock may be made, if permitted by the Corporation, by
the Optionee delivering the Notice to the Corporation together with irrevocable
instructions to a broker to promptly deliver to the Corporation the Total Option
Price in cash or by check or other instrument acceptable to the Corporation;
provided that in the event the Optionee chooses to pay the option purchase price
as so provided, the Optionee and the broker shall comply with such procedures
and enter into such agreements of indemnity and other agreements as the
Corporation shall prescribe as a condition of such payment procedure. Payment
instruments will be received subject to collection.

The delivery of certificates representing shares of Common Stock to be
purchased pursuant to the exercise of an option will be contingent upon receipt
by the Corporation of the Total Option Price for such shares and the fulfillment
of any other applicable requirements (including payment of any amount required
to be withheld by the Corporation pursuant to any applicable law).

8. STOCK APPRECIATION RIGHTS

(a) The Committee may, but shall not be obligated to, include
stock appreciation rights in tandem with any option granted under the Plan, on
such terms and conditions as it deems appropriate in each case. Such stock
appreciation rights shall permit the Optionee, at his or her election, to
surrender to the Corporation the right to exercise such option (or portion
thereof) in consideration for the payment by the Corporation of an amount equal
to the excess of the fair market value on the date of surrender, determined as
provided in Section 7(b) hereof, of the shares of Common Stock subject to such
option (or portion thereof) surrendered over the option exercise price of such
shares. Such payment may be made, at the

Andover Bancorp, Inc. 1995 Stock Incentive Plan
<PAGE> 6
discretion of the Committee, in shares of Common Stock valued at the fair market
value thereof on the date of such surrender, determined as provided in Section
7(b) hereof, or in cash, or any combination thereof.

(b) Any election by an Optionee who is subject to Section 16(b) of
the 1934 Act to exercise stock appreciation rights included in any option
agreement shall be made only during the period beginning on the third business
day following the date of release for publication of quarterly or annual
financial information and ending on the twelfth business day following such
date, shall be irrevocable, and shall be subject to the consent or disapproval
of the Committee. No stock appreciation right may be exercised within (i) one
year from the date of the Conversion, or (ii) six months from the date of grant
thereof, except as provided in Sections 6(b)(ii), 10(b) and 11 hereof.

(c) Any option surrendered as provided in this Section 8 shall be
cancelled by the Corporation and shall not be subject to further grant.

9. DIRECTORS' STOCK AWARDS

An Eligible Director may, pursuant to an irrevocable written election
at least six months before directors' fees would otherwise be paid, receive all
or a portion of such fees (including annual, per meeting and committee fees or
retainers) in shares of Common Stock, valued at fair market value (as determined
by the Committee in accordance with Section 7(b)) on the date the directors'
fees would otherwise be paid.

10. ADJUSTMENT UPON CHANGES IN CAPITALIZATION

(a) If the shares of the Corporation's Common Stock as a whole are
increased, decreased, changed into or exchanged for a different number or kind
of shares or securities of the Corporation, whether through merger,
consolidation, reorganization, recapitalization, reclassification, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure or the like, an appropriate and proportionate adjustment
shall be made in the number and kind of shares subject to the Plan, and in the
number, kind and per share exercise price of shares subject to unexercised
options or portions thereof granted prior to any such change. In the event of
any such adjustment in an outstanding option, the Optionee thereafter shall have
the right to purchase the number of shares under such option at the per share
price, as so adjusted, which the Optionee could purchase at the total purchase
price applicable to the option immediately prior to such adjustment.

(b) The Committee shall have the discretion and power in the case
of any event specified in Section 10(a) to determine and to make effective
provision for acceleration of the time or times at which any option or portion
thereof shall become exercisable. No fractional shares of Common Stock shall be
issued under the Plan on account of any adjustment specified herein.

11. EFFECT OF CERTAIN TRANSACTIONS

In the case of (i) the dissolution or liquidation of the Corporation,
(ii) a reorganization, merger or consolidation in which the Corporation is
acquired by another entity (other than a holding company formed by the
Corporation) or in which the Corporation is not the surviving entity, or (iii)
the sale of all or substantially all of the assets of the Corporation to another
entity, the Plan and the options issued hereunder shall terminate, unless
provision is made in connection with such transaction for the assumption of
options

Andover Bancorp, Inc. 1995 Stock Incentive Plan
<PAGE> 7
theretofore granted, or the substitution for such options of new options of the
successor entity or parent thereof, with appropriate adjustment as to the number
and kind of shares and the per share exercise prices, as provided in Section 10.
In the event of such termination, all outstanding options under the Plan shall
be exercisable in full for at least fifteen (15) days prior to the date of such
termination whether or not otherwise exercisable during such period.

12. TAX WITHHOLDING

(a) Payment by Participant. Each participant shall, no later than
the date as of which the value of any award or grant hereunder or of any shares
issued upon the exercise of any option or stock appreciation right granted
hereunder, first becomes includable in the gross income of the participant for
federal income tax purposes (the "Tax Date"), pay to the Corporation, or make
arrangements satisfactory to the Corporation regarding payment of any federal,
state, or local taxes of any kind required by law to be withheld with respect to
such income.

(b) Payment in Shares. A participant may elect to have such tax
withholding obligation satisfied, in whole or in part, by (i) authorizing the
Corporation to withhold from shares to be issued to the participant a number of
shares with an aggregate fair market value (determined by the Committee in
accordance with Section 7(b) as of the date the withholding is effected) that
would satisfy the withholding amount due, or (ii) transferring to the
Corporation shares owned by the participant with an aggregate fair market value
(determined by the Committee in accordance with Section 7(b) as of the date the
withholding is effected) that would satisfy the withholding amount due. With
respect to any Optionee who is subject to Section 16(b) of the 1934 Act, the
following additional restrictions shall apply:

(1) the election to satisfy tax withholding obligations
in the manner permitted by this Section 12(b) shall be made either (A)
during the period beginning on the third business day following the
date of release for publication of quarterly or annual financial
information and ending on the twelfth business day following such date,
or (B) at least six months prior to the Tax Date;

(2) such election shall be irrevocable;

(3) such election shall be subject to the consent or
disapproval of the Committee; and

(4) the stock withheld to satisfy tax withholding must
pertain to an option or stock appreciation right which has been held by
the Optionee for at least six months from the date of grant.

13. AMENDMENT OF THE PLAN

The Board of Directors of the Corporation may amend the Plan at any
time, and from time to time, subject to any required regulatory approval and to
the limitation that, except as provided in Sections 10 and 11 hereof, no
amendment shall be effective unless approved by the stockholders of the
Corporation in accordance with applicable law and regulations at an annual or
special meeting held within twelve months before or after the date of adoption
of such amendment, where such amendment will:

(a) increase the number of shares of Common Stock as to which
options may be granted or shares may be awarded under the Plan;

(b) change in substance Section 4 and 5 hereof relating to
eligibility to participate in the Plan;

Andover Bancorp, Inc. 1995 Stock Incentive Plan
<PAGE> 8
(c) otherwise materially increase the benefits accruing to
participants under the Plan.

Except as provided in Sections 10 and 11 hereof, rights and obligations
under any option granted before any amendment of the Plan shall not be altered
or impaired by such amendment, except with the consent of the Optionee.

14. NONEXCLUSIVITY OF THE PLAN

Neither the adoption of the Plan by the Board of Directors of the
Corporation nor the submission of the Plan to the stockholders of the
Corporation for approval shall be construed as creating any limitations on the
power of the Board of Directors of the Corporation to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under the Plan, and such arrangements
may be either applicable generally or only in specific cases. The Plan or the
granting of options or awarding of shares thereunder shall not be deemed to
confer upon any employee of the Corporation or its Subsidiaries any right to
continued employment.

15. GOVERNMENT AND OTHER REGULATIONS; GOVERNING LAW

(a) The obligation (if any) of the Corporation to sell and deliver
shares of Common Stock with respect to options granted under the Plan and to
award shares under the Plan shall be subject to all applicable laws, rules and
regulations, including all applicable federal and state securities laws, and the
obtaining of all such approvals from governmental agencies as may be deemed
necessary or appropriate by the Committee.

(b) The Plan shall be governed by Massachusetts law, except to the
extent that such law is preempted by federal law.

16. EFFECTIVE DATE OF PLAN; STOCKHOLDER APPROVAL

The Plan shall become effective on February 16, 1995; provided,
however, that the Plan shall be subject to the approval of the Corporation's
stockholders in accordance with applicable laws and regulations at an annual or
special meeting held within twelve months of such effective date. No options
granted under the Plan prior to such stockholder approval may be exercised until
such approval has been obtained. No shares of Common Stock may be awarded in
lieu of directors' fees prior to such stockholder approval. No option may be
granted under the Plan after the tenth anniversary of the effective date of the
Plan.

* * *

Andover Bancorp, Inc. 1995 Stock Incentive Plan

<PAGE> 1
EXHIBIT 10.12

DEFERRED COMPENSATION PLAN FOR DIRECTORS
OF ANDOVER BANCORP, INC. AND ITS SUBSIDIARIES

The Deferred Compensation Plan For Directors of Andover Bancorp, Inc.
and Its Subsidiaries, originally effective July 1, 1993, is hereby amended and
restated as follows effective February 22, 1996:

1. Eligibility. Any member of the Board of Directors of Andover
Bancorp, Inc. or any of its subsidiaries (each such entity
being referred to herein as the "Corporation") who is not an
employee of Andover Bancorp, Inc. or any of its subsidiaries
may elect to defer, in accordance with this Plan, payment of
all or a portion of the compensation payable to him for
service as such Director.

2. Election to Defer. A Director's election to defer payments
shall be made in writing and shall be effective upon receipt
and acceptance by the Corporation. Except in the case of a
newly elected Director who may file an election to defer
within thirty (30) days of his election as Director, an
election to defer shall be made no later than ten (10) days
preceding commencement of a calendar year with respect to
deferral of compensation to be earned in such year. Any
election may be revoked in writing and shall be effective upon
receipt by the Corporation, but only as to compensation to be
earned at and after commencement of the next succeeding
calendar month. Any election may be changed in writing and
shall be effective upon receipt by the Corporation, but only
as to compensation to be earned at and after commencement of
the next succeeding calendar year.

3. Crediting of Interest. The Corporation shall maintain a book
account to which the deferred compensation of each Director
participating in this Plan shall be credited as of the end of
each calendar month after such compensation is earned. As of
the end of each calendar month, the Corporation shall also
credit each deferred compensation account with interest on the
amount then standing in the account, exclusive of any deferred
compensation credited to the account as of such date. The
<PAGE> 2
rate to be used for this purpose shall be the maximum interest yield
paid by Andover Bank with respect to its 36-month term deposit
accounts, or if there shall be no 36-month term deposit accounts, at
the maximum interest yield paid on the term deposit account of such
duration as most closely approximates 36 months.

4. Stock Units.

(a) In lieu of receiving interest credit each month, a Director
may elect to convert the amounts in his deferred compensation account
(and any future deferrals) into stock units equivalent in value to
shares of common stock of Andover Bancorp, Inc. ("Stock"). Such an
election must be made on an irrevocable basis at least six months in
advance. A Director may revoke his election and elect to receive
interest credits pursuant to Paragraph 3 above, but any such revocation
must be made in writing on an irrevocable basis at least six months in
advance.

(b) The conversion of deferred compensation into stock units will
be made on the basis of the fair market value of the Stock on the date
of conversion, or the date the compensation would otherwise be paid,
whichever is applicable. For this purpose, fair market value of the
Stock on any given date shall mean the closing price reported for the
Stock on the NASDAQ National Market on such date or, if no sales were
reported on such date, for the last date preceding such date for which
a sale was reported.

(c) During the term of the deferral, each Director's account of
stock units will be credited with additional units to reflect any
payment of dividends (other than dividends payable only in shares of
Stock). Each account will be credited with a number of whole and
fractional shares of stock units determined by multiplying the dividend
value per share of Stock by the number of units in the account on the
record date and dividing the result by the fair market value of the
Stock (as defined in Paragraph 4(b) above) on the record date.
<PAGE> 3
(d) In the event of a stock dividend, stock split or similar
change in capitalization affecting the Stock, appropriate adjustments
shall be made in the number of stock units credited to each Director's
account.

5. Time and Method of Payment

(a) Amounts credited to a Director's deferred compensation account
shall be paid, or commenced to be paid, on the January 15 coincident
with or next following the date on which the Director ceases to be a
member of the Board of Directors of the Corporation for any reason
whatsoever. In the case of semi-annual installments, payments shall be
made on each July 15.

(b) Payments of deferred compensation may be made either in a
single lump sum or in annual, or semi-annual, installments over a
period of ten (10) years, as the Director may have irrevocably
specified before the compensation is earned. In the absence of an
effective election, payment shall be made in a single lump sum. In the
case of installment payments, interest or dividend equivalent shall
continue to be credited in accordance with Paragraph 3 or 4 during the
payment period. The amount of each installment payment shall be equal
to the amount credited to the deferred compensation account as of the
preceding June 30 or December 31, as the case may be, divided by the
number of payments remaining to be made, including the current payment.
On and after the date which is the later of six months from the
effective date of this amendment or the date this amendment is approved
by shareholders of Andover Bancorp, Inc., payments from each Director's
deferred compensation account of stock units shall be payable only in
the form of whole shares of Stock, with any fractional share payable in
cash.

(c) Elections by a Director of a method of payment under sub-
paragraph (b) shall be made in writing, effective upon receipt and
acceptance by the Corporation, and applicable only to compensation to
be earned after the effective date of the election. Such elections may
also be changed by a Director,
<PAGE> 4
subject to the same restrictions.

(d) Payments of deferred compensation shall be made as they become
due to the Director if then living, otherwise to a beneficiary or
beneficiaries designated by the Director in writing to the Corporation
prior to the Director's death, or failing such designation, the
Director's estate.

(e) Notwithstanding any provision hereof to the contrary, if a
Director, or after a Director's death the Director's beneficiary,
believes he is suffering from financial hardship, an application may be
made to the Board of Directors of the Corporation for an acceleration
of payments from the deferred compensation account of the Director. A
"financial hardship" shall mean a need for financial assistance due to
the occurrence of an unanticipated emergency caused by an event beyond
the Director's control. The need for financial assistance must be such
that the Director, any member of the Director's immediate family or,
after the Director's death, a designated beneficiary will be subject to
substantial hardship if the acceleration is not permitted. If the Board
of Directors of the Corporation determines, in its sole discretion,
that a hardship exists, the Corporation may accelerate payment to the
Director or the designated beneficiary of only so much of the deferred
compensation account as the Board of Directors of the Corporation may
determine is required to alleviate such hardship, and the deferred
compensation account shall be charged with said amount upon payment.

6. Limitation on Rights of Directors. No action taken pursuant
to this Plan shall create or be deemed to create a trust or
fiduciary relationship of any kind between the Corporation and
the Directors. Although the Corporation shall have no
obligation to establish any separate fund, reserve or to
invest in any specific asset to provide security with respect
to any deferred amounts during the deferral period, the
Corporation may elect to do so and, in such event, the
Directors shall not have any interest in such assets and all
<PAGE> 5
such assets shall continue for all purposes to be a part of the general
assets of the Corporation, with the title to the beneficial ownership
of such assets remaining at all times in the Corporation. Each
Director, his legal representative or any of his beneficiaries shall
not have any right, other than the right of an unsecured general
creditor of the Corporation, in respect to the deferred compensation
account established hereunder, and such persons shall have no property
interest in any specific assets of the Corporation.

7. Nonforfeitable. The right of each Director to the payment of deferred
compensation under this Plan shall be nonforfeitable and no action or
failure to act by the Director, the Corporation or any other person
shall deprive the Director of, or excuse the Corporation from its
obligations to pay, the amounts due hereunder.

8. Withholding Tax. The Corporation shall have the right to deduct from
all deferred amounts or payments hereunder any federal or state taxes
required by law to be withheld with respect to such deferred amounts or
payments.

9. Non-Assignable. The deferred compensation payable under this Plan shall
not be subject to alienation, assignment, garnishment, execution or
levy of any kind, and any attempt to cause any compensation to be so
subjected shall not be recognized.

10. Termination and Amendment. This Plan may be amended at any time or may
be terminated, in whole or in part, at any time, and from time to time,
by Andover Bancorp, Inc. The foregoing provisions of this Paragraph
notwithstanding, no amendment or termination of this Plan shall,
without the consent of a Director, adversely affect the amounts payable
hereunder on account of compensation deferred prior to the effective
date of such amendment or termination.

11. Notices. All notices, elections or designations by a Director to the
Corporation shall be delivered in person or by registered mail, postage
prepaid, and noted to be brought to the attention of the Treasurer,
Andover Bancorp, Inc.
<PAGE> 6
12. Governing Law. This Plan, and all actions taken hereunder, shall be
governed by and construed in accordance with the laws of the State of
Massachusetts, except as such laws may be superseded by any applicable
federal law.

13. Shares Issuable. The aggregate maximum number of shares of Stock
reserved and available for issuance under the Plan shall be 50,000,
subject to appropriate adjustments in the event of a stock dividend,
stock split, or similar change in capitalization affecting the Stock.
Shares subject to the Plan are authorized but unissued shares or
Treasury shares. Notwithstanding the foregoing, no shares of Stock may
be issued under the Plan until the amendment and restatement of this
Plan has been approved by the affirmative votes of the holders of a
majority of the shares of Stock of Andover Bancorp, Inc. present, or
represented, and entitled to vote at a meeting of shareholders.

<PAGE> 1
EXHIBIT 13

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-16358

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

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

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

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508)749-2000

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

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

NONE

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

COMMON STOCK, $0.10 PAR VALUE
PREFERRED STOCK PURCHASED RIGHTS
(Title of class)

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

Class: Common Stock, par value $0.10 per share
Outstanding as of February 21, 1996: 4,236,971 shares

DOCUMENTS INCORPORATED BY REFERENCE

ITEM 1. BUSINESS

GENERAL

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

The Bank is a Massachusetts-chartered savings bank which was incorporated
in 1834 and is headquartered in Andover, Massachusetts. On May 8, 1986, Andover
Bank converted from mutual to stock form. Deposits at Andover Bank are insured
by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per
separately insured account and by the Depositors Insurance Fund, Inc. ("DIF")
for that portion of deposits in excess of $100,000.

ABNH is a de novo guaranty savings bank chartered in September, 1995 and
headquartered in Salem, New Hampshire. Deposits at Andover Bank NH are insured
by the FDIC up to $100,000 per separately insured account.

The Banks are engaged principally in the business of attracting deposits
from the general public and investing in residential and commercial real estate
loans, in construction, consumer, and corporate loans, and in various
securities. Emphasis is placed on both retail and corporate banking. Retail
activities, the principal source of franchise value to the Banks, consist of
branch operations, home mortgage and consumer lending, and mortgage banking. The
Banks offer a variety of retail products through branch offices, automated
teller machines ("ATMs"), and product specialists. Corporate banking activities
consist primarily of commercial real estate, construction, land and corporate
lending. These are conducted primarily through loan officers and product
specialists.

The financial performance in 1995 was negatively impacted by a
non-recurring, pre-tax charge to earnings of $1.0 million related to the
terminated acquisition of Finest Financial Corp, the parent company of Pelham
Bank and Trust Company. The financial performance of 1994 reflects the
acquisition of Community Savings Bank ("Community" or the "Acquired
Institution") on April 1, 1994. The acquisition was accounted for as a purchase,
with all assets and liabilities recorded at fair value and has been beneficial
to the Company.

MARKET AREA

The Bank's market area is centered in Andover, Massachusetts, approximately
25 miles north of downtown Boston and the Bank operates banking offices in the
towns of Andover, Lawrence, Methuen, North Andover and Tewksbury, which serve
those towns as well as surrounding communities in northeastern Massachusetts and
in southern New Hampshire. ABNH's primary market area is centered in Salem, New
Hampshire, approximately 10 miles north of Andover, Massachusetts, and serves
the surrounding towns in southern New Hampshire.

LENDING ACTIVITIES

General. Lending is the principal business of the Banks and loans represent
the largest portion of the Company's assets. As of December 31, 1995, the loan
portfolio, prior to the allowance for loan losses, amounted to $768.6 million or
69.2% of total assets. The Banks' loan portfolio increased 19.2% during 1995 as
lower loan origination volume was supplemented with the purchase of $59.9
million in loans.

The primary lending activity has been the origination of first mortgage
loans for the purchase, refinance, or construction of residential properties in
Andover's primary market area and adjacent communities. Such loans are generally
viewed as the least vulnerable to major economic changes. They provide a
relatively stable source of interest income in the loan portfolio. They also
provide a significant source of fee income when they are sold in the secondary
mortgage market and serviced by the Bank. The Bank is an active servicer of
residential loans for investors in the secondary mortgage market.

2
<PAGE> 3
The Banks originate a variety of other loans for consumer purposes. These
include home equity, personal, and education loans, among others, and constitute
an additional source of interest income in the loan portfolio. The consumer
lending activities complement its home mortgage activities and position the
Company as a full service retail lender. The retail lending activities of the
Company complement its retail deposit gathering activities and strengthen the
Company's overall retail franchise in the market area.

The Banks also originate non-retail or corporate loans, such as commercial
real estate, commercial, construction and land loans. Historically, these types
of loans have generated higher yields and returns than retail loans, but also
involve additional risk. See "Risk Elements." They have also been viewed as a
means of maintaining a diversified loan and asset portfolio. As of December 31,
1995, non-retail loans amounted to $159.2 million, prior to the allowance for
loan losses.

Residential Mortgage Loans. Residential mortgage loans totalling $558.2
million represented 72.6% of the total loans at December 31, 1995. Included in
residential mortgage loans was $10.8 million in outstanding second mortgages
made to facilitate the purchase of principal residences by borrowers needing
large loan amounts under the Bank's "Econo-Max(R)" loan program. An additional
$5.2 million in residential mortgage loans was held for sale at that date.
During 1995, the Company purchased from other banks, $56.7 million of variable
rate, seasoned residential loans on properties located within Massachusetts.

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

Commercial Real Estate Loans. At December 31, 1995, commercial real estate
loans totalled $121.9 million, representing 15.9% of total loans. Approximately
$45.3 million, or 37.2% of these loans, are secured by apartment buildings and
multi-family residential properties. The balance of the commercial real estate
loans are secured by commercial facilities, including office, retail and light
manufacturing properties, small shopping centers, and various other types of
commercial real estate. Commercial real estate loans generally amortize over a
period of 15 to 25 years. The interest rate on such loans is generally set at a
margin above either the one-year Treasury index or the prime rate as published
in the Wall Street Journal and is subject to periodic adjustment.

Construction and Land Loans. Construction and land loans totalled $18.1
million at December 31, 1995, representing 2.4% of total loans. At that date,
amounts committed to but not yet advanced in connection with such loans totalled
an additional $8.7 million. At December 31, 1995, outstanding construction loans
totalled $9.8 million and outstanding land loans (including loans for unimproved
land and land development) totalled $8.3 million. Substantially all of the
construction lending is for residential development of detached single-family
homes. Construction and land loans generally have a term of two years, although
the Company typically is entitled to review and adjust the interest rate at the
end of the first year. The interest rate generally is set at a margin above the
prime rate as published in the Wall Street Journal.

Consumer Loans. Consumer loans totalled $51.2 million at December 31, 1995,
representing 6.6% of total loans. Home equity loans constitute the greatest
portion of the Banks' consumer lending activity and totalled $37.1 million at
December 31, 1995. Home equity loans are offered both in fixed-rate and
adjustable form generally based on a margin over the prime rate as published in
the Wall Street Journal and with varying terms of 3 to 10 years. Home equity
loans are subject to the same general underwriting standards as residential
first mortgage loans.

Commercial Loans. At December 31, 1995, commercial loans totalled $19.2
million, or approximately 2.5% of total loans. The interest rate on commercial
loans generally varies at a margin above the prime rate as published in the Wall
Street Journal. Commercial loans may be secured in whole or in part by real
estate unrelated to the principal purpose of the loan or secured by inventories
and receivables and are ordinarily guaranteed by the principals of the borrower.

3
<PAGE> 4
Loan Origination. Mortgage loans originate from a number of sources. These
include realtor, builder and customer referrals, direct advertising and
participation in home shows and other events. The Company employs a number of
mortgage loan originators who maintain regular contact with real estate firms
and other sources of business and who respond to general mortgage inquiries.
These mortgage specialists are assigned specific territories and receive
commissions on closed mortgage loans. In 1995, according to available data on
market share, Andover Bank ranked at or near the top in total home mortgages
closed in each community where it had a branch office. Total residential
mortgages originated in 1995 totalled $132.1 million.

Consumer loans are solicited by advertising and direct mail targeted to
existing deposit and mortgage customers and, from time to time, selected market
area households which have no customer relationship with the Bank. The primary
origination activity in the consumer loan area relates to home equity lines of
credit which totalled $10.4 million in 1995, while other consumer loan
originations totalled $8.0 million.

Commercial real estate, commercial, construction and land loans are
originated from direct solicitation of existing and prospective customers and
from a variety of referral sources. The Banks originated $66.5 million in such
loans during 1995.

RISK ELEMENTS

General. Overbuilding and the weakened New England economy and real estate
market were the principal causes for the past deterioration of the loan
portfolio. The Company's operating results continue to be adversely affected by
the loss of interest income from nonaccruing loans and restructured loans,
provision for losses on loans and other real estate owned and costs associated
with collecting, holding and disposing of non-performing assets. For further
information concerning the composition of the Bank's loan portfolio, nonaccrual
and restructured loans, the allowance for loan losses, and other real estate
owned, see Notes 4 and 6 of Notes to the "Consolidated Financial Statements" and
Item 7, "Management's Discussion and Analysis -- Results of Operations --
Financial Condition -- Risk Elements."

Non-performing Assets. Non-performing assets consist of nonaccruing loans,
other real estate owned and restructured loans. During 1995, non-performing
assets decreased 15.7% or $4.0 million from 1994 levels; however, non-performing
assets remain above desired levels at 1.9% of total assets at year-end. The
Company places all loans, regardless of collateral values, on nonaccrual status
when interest is past due 90 days or more. Loans for which payments are less
than 90 days past due are placed on nonaccrual status where there exists serious
doubt as to collectibility. At December 31, 1995, the Bank had $11.6 million in
nonaccruing loans, $4.2 million in other real estate owned and $5.6 million in
restructured loans. The weighted average interest rate on restructured loans at
December 31, 1995 was 7.00% and restructured loans were performing in accordance
with their restructured terms.

Through periodic provisions charged to expense, the Banks maintain an
allowance for losses on loans. The provision for loan losses totalled $1.3
million in 1995 primarily due to loan growth and continued additions to the
non-performing loans. There was no provision for loan losses in 1994 and 1993
resulting from the continued progress in reducing non-performing assets during
1994 and 1993, as well as the overall improvement in the risk characteristics of
the loan portfolio in general.

Significant Risk Elements. The largest concentration included in risk
elements at December 31, 1995, were non-performing assets within the City of
Lawrence with a carrying value of $11.4 million. This concentration of
non-performing assets includes loans to three separate borrowers totalling $1.5
million, $1.2 million and $1.1 million, respectively. Real estate in Lawrence
has been particularly hard hit by increasing vacancies, partially as a result of
the reduction in rental assistance provided by state and federal agencies.
Current unit carrying amounts of other real estate owned have been adjusted to
be at or below current appraised values. Andover expects that the disposition of
other real estate owned will continue to involve a significant allocation of
management resources and administrative expenses.

4
<PAGE> 5
Current Market Conditions. The New England region, including those portions
of northeastern Massachusetts and southern New Hampshire that constitute
Andover's market area, experienced a significant economic decline from 1988
through 1993. While stabilization has appeared in certain sectors of the economy
and real estate markets, the reverberations of the economic decline will
continue to be felt in 1996. The decline has adversely affected the real estate
markets and the banking industry in New England. The effects of the economic
downturn and resultant oversupply were especially evident in the condominium and
commercial real estate markets, where prices had declined substantially in many
cases. Slow rentals and sales, at declining rents and prices, had in turn
affected the ability of some developers to repay or refinance their commercial
real estate, construction and land loans. Additionally, numerous bank failures
placed properties into the hands of federal liquidators who were concerned in
large part with a property's current liquidation. The continued liquidation of
these properties will likely keep prices deflated on commercial real estate and
multi-family homes for the foreseeable future. In the single-family sector,
prices also suffered over the past several years. However, prices for
single-family homes appear to have stabilized with origination volumes being
sensitive to market interest rates.

INVESTMENT ACTIVITIES

The investment portfolio, an important component of Andover's diversified
asset structure, is a source of earnings in the form of interest and dividends,
provides for diversification and is a source of liquidity. Overall, the
portfolio, comprised of mortgage-backed securities, corporate bonds, U. S.
Treasury and federal agency securities and short-term investments, represented
25.7% of total assets or $285.2 million as of December 31, 1995.

The Company reduced its investments available for sale portfolio during the
fourth quarter of 1995 to purchase residential whole loans. The Company believes
these loans will provide a superior return to the securities generally available
for investment. The primary component of the total investment portfolio is
mortgage-backed securities which accounted for 68.4% of total investments at
December 31, 1995. The remaining portfolio is comprised of other high grade
investment securities.

Overall, in 1995, the total investment portfolio produced interest and
dividend income of $23.0 million as compared with $22.3 million in 1994. The
investment portfolio and the sale of loans generated net gains on sales,
redemptions and the marking of certain securities to market of $327,000 in 1995
as compared to net losses of $234,000 in 1994. For additional information on
investments, see Notes 1 and 3 of Notes to the "Consolidated Financial
Statements" and Item 7, "Management's Discussion and Analysis -- Results of
Operations -- Financial Condition -- Investments."

DEPOSITS AND OTHER SOURCES OF FUNDS

The Banks' major sources of funds are deposits, borrowings, principal
payments on loans and mortgage-backed securities, and maturities of investments.
Borrowings are generally used to fund long-term assets and short-term liquidity
requirements or to manage interest rate risk. Total deposits amounted to $743.2
million at December 31, 1995.

The Bank is a member of the Federal Home Loan Bank of Boston ("FHLB") and
is authorized to borrow funds to meet withdrawals of savings deposits or
expansion of the loan and investment portfolios. These borrowings are subject to
collateral requirements. Borrowing limitations are based on the Bank's total
assets, but may exceed the limitation if necessary to fund withdrawals. As a
FHLB member, the Bank is required to hold FHLB stock equal to at least 1% of
residential mortgages or 5% of outstanding FHLB advances, whichever is higher.
The Bank also has available various other sources of funds, including secured
borrowings, federal funds lines of credit from commercial banks and reverse
repurchase agreements from brokerage firms, FHLMC and FNMA. The Bank may also
obtain funds from the Federal Reserve Bank of Boston by pledging certain assets.
At December 31, 1995, total borrowings outstanding from these sources amounted
to $272.6 million.

For additional information concerning the composition and maturity of
deposits and borrowings, see Notes 9, 10 and 11 of Notes to the "Consolidated
Financial Statements" and Item 7, "Management's Discussion and Analysis --
Results of Operations -- Financial Condition -- Asset and Liability Management
- -- Liquidity -- Capital Resources."

5
<PAGE> 6
OTHER SERVICES

Investment Services. The Bank makes investment and brokerage services
available to its customers by leasing lobby space to Liberty Securities
Corporation. Two fully licensed brokers of Liberty Securities located at the
Bank's headquarters are available for consultation on investment opportunities,
including mutual funds, municipal bonds, government-backed securities and
annuities. The Bank received income of approximately $101,000 from these
services in 1995.

COMPETITION

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

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

SUPERVISION AND REGULATION

The Company and the Banks are heavily regulated. As a multi-bank holding
company, Andover is supervised by the Board of Governors of the Federal Reserve
System ("FRB") and it is also subject to the jurisdiction of the Massachusets
Board of Bank Incorporation. As a Massachusetts-chartered savings bank, the Bank
is subject to regulation and supervision by the FDIC and the Massachusetts
Commissioner of Banks (the "Commissioner"). As a New Hampshire-chartered
guaranty savings bank, ABNH is subject to regulation and supervision of the FDIC
and the New Hampshire Commissioner of Banks.

EMPLOYEES

At December 31, 1995, Andover had 243 full-time equivalent employees. None
of the employees of Andover are represented by a collective bargaining group and
management considers relations with its employees to be good.

SUBSIDIARIES

Andover has two direct subsidiaries, the Bank and ABNH. The Bank has seven
wholly-owned subsidiaries. Four of its subsidiaries were organized to hold real
property acquired by the Bank by foreclosure or acceptances of deeds in lieu of
foreclosure. Two other subsidiaries were set up as Massachusetts security
corporations to take advantage of more beneficial state tax rates. The seventh
subsidiary (ASB Development Corp.) holds title to a portion of Andover's main
office, the loan operation building and to other income producing property. A
subsidiary of ASB Development Corp. holds real estate property that comprises a
portion of Andover's main office location. ABNH currently has no subsidiaries.

6
<PAGE> 7
ITEM 2. PROPERTIES

Andover conducts its business from its main office and other properties
listed below, all of which are considered to be in good condition and adequate
for the purposes for which they are used. Andover also serves customers through
its affiliation with three Automatic Teller Machine ("ATM") networks: NYCE
24(R), EXCHANGE(R) and CIRRUS(R) with over 80,000 ATM locations worldwide. The
following table sets forth certain information relating to bank premises owned
or used by Andover in conducting its business.

<TABLE>
<CAPTION>
OWNED OR
LOCATION LEASED
-------- --------
<S> <C>
Andover Bank
Main Office:
Andover
61 Main Street........................................................................... Owned
31-45 Main Street-Annex.................................................................. Owned
11 Chestnut Street....................................................................... Owned

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

Methuen
547 Broadway............................................................................. Owned
91 Pleasant Valley Street (1)............................................................ Owned
228 Haverhill Street..................................................................... Owned

North Andover
108 Main Street.......................................................................... Owned

Tewksbury
995 Main Street.......................................................................... Owned
2171 Main Street (2)..................................................................... Leased

Andover
159 River Road........................................................................... Owned

Andover Bank NH
Main Office:
Salem
130 Main Street (3)...................................................................... Leased
</TABLE>
- -------------------
(1) Land is held under a ground lease which expires December 1, 1996, with
renewal options for an additional 79 years.

(2) Lease expires January 31, 1999, with renewal options for an additional five
years.

(3) Lease expires July 31, 1997, with renewal options for an additional
six years.

ITEM 3. LEGAL PROCEEDINGS

Andover is involved in various legal proceedings incidental to its
business, none of which is believed by management to be material to the
financial condition of Andover.

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

None.

7
<PAGE> 8
PART II

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

STOCK PRICES AND DIVIDENDS

Andover's Common Stock trades on the National Market tier of The Nasdaq
Stock Market(sm) under the symbol: ANDB. On March 1, 1996, there were
approximately 2,653 holders of record of the 4,239,571 shares of Andover Common
Stock outstanding.

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

<TABLE>
<CAPTION>
PRICE
----- DIVIDENDS
QUARTER ENDED HIGH LOW PER SHARE
------------- ---- --- ---------
<S> <C> <C> <C>
1994

March 31, 1994........................... $19.625 $14.875 $.10
June 30, 1994............................ 21.75 16.75 .10
September 30, 1994....................... 20.75 17.125 .10
December 31, 1994........................ 17.375 13.50 .10

1995

March 31, 1995........................... $18.875 $14.25 $.10
June 30, 1995............................ 19.875 16.625 .10
September 30, 1995....................... 22.625 18.375 .12
December 31, 1995........................ 23.25 20.625 .12
</TABLE>

The payment of dividends by Andover is subject to the discretion of
Andover's Board of Directors. Holding companies such as Andover engage in no
business other than acting as the holding company of their subsidiaries. The
only funds available to Andover for the payment of dividends are cash and cash
equivalents held at the holding company level, dividends paid by the Banks to
Andover, and borrowings. ABNH will be severely limited in its ability to pay
dividends during its initial years of operation. At December 31, 1995, Andover
held $1.6 million in cash and interest-bearing deposits at the holding company
level.

Dividend payments totalled $1.9 million in 1995 and $1.7 million in 1994.
On January 18, 1996, a dividend of $.12 per share was declared, payable on
February 12, 1996. See Note 13 to the "Consolidated Financial Statements."

8
<PAGE> 9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......................... $1,110,847 $1,058,672 $831,908 $784,284 $659,598
Total loans.......................... 768,598 645,037 456,813 384,965 364,074
Allowance for loan losses............ 11,665 12,343 13,392 16,054 22,573
Investments(1)....................... 285,232 352,685 294,969 292,825 197,371
Assets held for sale................. 5,162 2,507 32,280 50,946 49,061
Deposits............................. 743,205 727,858 558,773 539,765 523,672
Borrowed funds....................... 272,626 251,185 197,637 178,226 78,175
Stockholders' equity................. 85,165 72,522 70,885 61,718 53,808
Non-performing assets................ 21,368 25,348 27,930 42,913 70,285
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and dividend income .......... $ 76,886 $ 63,585 $ 52,531 $ 51,710 $ 52,727
Interest expense ...................... 44,552 33,421 26,034 28,262 35,920
-------- ---------- ---------- -------- --------
Net interest and dividend income ...... 32,334 30,164 26,497 23,448 16,807
Provision for loan losses ............. 1,295 -- -- 750 33,250
Net gains (losses) from sales of assets
held for sale, investments available
for sale and held for investment (1) 327 (234) 396 2,729 206
Losses on real estate operations ...... (2,003) (2,617) (4,547) (10,381) (13,798)
Other income .......................... 5,469 4,039 2,885 4,470 3,544
Merger expense ........................ 1,000 -- -- -- --
Non-interest expense .................. 18,860 17,528 15,224 14,615 15,823
-------- ---------- ---------- -------- --------
Income (loss) before income
tax expense (benefit) ............. 14,972 13,824 10,007 4,901 (42,314)
Income tax expense (benefit) .......... 5,634 4,781 2,449 (3,009) (10,321)
-------- ---------- ---------- -------- --------
Net income (loss) ..................... $ 9,338 $ 9,043 $ 7,558 $ 7,910 $(31,993)
======== ========== ========== ======== ========
PER SHARE DATA:
Net income (loss) ..................... $ 2.22 $ 2.16 $ 1.84 $ 1.93 $ (7.81)
Dividends declared .................... 0.44 0.40 0.15 0.00 0.00
Book value at end of period ........... 20.10 17.23 17.09 15.06 13.13
Book value excluding SFAS No. 115 ..... 20.05 18.33 16.63 15.06 13.13
SELECTED FINANCIAL RATIOS:
Return on average assets .............. 0.87% 0.94% 0.96% 1.12% (4.98)%
Return on average equity (2) .......... 11.51 12.36 11.60 13.93 (46.93)
Average equity as a percentage
of average assets (2) .............. 7.59 7.57 8.30 8.03 10.62
Dividend payout ratio ................. 19.82 18.52 8.15 N/A N/A
Weighted average interest rate spread . 2.71 2.91 3.20 3.17 2.08
Net yield on average earning assets .. 3.14 3.26 3.56 3.53 2.76
</TABLE>
- ------------------------
(1) Includes investment securities, mortgage-backed securities and short-term
investments, both available for sale and held to maturity.

(2) Excludes the effect of SFAS No. 115.

9
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

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

The following is a discussion and analysis of the Company's consolidated
results of operations for the last three years and its financial condition at
the end of fiscal 1995 and 1994. In order to understand this section in context,
it should be read in conjunction with the Consolidated Financial Statements and
accompanying footnotes.

RESULTS OF OPERATIONS

Andover generated net income of $9.3 million or $2.22 per share, $9.0
million or $2.16 per share and $7.6 million or $1.84 per share in 1995, 1994 and
1993, respectively. Andover's return on average assets decreased to 0.87% in
1995 compared to 0.94% in 1994 and 0.96% in 1993. Return on average
stockholders' equity decreased to 11.51% in 1995 compared to 12.36% in 1994 and
11.60% in 1993. The financial performance in 1995 was negatively impacted by a
pre-tax charge to earnings of $1.0 million taken in connection with the failed
acquisition of Finest Financial Corp., the parent company of Pelham Bank and
Trust Company. Operating results in 1994 were positively impacted by a rise in
earning assets resulting from the acquisition of Community, partially offset by
an increased effective income tax rate as compared to 1993. The declining
economy and real estate markets led to high levels of non-performing assets
during 1990 through 1992; non-performing assets were 1.9%, 2.4% and 3.4% of
total assets at December 31, 1995, 1994 and 1993, respectively. While progress
continued to be made during 1995 in reducing non-performing assets, a provision
for loan losses in the amount of $1.3 million was recorded. The continued
progress in reducing non-performing assets and changing risk characteristics of
the loan portfolio led to no provision for loan losses recorded in 1994 and
1993. Additionally, losses on real estate operations negatively impacted
earnings and totalled $2.0 million, $2.6 million and $4.5 million in 1995, 1994
and 1993, respectively.

Net Interest and Dividend Income. Net interest and dividend income was
$32.3 million in 1995, up from $30.2 million in 1994 and $26.5 million in 1993.
Net interest income increased $2.2 million during 1995 as a result of higher
average earning asset volumes. Market interest rates have been fairly volatile
over the past four years. Interest rates increased dramatically during 1994
after two years of historically low levels and peaked in the fourth quarter of
1994. During 1995, market interest rates decreased from the levels experienced
in 1994, although they remained at levels above those experienced in 1993 and
1992. While interest rates have declined during 1995, the rates paid and yields
earned have both increased during the year due to the lagged nature of many of
the Company's assets and liabilities. This combination led to an increase of 60
basis points in the yield on average earning assets during 1995 to 7.47% while
the rate paid on average interest-bearing liabilities increased 80 basis points
to 4.76%. The net impact of these increases led to a decline of 12 basis points
on the net yield on earning assets during 1995 to 3.14% from 3.26% in 1994. The
increase in net interest and dividend income in 1994 over 1993 of $3.7 million
was primarily attributable to the increased average earning asset volumes,
partially offset by a declining yield on those assets. The decrease yield of 19
basis points during 1994 to 6.87% in light of the increased interest rate
environment is due to large volumes of fixed rate assets originated in prior
years when rates were lower as well as the time delay in the repricing of the
adjustable rate assets. There was a slight increase in the rate paid on
liabilities during 1994, totalling 10 basis points to an overall rate of 3.96%.
The combination of these two factors led to a 30 basis point decline in the net
yield on earning assets during 1994 to 3.26%. The amount of foregone interest
income from nonaccruing and restructured loans totalled $1.0 million in 1995,
$1.1 million in 1994 and $883,000 in 1993.

10
<PAGE> 11
In 1995, average earning assets increased 11.3% to $1,029.6 million, due to
an increase in average loans resulting from retained loan originations as well
as loan purchases. In 1994, average earning assets increased 24.3% to $924.9
million from 1993's level of $743.9 million. This increase is due to the growth
strategy of the Company to increase the net interest margin via the acquisition
of Community as well as internal growth in loans and investments.

Total average loans increased $101.7 million during 1995 primarily due to
retained loan originations and whole loan purchases and total average loans
increased $136.5 million during 1994 primarily due to the Community acquisition.
The yield on real estate loans increased 68 basis points during 1995 to 7.76%
while dropping 18 basis points in 1994 to 7.08%. The reasons for the yield on
real estate loans going in an inverse direction with market interest rates is
once again due to the lag in the repricing of the variable rate loans as well as
the repricing limitation of only 2% during one year. The yield on consumer loans
increased 113 basis points during 1995 to 9.14% and 41 basis points during 1994
to 8.01%. The yield on commercial loans increased 327 basis points during 1995
to 11.21% and 116 basis points in 1994 to 7.94%. Consumer and commercial loans
were affected by the increase in the prime rate during the past two years.
Commercial loans were also favorably impacted by a reduction in nonaccrual loans
and higher amortized fee income during 1995.

The volatility in the interest rates has also impacted the yields earned on
the investment portfolio. The yield on short-term investments increased 184
basis points during 1995 to 5.81% and 83 basis points in 1994 to 3.97%. The
yields earned on investment securities decreased slightly in 1995 to 6.24% while
also dropping 136 basis points in 1994 to 6.25%. The yield on mortgage-backed
securities increased 23 basis points during 1995 to 6.71% and decreased slightly
in 1994 to 6.48%.

The rate paid on deposits increased 80 basis points in 1995 to 4.25% and 11
basis points in 1994 to 3.45%. Core deposits, which include NOW account, savings
and money market accounts, continued to decrease in both of the past two years
as customers continue to shift into higher paying term certificates of deposits.
While the Company was able to keep the rates paid on the core deposits fairly
low overall during 1995, there was an increase in the rate paid as compared to a
decrease in the core deposit rates in 1994. Certificates of deposit increased
$88.3 million and the rate paid increased 85 basis points during 1995 while also
increasing $96.0 million and 22 basis points, respectively, in 1994.

In order to fund the growth in average earning assets, the Company has
continued its reliance on borrowed funds as an alternative source of funds.
During 1995, the average balance on borrowed funds increased $23.7 million and
the rate paid increased 79 basis points to 6.16% while in 1994, average balances
increased $40.6 million and the rate paid increased 11 basis points to 5.37%.

Overall, the continued compression in the margins over the past two years
have led to an interest rate spread of 2.71% in 1995, down 20 basis points from
2.91% in 1994. The decline in the spread in 1994 totalled 29 basis points.

11
<PAGE> 12
The following table presents an analysis of the average yields earned and
rates paid for the years indicated.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ---------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ---- ---- ------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments ....... $ 10,775 $ 626 5.81% $ 5,220 $ 207 3.97% $ 7,740 $ 243 3.14%
Investment securities (1) .... 112,342 7,009 6.24 102,458 6,406 6.25 69,482 5,286 7.61
Mortgage-backed securities (1) 229,111 15,375 6.71 241,574 15,656 6.48 227,492 15,043 6.61
----------- ------- -------- ------- ----------- --------
Total investments ........... 352,228 23,010 6.53 349,252 22,269 6.38 304,714 20,572 6.75
----------- ------- -------- ------- ----------- --------
Real estate loans(1) (2) ..... 609,485 47,313 7.76 513,481 36,345 7.08 376,453 27,338 7.26
Consumer loans(2) ............ 50,606 4,625 9.14 48,870 3,915 8.01 45,252 3,437 7.60
Commercial loans(2) .......... 17,295 1,938 11.21 13,292 1,056 7.94 17,453 1,184 6.78
----------- ------- -------- ------- ----------- --------
Total loans ................. 677,386 53,876 7.95 575,643 41,316 7.18 439,158 31,959 7.28
----------- ------- -------- ------- ----------- --------
Total interest-earning assets 1,029,614 76,886 7.47% 924,895 63,585 6.87% 743,872 52,531 7.06%
------- ------- --------

Allowance for loan losses ...... (11,749) (13,826) (14,677)
Other real estate owned ........ 6,720 12,014 18,844
Other assets ................... 44,336 43,139 36,707
----------- -------- -----------

Total assets ................ $ 1,068,921 $966,222 $ 784,746
=========== ======== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts.............. $ 63,049 $ 711 1.13% $ 61,518 $ 725 1.18% $ 51,612 $ 807 1.56%
Regular savings accounts.. 71,659 1,554 2.17 76,357 1,512 1.98 61,716 1,368 2.22
Money market deposit
accounts................ 133,989 3,548 2.65 150,557 3,460 2.30 141,376 3,562 2.52
Certificates of deposit... 419,385 23,433 5.59 331,076 15,677 4.74 235,086 10,615 4.52
----------- ------- -------- ------- ----------- --------
Total interest-bearing
deposits.............. 688,082 29,246 4.25 619,508 21,374 3.45 489,790 16,352 3.34
----------- ------- -------- ------- ----------- --------
Borrowed funds :
Reverse repurchase agreements 14,798 897 6.06 25,228 1,089 4.32 15,893 519 3.27
Notes payable............. 233,489 14,409 6.17 199,310 10,958 5.50 168,051 9,163 5.45
----------- ------- -------- ------- ----------- --------
Total borrowed funds..... 248,287 15,306 6.16 224,538 12,047 5.37 183,944 9,682 5.26
----------- ------- -------- ------- ----------- --------
Total interest-bearing
liabilities.......... 936,369 44,552 4.76% 844,046 33,421 3.96% 673,734 26,034 3.86%
------- ------- --------

Demand deposits............. 45,328 43,592 42,373
Other liabilities......... 6,111 5,410 3,509
----------- -------- -----------
Total liabilities........ 987,808 893,048 719,616
----------- -------- -----------
Stockholders' equity........ 81,113 73,174 65,130
----------- -------- -----------
Total liabilities and stock-
holders' equity....... $ 1,068,921 $966,222 $ 784,746
=========== ======== ===========
Net interest income $32,334 $30,164 $ 26,497
======= ======= ========

Interest rate spread 2.71% 2.91% 3.20%
==== ==== ====
Net yield on earning assets 3.14% 3.26% 3.56%
==== ==== ====
</TABLE>

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

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

12
<PAGE> 13
Rate/Volume Analysis. The following table shows the changes in interest
income and interest expense caused by changes in the volume of interest earning
assets and interest bearing liabilities, and changes in interest rates. The
change attributable to a mix of volume and rate has been allocated
proportionally to the change due to volume and the change due to rate.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------------------ -------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
---------------------- -----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and Dividend Income
Loans:
Real estate ......................... $ 7,228 $ 3,740 $ 10,968 $ 9,715 $ (708) $ 9,007
Consumer ............................ 143 567 710 284 194 478
Commercial .......................... 373 509 882 (310) 182 (128)
-------- -------- -------- -------- -------- --------
Total interest on loans ........... 7,744 4,816 12,560 9,689 (332) 9,357
-------- -------- -------- -------- -------- --------

Investments:
Short-term investments ............... 292 127 419 (91) 55 (36)
Investment securities ................ 617 (14) 603 2,184 (1,064) 1,120
Mortgage-backed securities ........... (825) 544 (281) 917 (304) 613
-------- -------- -------- -------- -------- --------
Total interest and dividends on
investments ...................... 84 657 741 3,010 (1,313) 1,697
-------- -------- -------- -------- -------- --------
Total interest and dividend
income ........................... 7,828 5,473 13,301 12,699 (1,645) 11,054
-------- -------- -------- -------- -------- --------

Interest Expense
Savings deposits ..................... (405) 521 116 711 (751) (40)
Time certificates .................... 4,631 3,125 7,756 4,523 539 5,062
Reverse repurchase agreements ........ (542) 350 (192) 368 202 570
Notes payable ........................ 2,013 1,438 3,451 1,718 77 1,795
-------- -------- -------- -------- -------- --------
Total interest expense ............. 5,697 5,434 11,131 7,320 67 7,387
-------- -------- -------- -------- -------- --------

Net increase (decrease) in net interest
and dividend income ................ $ 2,131 $ 39 $ 2,170 $ 5,379 $ (1,712) $ 3,667
======== ======== ======== ======== ======== ========
</TABLE>

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

13
<PAGE> 14
The provision for loan losses in 1995 was $1.3 million. There was no
provision for loan losses in 1994 and 1993. Net charge-offs amounted to $2.0
million in 1995 compared to $2.8 million in 1994 and $2.7 million in 1993. Among
the factors used to determine that a provision was necessary in 1995 were the
level of nonaccrual and restructured loans, delinquencies and charge-offs.
Additionally, growth in the loan portfolio of over 19% contributed to the need
for a provision in 1995. The contributing factors that led to management's
conclusion that no provision for loan losses was needed in 1994 and 1993 were
the decline in the risk characteristics of loans over the prior two years and
the resulting allowance coverage as a percentage of nonaccruing loans.
Additionally, $505,000 in loan loss recoveries and $347,000 in interest payments
applied as principal reductions on nonaccrual loans contributed to management's
assessment of the adequacy of the allowance for loan losses in 1994.

While management believes it has been prudent in its analysis of the
allowance for loan losses and in estimating the net fair values of other real
estate owned, management is unable to predict the ultimate course of the economy
or the extent of its impact on the Company's financial condition. See "Financial
Condition -- Risk Elements" and Notes 4 and 6 to the "Consolidated Financial
Statements."

Non-interest Income (Loss). The Company recorded income from non-interest
sources of $3.8 million in 1995 and $1.2 million in 1994, as compared to a net
loss from non-interest sources of $1.3 million in 1993. The increases of $2.6
million in 1995 and $2.5 million in 1994 were primarily due to a reduction in
the losses on real estate operations and increases in mortgage banking income.

Net gains from sales and redemptions of investments totalled $272,000 in
1995, $236,000 in 1994 and $245,000 in 1993. See "Financial Condition --
Investments" and Notes 1 and 3 to the "Consolidated Financial Statements."

The Company recorded net gains on assets held for sale of $55,000 in 1995
and $151,000 in 1993 as compared to net losses of $470,000 in 1994. The gains in
1995 were primarily due to a reduction of the unrealized loss on loans held for
sale whose fair value was below amortized cost at December 31, 1994. The losses
in 1994 were primarily the result of selling mortgage-backed securities in a
rising interest rate environment. Included in 1994 was a realized loss of
$122,000 on the transfer of loans originally held for sale to the loan portfolio
as well as an unrealized loss based on the fair value of loans held for sale as
of December 31, 1994. The gains in 1993 were primarily due to the ability of the
Company to sell higher yielding mortgage-backed securities in an environment
where interest rates were falling offset by a provision of $800,000 taken as a
result of accelerated prepayments and estimated future prepayments on loans
serviced for others. See "Financial Condition -- Investments" and Notes 1 and 2
to the "Consolidated Financial Statements."

Andover may incur gains and losses on the sale of the loans that it
originates. These loans are generally securitized prior to sale in the form of
mortgage-backed securities which are guaranteed by a government agency and are
then held for sale. Because loans held for sale are stated at the lower of cost
or market value and mortgage-backed securities held for sale are stated at fair
value, periods of rising interest rates cause decreased values of loans and
mortgage-backed securities held for sale, resulting in a charge to income. The
Company frequently enters into forward delivery contracts to reduce exposure to
this risk from rising interest rates. Forward delivery contracts may, however,
increase exposure to the risk from declining interest rates if sufficient loans
or mortgage-backed securities held for sale bearing interest rates specified by
the contracts are not available to meet the delivery schedules under the
contracts. See Note 18 to the "Consolidated Financial Statements."

Losses on real estate operations totalled $2.0 million in 1995, $2.6
million in 1994 and $4.5 million in 1993. Real estate operations consist of the
provision for the valuation allowance, operating and administrative costs of
maintaining other real estate owned and gains or losses on sales of properties.
The Company accounts for other real estate owned at the lower of cost or
estimated net fair value. Declines in value subsequent to foreclosure or
substantive repossession result in a charge to the valuation allowance.

14
<PAGE> 15
Replenishing the valuation allowance caused by charge-offs taken as a
result of declines in value resulted in a charge of $750,000, $1.4 million and
$1.9 million to real estate operations in 1995, 1994 and 1993, respectively.
Deterioration in the New England real estate market during 1991 through 1993 led
to high levels of other real estate owned and corresponding administrative
costs. Gains on sales of other real estate owned totalled $582,000 in 1995, $1.4
million in 1994 and $128,000 in 1993 reflecting, in part, the appropriate
carrying values for the properties sold during the year. The costs of
foreclosing on loans, as well as the administrative costs of maintaining the
non-performing assets, correspond with the volume of problem assets and totalled
$2.0 million in 1995, $3.0 million in 1994 and $3.2 million in 1993. These costs
will continue to be incurred until the level of non-performing assets
significantly decreases. See "Financial Condition -- Risk Elements" and Note 6
to the "Consolidated Financial Statements."

Mortgage banking income represents the gross servicing fee income less
amortization of capitalized excess mortgage servicing rights. Mortgage banking
income totalled $2.4 million in 1995, $1.4 million in 1994 and $648,000 in 1993.
The increased income in each of the years was due to a reduction in the
amortization of the excess mortgage servicing rights as well as an increase in
the total loans serviced for others. As a servicer for investors, the Company
generally retains a fee out of the interest paid by the borrower. The table
below summarizes the Company's results from servicing loans for investors.

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Gross servicing income ............................ $ 2,611 $ 2,207 $ 2,498
Amortization included in mortgage banking income... (240) (765) (1,850)
Amortization included in mortgage banking expense.. (602) (32) --
--------- --------- ---------
Net loan servicing revenue ........................ $ 1,769 $ 1,410 $ 648
========= ========= =========

Average loans serviced for investors .............. $ 628,450 $ 458,361 $ 483,351
Year-end loans serviced for investors ............. $ 780,356 $ 513,227 $ 458,159
</TABLE>

Excluded from the table above are provisions for accelerated prepayments
taken in 1993 that were included in net gains on assets held for sale due to the
high level of refinancing activity and totalled $800,000. During 1995 and 1994,
the Company purchased mortgage servicing rights to $303.6 million and $82.1
million, respectively, in residential first mortgage loans. The Company intends
to continue purchasing mortgage servicing to increase the use of its existing
servicing capacity and increase loan service revenue. The Company also expects
to continue selling mortgages in the secondary market and that servicing income
related to this activity will continue for the forseeable future. See Notes 1
and 5 to the "Consolidated Financial Statements."

Other income totalled $3.1 million, $2.6 million, and $2.2 million in 1995,
1994 and 1993, respectively, and was derived primarily from customer service
charges and fees. Deposit account service charges representing the largest
component of such other income, totalled $1.6 million in 1995, $1.5 million in
1994 and $1.3 million in 1993. The increase in 1995 was due to a service charge
increase while the increase in 1994 resulted from an increase in the total
number of deposit accounts resulting from the acquisition of Community. Loan
late charges and other fees have increased over the past two years in relation
to the increase in total loans. In 1995, the Company recognized gains of
$220,000 on the sale of a non-marketable security, $89,000 on the sale of a
former branch facility and another $78,000 on the sale of the student loan
portfolio in the first quarter of the year. Other income which has remained
relatively flat over the past three years includes income from Liberty
Securities, rental income from tenants, safe deposit and ATM fees and other
miscellaneous charges. See Note 14 to the "Consolidated Financial Statements."

Non-interest Expense. Non-interest expenses increased $2.3 million or 13.3%
to $19.9 million in 1995. Non- interest expenses increased $2.3 million or 15.1%
to $17.5 million in 1994. The increased in 1995 was primarily due to the $1.0
million charge taken in connection with the failed acquisition of Finest
Financial Corp. as well as costs associated with operating a larger institution.
The increase in 1994 resulted from the acquisition of Community and thus higher
salaries and overhead costs.

15
<PAGE> 16
Salaries and employee benefits increased $578,000 to $9.6 million in 1995
and increased $1.6 million in 1994 to $9.0 million. The increase in 1995 was the
result of a higher head count, opening the new bank subsidiary and merit
increases. The increase in 1994 was primarily due to the acquisition of
Community and increased headcount needed in running a larger institution.
Additionally in 1994, the Company enhanced various benefit programs such as the
ESOP, 401K employer contribution and continuing education that resulted in an
additional $223,000 charge to earnings. See Note 15 to the "Consolidated
Financial Statements."

Office occupancy and equipment increased $157,000 to $2.3 million in 1995
and increased $286,000 in 1994 to $2.2 million. The primary reason for the
increase in 1995 and 1994 was the improvement of technology and computer systems
throughout the organization, resulting in higher depreciation expense. The
Company also accelerated depreciation of obsolete equipment and computers.
Additionally, in 1994, the Bank incurred a charge to earnings that totalled
$167,000 for the early termination of a lease as well as increased costs for two
additional branches resulting from the acquisition of Community. See Note 7 to
the "Consolidated Financial Statements."

Data processing expenses totalled $1.2 million in 1995, $966,000 in 1994
and $887,000 in 1993. Data processing expenses increased $235,000 in 1995 due to
a higher loan and deposit base resulting from the acquisition of Community as
well as from the purchase of mortgage loan servicing. Data processing expenses
increased 8.9% in 1994, primarily due to operating a larger institution.

Mortgage banking expenses totalled $913,000 in 1995, $415,000 in 1994 and
$454,000 in 1993. These expenses include amortization of the purchased servicing
rights, as well costs associated with the servicing portfolio for outside
investors. The increase of $498,000 in 1995 was due primarily to the increased
amortization of the purchased servicing rights. The modest decrease in 1994 was
due to a reduction in the costs associated with the servicing portfolio.

Deposit insurance premiums were $892,000, $1.6 million and $1.5 million
1995, 1994 and 1993, respectively. Deposit insurance premiums decreased $719,000
in 1995 due primarily to the premium refund from the FDIC in the third quarter
in the amount of $471,000. Additionally, the assessment rate dropped during the
latter half of 1995 resulting in overall cost reductions. Deposit insurance
premiums increased $136,000 in 1994 due to a higher deposit base. The Banks are
in the lowest risk category in calculating FDIC insurance premiums.

Marketing expenses totalled $847,000 in 1995, $677,000 in 1994 and $738,000
in 1993. Marketing expenses increased $170,000 in 1995 due to promotions related
to the opening of Andover Bank NH as well as a number of other discretionary
promotions for various retail products. The decrease in 1994 was due to a
reduction in the marketing of various residential loan products and promotions.

Professional fees, including corporate legal expense and accounting and
audit expenses, totalled $681,000 in 1995, $648,000 in 1994 and $660,000 in
1993. The modest increase in 1995 was due primarily to costs related to the
opening of ABNH.

The merger expense of $1.0 million in 1995 was related to the costs
associated with the terminated merger agreement with Finest Financial Corp. in
the second quarter. This non-recurring charge included costs incurred by the
investment advisors and the legal and audit professionals. See Note 19 to the
"Consolidated Financial Statements."

Other operating expenses totalled $2.4 million in 1995, $2.0 million in
1994 and $1.7 million in 1993. The increases of $380,000 in 1995 and $302,000 in
1994 are both due to running a larger organization with a new bank added in 1995
and two branches acquired in 1994. The consecutive increases result from higher
postage expenses, office supplies and printing costs as well as telephone costs
and directors fees.

16
<PAGE> 17
Federal and State Income Tax Expense. The Company recorded tax expenses of
$5.6 million, $4.8 million and $2.4 million in 1995, 1994 and 1993,
respectively. Recognition of deferred tax assets and liabilities is based on the
expected future tax consequences of temporary differences between the financial
reporting and tax basis of the Company's assets and liabilities. Measurement of
deferred tax assets and liabilities is based upon the provision of enacted tax
laws and the effects of future changes in tax laws or rates.

Management believes the existing net deductible temporary differences that
give rise to the net deferred income tax asset will reverse in periods in which
the Company generates net taxable income. For the years ending December 31,
1995, 1994 and, 1993, the Company generated taxable income of approximately $3.8
million, $3.4 million and $4.5 million, respectively. Taxable income differs
from pretax book income primarily as a result of loan losses and provision for
losses on other real estate owned being recognized in a different period than
for book income. The Company recorded a reduction of the valuation allowance due
to increased recoverable federal income taxes of $600,000 in 1995, $1.0 million
in 1994 and $1.5 million in 1993.

At December 31, 1995, the net deferred tax asset is supported by
recoverable income taxes of approximately $3.1 million. The total income tax
expense has been increased to reflect the adjustment to the deferred tax assets
for the tax impact of the Massachusetts tax rate reduction as part of the Bank
Tax Reform Law signed by the Governor of Massachusetts on July 27, 1995.
Management believes that the net deferred income tax asset at December 31, 1995
will be realized based upon the significant reduction in the level of
non-performing assets over the past several years. It is management's belief
that the valuation allowance is adequate to reduce the total deferred tax asset
to an amount that is more likely than not to be realized. It should be noted,
however, that factors beyond management's control, such as the general state of
the economy and real estate values, can affect future levels of taxable income
and that no assurance can be given that sufficient taxable income will be
generated to fully absorb gross deductible temporary differences. See Note 12 to
the "Consolidated Financial Statements."

FINANCIAL CONDITION

Total assets increased $52.2 million, or 4.9%, to $1,110.8 million at
December 31, 1995. The growth in total assets was primarily due to an increase
in total loans of $123.6 million, offset by a decrease in the investment
portfolio of $67.5 million. Total assets at December 31, 1994 amounted to
$1,058.7 million, an increase of $226.8 million or 27.3% from $831.9 million at
December 31, 1993, primarily resulting from the acquisition of $115.8 million in
total assets of Community during the year.

Loans. Total loans at December 31, 1995, prior to the allowance for loan
losses, amounted to $768.6 million compared with $645.0 million at December 31,
1994, an increase of $123.6 million or 19.2% primarily due to the purchase of
$59.9 million in residential and commercial whole loans. At December 31, 1995,
68.5% of Andover's total loan portfolio consisted of loans with adjustable
rates.

17
<PAGE> 18
The following table shows the composition of the Company's loan portfolio
at the dates indicated. The balances shown are net of unadvanced funds and
deferred loan origination fees and costs.

<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential ............. $ 558,231 72.6% $ 452,708 70.2% $ 297,779 65.2% $ 229,961 59.7% $ 168,962 46.4%
Commercial .............. 121,909 15.9 108,725 16.8 85,339 18.6 79,560 20.7 90,877 25.0
Construction and land ... 18,138 2.4 18,021 2.8 13,991 3.1 11,293 2.9 20,229 5.5
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total real estate loans 698,278 90.9 579,454 89.8 397,109 86.9 320,814 83.3 280,068 76.9
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----

Consumer loans:
Home improvement, second
mortgage and home equity
line of credit ......... 43,463 5.6 42,602 6.6 39,338 8.6 39,071 10.2 45,123 12.4
Personal ................ 3,369 0.4 2,751 0.4 2,073 0.5 2,762 0.7 4,418 1.2
Guaranteed education .... 2,149 0.3 4,759 0.8 2,847 0.6 1,948 0.5 1,805 0.5
Collateral .............. 2,189 0.3 2,052 0.3 1,504 0.3 1,812 0.5 2,008 0.6
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total consumer loans .. 51,170 6.6 52,164 8.1 45,762 10.0 45,593 11.9 53,354 14.7
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----

Commercial loans ......... 19,150 2.5 13,419 2.1 13,942 3.1 18,558 4.8 30,652 8.4
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----

Total loans ........... 768,598 100.0% 645,037 100.0% 456,813 100.0% 384,965 100.0% 364,074 100.0%
--------- ===== --------- ===== --------- ===== --------- ===== --------- =====

Allowance for loan losses (11,665) (12,343) (13,392) (16,054) (22,573)
--------- --------- --------- --------- ---------

Net loans ............. $ 756,933 $ 632,694 $ 443,421 $ 368,911 $ 341,501
========= ========= ========= ========= =========
</TABLE>

Total real estate loans increased $118.8 million in 1995 to $698.3 million
at December 31, 1995, primarily resulting from the purchase of $59.9 million in
real estate whole loans. Origination volumes have also been affected by the
interest rate environment over the past five years and are sensitive to market
rates, particularly in the refinancing arena. As can be determined by the
following table, loan originations were extremely high in the years with the
lowest interest rates. Loan originations dropped in 1995 due to the higher
interest rates existing during most of the year. Residential loan originations
totalled $132.1 million in 1995, $180.4 million in 1994 and $311.1 million in
1993. The originations are not fully reflected in loans outstanding due to the
securitization of residential real estate loans into mortgage-backed securities
held for sale of $20.8 million in 1995, $60.8 million in 1994 and $154.3 million
in 1993 as well as regular amortization and prepayments.

The majority of the Company's residential loans are underwritten to be
eligible for sale in the secondary market. Andover sells most of the eligible
30-year fixed-rate loans it originates. A loan which the Company intends to sell
in the secondary market may be sold directly or converted into mortgage-backed
securities and sold in that form. Residential loans sold either directly or in
the form of mortgage-backed securities amounted to $21.6 million in 1995 and
$60.9 million in 1994, versus $162.1 million in 1993 and $204.4 million in 1992.
The portfolio of residential mortgage loans serviced for others totalled $780.4
million at December 31, 1995, compared to $513.2 million at December 31, 1994
and $458.2 million at December 31, 1993.

18
<PAGE> 19
The following table shows the composition of the Company's loan
originations and loan purchases for the years indicated:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate loans:
Residential fixed rate............................. $ 88,990 $ 83,775 $229,827 $294,346 $122,282
Residential variable rate.......................... 43,138 96,657 81,308 29,393 31,561
-------- -------- -------- -------- --------
Total residential originations.................... 132,128 180,432 311,135 323,739 153,843

Commercial......................................... 17,991 17,745 14,537 6,512 9,024
Construction and land.............................. 31,543 30,498 26,110 16,255 16,899
-------- -------- -------- -------- --------
Total real estate loan originations............... 181,662 228,675 351,782 346,506 179,766
-------- -------- -------- -------- --------

Residential variable rate whole loan purchases..... 56,665 -- -- -- --
Commercial whole loan purchases.................... 3,213 -- -- -- --
-------- -------- -------- -------- --------
Total real estate purchases....................... 59,878 -- -- -- --
-------- -------- -------- -------- --------

Total real estate loan originations and purchases. 241,540 228,675 351,782 346,506 179,766
-------- -------- -------- -------- --------

Consumer loans:

Home equity line of credit......................... 10,350 14,614 22,411 12,560 12,254
Other consumer..................................... 8,022 5,723 2,134 3,589 7,132
-------- -------- -------- -------- --------
Total consumer loans.............................. 18,372 20,337 24,545 16,149 19,386
-------- -------- -------- -------- --------

Commercial loans................................... 16,933 10,437 6,161 8,985 9,941
-------- -------- -------- -------- --------

Total loan originations and purchases............. $276,845 $259,449 $382,488 $371,640 $209,093
======== ======== ======== ======== ========
</TABLE>

Outstanding commercial loans increased in 1995 to $19.2 million at December
31, 1995. Commercial real estate loans increased $13.2 million in 1995 to $121.9
million at December 31, 1995, while construction and land loan balances
increased slightly to $18.1 million in the same period. While originations of
corporate loans, comprised of commercial real estate, commercial, construction
and land loans, are sensitive to the interest rate environment, the capacity for
borrowing and real estate values have a more critical role. During the declining
real estate markets in the early 1990's, commercial real estate and development
loans were particularly hard hit. Origination volume for corporate loans
decreased in 1991 and 1992, corresponding with the declining real estate values.
Origination volume for these loans have increased in each of the past three
years, reflecting the stabilizing values and the Company's interest in corporate
lending. Total originations of corporate loans were $66.5 million in 1995, $58.7
million in 1994 and $46.8 million in 1993.

Loans transferred into real estate owned totalled $3.2 million, $4.4
million and $2.1 million in 1995, 1994 and 1993, respectively. Commercial real
estate, construction and land, and commercial loans involve significant risks
compared with single-family residential mortgage and consumer lending. See Item
1, "Business -- Lending Activities."

Consumer loans outstanding decreased slightly to $51.2 million at December
31, 1995, from $52.2 million at year-end 1994. During the first quarter of 1995,
student loans totalling $5.5 million were sold at a gain of $78,000.
Additionally, originations of consumer loans are also sensitive to changes in
the interest rate environment and have decreased during the past two years to
$18.4 million in 1995.

19
<PAGE> 20
RISK ELEMENTS

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

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans..................................... $11,627 $14,516 $11,531 $15,912 $41,089
Restructured loans.................................... 5,583 2,036 3,279 2,560 264
------- ------- ------- ------- -------
Total non-performing loans....................... 17,210 16,552 14,810 18,472 41,353
Other real estate owned............................... 4,158 8,796 13,120 24,441 28,932
------- ------- ------- ------- -------

Total non-performing assets...................... $21,368 $25,348 $27,930 $42,913 $70,285
======= ======= ======= ======= =======

Total non-performing assets as a
percentage of total assets........................... 1.9% 2.4% 3.4% 5.5% 10.7%
</TABLE>

During 1995, continued progress was made in reducing non-performing assets
with a reduction of $4.0 million or 15.7%. Due to the rising interest rate
environment of 1995, several borrowers had difficulties in meeting their
obligations, therefore, the Bank modified their interest rate, causing an
increase in restructured loans. Andover had experienced a sharp increase in the
level of non-performing assets and a corresponding rise in foregone income, loan
losses and other costs associated with non-performing assets beginning in 1990
due to the deteriorating New England real estate market and economy. Interest
income of approximately $1.6 million would have been recorded in 1995 on
nonaccruing loans if those loans had been on a current basis in accordance with
their original terms. Interest income actually recognized in 1995 on nonaccruing
loans amounted to approximately $118,000. Additionally, another $438,000 in
interest payments were applied as a reduction of the loan balance instead of as
interest income, was received on nonaccruing loans during 1995. Of the $11.6
million in nonaccruing loans at December 31, 1995, $2.7 million are less than 90
days past due but have exhibited some other credit weakness.

The following table shows detailed activity by quarter of nonaccruing loans
and other real estate owned for the quarters ending:

<TABLE>
<CAPTION>
12/31/95 9/30/95 6/30/95 3/31/95
-------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance.................................................. $17,503 $19,234 $21,747 $23,312
Additions.......................................................... 2,447 3,236 2,276 2,254
Sales, restructurings, payments
and other decreases.............................................. (3,429) (4,281) (4,164) (2,949)
Charge-offs and valuation adjustments.............................. (736) (686) (625) (870)
------- ------- ------- -------
Balance at end of quarter.......................................... $15,785 $17,503 $19,234 $21,747
======= ======= ======= =======

<CAPTION>
12/31/94 9/30/94 6/30/94 3/31/94
-------- ------- ------- -------
(IN THOUSANDS)
Beginning balance.................................................. $26,333 $27,935 $24,978 $24,651
Additions.......................................................... 2,116 3,496 3,124 2,749
Additions from Acquired Institution................................ -- -- 5,147 --
Sales, restructurings, payments
and other decreases.............................................. (4,194) (3,212) (3,303) (1,799)
Charge-offs and valuation adjustments.............................. (943) (1,886) (2,011) (623)
------- ------- ------- -------
Balance at end of quarter.......................................... $23,312 $26,333 $27,935 $24,978
======= ======= ======= =======
</TABLE>

20
<PAGE> 21
As noted in the table above, the additions during 1995 were below those
amounts experienced in 1994 while the sales, restructurings, payments and other
decreases during 1995 continued at a strong pace and exceeded the sales of 1994,
resulting in a decrease for the year.

Nonaccruing Loans. Management places loans, regardless of collateral
values, on nonaccrual status when interest is past due 90 days or more. All
previously accrued but uncollected interest is reversed against current period
interest income when a loan is placed on nonaccrual status. When collection
procedures do not bring a loan to performing status, Andover generally
institutes action to foreclose upon the property or to acquire it by deed in
lieu of foreclosure. Loans for which payments are less than 90 days past due are
placed on nonaccrual status where there exists serious doubt as to the ultimate
collectibility of the loan.

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

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential real estate................................. $ 3,037 $ 4,232 $ 2,595 $ 3,878 $ 8,082
Commercial real estate.................................. 7,195 8,004 6,313 9,220 20,329
Construction and land................................... -- 382 483 429 7,102
Commercial.............................................. 1,136 1,381 1,660 1,828 5,065
Consumer................................................ 259 517 480 557 511
------- ------- ------ ------ -------
Total nonaccrual loans................................ $11,627 $14,516 $11,531 $15,912 $41,089
======= ======= ======= ======= =======

Allowance for loan losses............................... $11,665 $12,343 $13,392 $16,054 $22,573
======= ======= ======= ======= =======

Allowance for loan losses as a percentage of
nonaccruing loans.................................... 100.3% 85.0% 116.1% 100.9% 54.9%
Allowance for loan losses as a percentage of
non-performing loans................................. 67.8% 74.6% 90.4% 86.9% 54.6%
Allowance for loan losses as a percentage of total loans 1.5% 1.9% 2.9% 4.2% 6.2%
</TABLE>

During 1995, loans on nonaccrual decreased 19.9% to $11.6 million, spread
among all loan categories. The increase in 1994 was primarily due to the
acquisition of Community. A significant portion of Andover's nonaccruing loans
are secured by mixed-use commercial and multi-family real estate located in
Lawrence, Massachusetts. This city has been especially hard hit with declining
real estate values and increasing vacancies in multi-family investor-owned
properties, which represents the majority of Andover's collateral on troubled
loans in Lawrence. Continued deterioration in this market area will adversely
impact the collectibility of residential and commercial real estate loans and
may result in an increased level of non-performing assets in 1996. At December
31, 1995, approximately $5.8 million of nonaccruing loans, $3.3 million of
restructured loans and $2.3 million of other real estate owned were secured by
residential properties located in Lawrence, of which the largest non-performing
loans include loans to three borrowers totalling $1.5 million, $1.2 million and
$1.1 million, respectively. The amount of accruing loans secured by properties
in Lawrence totalled approximately $49.4 million at December

21
<PAGE> 22
31, 1995. The two largest relationships with borrowers included in the accruing
Lawrence portfolio totalled $1.3 million and $1.2 million, respectively, at
December 31, 1995. Substantially all of the accruing loans at year end in
Lawrence were secured by residential properties.

Restructured Loans. A restructured loan is one for which the Bank has
modified the terms to provide a temporary reduction in the rate of interest and,
in most instances, an extension of payments of principal or interest or both due
to the deterioration in the financial position of the borrowers. Restructured
loans are not returned to performing status until the obligation has performed
for a reasonable period of time, its ultimate collectibility is no longer in
doubt and is at a market rate of interest.

Restructured loans totalled $5.6 million and $2.0 million at December 31,
1995 and 1994, respectively. Interest rate modifications typically do not exceed
one year. The weighted average interest rate on restructured loans as of
December 31, 1995 was 7.00%. Interest income that would have been recognized in
1995 if restructured loans had been performing in accordance with their original
terms was $410,000. The actual amount of interest on these loans that was
recognized in interest income in 1995 was $340,000.

Other Real Estate Owned. Andover's other real estate owned has remained at
rather high levels after rising significantly in 1990 and 1991 due to the
deterioration in the New England real estate market and economy. A valuation
allowance was established in 1991 and represents management's evaluation of
collectibility, prior loss experience, selling costs and quality of the
properties included in other real estate owned.

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

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential real estate................................ $1,131 $1,245 $ 1,522 $ 2,784 $ 3,900
Commercial real estate................................. 572 3,484 5,374 7,954 8,757
Multi-family real estate............................... 1,820 2,405 3,914 9,537 11,499
Construction and land.................................. 1,048 2,377 3,396 5,866 6,776
------ ------ ------- ------- -------
4,571 9,511 14,206 26,141 30,932
Valuation allowance.................................... (413) (715) (1,086) (1,700) (2,000)
------ ------ ------- ------- ------
Total other real estate owned..................... $4,158 $8,796 $13,120 $24,441 $28,932
====== ====== ======= ======= =======
</TABLE>

Substantive repossessions, for which the Bank had not completed legal
transfer of ownership, included in the above table, totalled $384,000 and $2.3
million at December 31, 1995 and 1994, respectively. All other real estate owned
is carried at the lower of the carrying value of the loan or the estimated net
fair value of the property constructively or actually received. Initial
writedowns to net fair value are charged to the allowance for loan losses and
totalled $1.7 million in 1995, $2.8 million in 1994 and $1.1 million in 1993.
Subsequent provisions for losses due to the deterioration in real estate values
are charged to real estate operations and totalled $750,000 in 1995, $1.4
million in 1994 and $1.9 million in 1993. Gains of $582,000, $1.4 million and
$128,000 were recognized on sales of $8.0 million, $10.1 million and $12.9
million in other real estate owned in 1995, 1994 and 1993, respectively. Of the
properties included in other real estate owned at December 31, 1995, Andover had
outstanding purchase and sales agreements or firm offers of $1.2 million on
properties with a carrying value approximating that amount. There is no
assurance such sales will be consummated.

22
<PAGE> 23
Due to the level of nonaccrual loans at December 31, 1995, continued
foreclosures are likely to occur in 1996 resulting in additional foreclosure and
related operating expenses. The impact of existing non-performing assets on
future interest income will be largely dependent upon converting these assets to
earning status, either through a return to performing status or through
foreclosure and subsequent disposition of the property, which remain somewhat
limited in the current real estate market. It is expected that the level of
foreclosures and related expenses will continue to adversely impact earnings in
1996.

There are no binding commitments for capital expenditures on other real
estate owned at December 31, 1995. See Item 1, "Business -- Risk Elements."

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

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.......................... $12,343 $13,392 $16,054 $22,573 $ 13,260
Balance of Acquired Institution....................... -- 1,715 -- -- --
Provision............................................. 1,295 -- -- 750 33,250

Charge-offs:
Residential real estate.......................... (1,501) (1,271) (610) (1,027) (1,506)
Commercial real estate........................... (867) (1,614) (1,541) (4,267) (14,804)
Construction and land............................ (57) (41) -- (1,168) (783)
Commercial....................................... (171) (194) (814) (2,132) (7,022)
Consumer......................................... (171) (149) (121) (169) (504)
------- ------- ------- ------- --------
Total charge-offs................................ (2,767) (3,269) (3,086) (8,763) (24,619)
------- ------- ------- ------- --------

Recoveries:
Residential real estate.......................... 120 4 32 249 47
Commercial real estate........................... 183 141 130 454 433
Construction and land............................ 2 57 -- 69 --
Commercial....................................... 461 280 232 610 176
Consumer......................................... 28 23 30 112 26
------- ------- ------- ------- --------
Total recoveries................................. 794 505 424 1,494 682
------- ------- ------- ------- --------

Net charge-offs....................................... (1,973) (2,764) (2,662) (7,269) (23,937)
------- ------- ------- ------- --------

Balance at end of year................................ $11,665 $12,343 $13,392 $16,054 $ 22,573
======= ======= ======= ======= ========
Ratio of net charge-offs to average loans
outstanding......................................... 0.29% 0.48% 0.61% 1.76% 5.33%
</TABLE>

Net charge-offs totalled $2.0 million in 1995, $2.8 million in 1994, and
$2.7 million in 1993. The ratio of net charge-offs to average loans, however,
has continued its steady decline from the levels experienced in 1991 and total
only 0.29% for 1995.

The allowance for loan losses as a percentage of total loans decreased to
1.5% at December 31, 1995, from 1.9% and 2.9% at December 31, 1994 and 1993,
respectively. Management analyzes the adequacy of the allowance for loan losses
at least quarterly. See "Results of Operations -- Provision for Loan Losses."
Management measures the adequacy of its allowance for loan losses by assigning
loans into risk categories based on a loan classification system modelled after
the bank regulatory classification system. While management believes that its
allowance for loan losses is adequate to cover potential losses, there are
uncertainties regarding future events, particularly in the currently weakened
New England real estate market and economy. Further deterioration in the real
estate market or economy may result in additional nonaccruing loans, charge-offs
and a need for provisions for loan losses to

23
<PAGE> 24
maintain an adequate allowance. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Banks'
allowance for loan losses. Such agencies may require the Banks to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination. Allocation of the allowance for loan
losses to the various categories of the portfolio is also made periodically,
based on management's judgment in weighing various factors, including the
quality of specific loans, the level of nonaccruing loans in the various
categories, current economic conditions, trends in delinquencies and prior
charge-offs, and the collateral value of the underlying security. Because the
allowance for loan losses is based on various estimates, including loan
collectibility and real estate values, and includes a high degree of judgment,
subsequent changes in the general economic prospects of the borrowers may
require changes in those estimates.

The Banks monitor the loan portfolio and related allowance through the use
of "account plans" prepared for nonaccruing loans, other real estate owned and
other loans identified by management as needing closer monitoring. The "account
plans" are prepared for loans which have been assigned adverse credit risk
ratings and have been considered in determining the appropriate level of
allowance for loan losses. The largest exposure to a single borrower included in
non-performing loans at December 31, 1995, was 13 loans totalling approximately
$1.5 million, consisting primarily of multi-family real estate.

The changes in the allowance allocated to each category of loan directly
corresponds to the level of nonaccrual loans and adversely classified loans.
Those levels have a direct correlation to the level of deterioration in the New
England real estate market and economy. Andover historically has experienced
minimal losses in its residential mortgage loan portfolio and, therefore,
allocations applicable to this portfolio are lower.

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

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------------- -------------------- -------------------- -------------------- --------------------
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS A % OF AS A % OF AS A % OF AS A % OF AS A % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN
LOAN CATEGORY ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO
------------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential .......... $ 1,794 73% $ 1,855 70% $ 975 65% $ 1,012 60% $ 1,476 46%
Commercial ........... 7,381 16 7,633 17 6,108 19 7,432 20 12,152 25
Construction and land 549 2 971 3 791 3 727 3 2,483 6
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total real estate 9,724 91 10,459 90 7,874 87 9,171 83 16,111 77
Consumer ............... 344 7 478 8 388 10 452 12 823 15
Commercial ............. 1,201 2 1,113 2 1,455 3 1,644 5 4,810 8
Unallocated ............ 396 -- 293 -- 3,675 -- 4,787 -- 829 --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------

Totals .......... $11,665 100% $12,343 100% $13,392 100% $16,054 100% $22,573 100%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

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

INVESTMENTS AND MORTGAGE-BACKED SECURITIES

As of December 31, 1995, Andover's investment portfolio totalled $285.2
million, a decrease of 19.1% from $352.7 millon at year-end 1994. A large part
of the decrease in the investment portfolio was due to the sale of $27.4 million
in investments available for sale with the proceeds used to fund a residential
whole loan purchase in the fourth quarter of 1995. The Company manages the
investment portfolio in accordance with the investment policy adopted by the
Board of Directors. The primary objectives are to provide interest and dividend
income, to ensure adequate liquidity and achieve an acceptable asset/liability
gap position.

24
<PAGE> 25
The primary component of the total investment portfolio is mortgage-backed
securities, which accounted for 68% of total investments at December 31, 1995.
The remaining portion of the total investment portfolio consists of U.S.
government and federal agency obligations, and other investment grade
securities. Substantially all of the mortgage-backed security portfolio as of
December 31, 1995, represent undivided interests in pools of mortgages which
have been formed into pass-through securities and sold to investors by the
Government National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"). Securities issued by GNMA, a wholly-owned U.S. government corporation,
are fully guaranteed as to the timely payment of principal and interest.
Securities issued by FHLMC and FNMA, government sponsored corporations, carry
each corporation's guarantee as to the timely payment of interest and the
ultimate payment of principal. Cash flows from the underlying mortgages of all
mortgage-backed securities are passed through to Andover in the form of monthly
payments of interest, scheduled principal amortization, and prepayments of
mortgage balances. These securities, therefore, have unpredictable cash flows.

At December 31, 1995, the investment portfolio had $1.6 million in
collateralized mortgage obligations ("CMO's"), a decline of $13.1 million from
last year. The underlying collateral of these CMO's consists of residential
mortgages and these derivative securities are not considered "high-risk" as
defined by the regulatory agencies.

Included in federal agency obligations at December 31, 1995 were $4.5
million in "step-up" bonds issued by the Federal Home Loan Bank and FHLMC. These
bonds have guaranteed interest rate increases and are callable at par.

The approximate market value of adjustable rate bonds and mortgage-backed
securities included in the investment portfolio totalled $6.0 million and $45.3
million, respectively, at December 31, 1995.

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

Investments available for sale are recorded at their fair value with
changes in fair value recorded as a separate component of stockholders' equity,
net of the related income taxes. Upon the adoption of SFAS 115, the Company
transferred $149.3 million of various securities into investments available for
sale. The net unrealized gain on the investments available for sale included in
stockholders' equity, net of applicable income taxes, was $1.9 million at
December 31, 1993. Under the provision of the FASB's Special Report, "A Guide to
Implementation of SFAS 115 - Accounting for Certain Investments in Debt and
Equity Securities - Questions and Answers," the Company reclassified certain
investments with an amortized cost of $51.2 million and a net unrealized gain of
$771,000 from held to maturity to available for sale in December of 1995.

During 1995, there was a decline in market interest rates. This caused a
change in the unrealized gain of approximately $22.0 million in the investment
portfolio from a net unrealized loss of $19.2 as of December 31, 1994 to a net
unrealized gain of $2.8 million as of December 31, 1995. The changes in interest
rates and their impact on the unrealized gain or loss in the investment
portfolio is not a material factor in the Company's overall investment strategy.
This is largely due to the fact that neither the changes nor their impact can be
controlled and the Company seeks a way to diversify the asset mix, earn an
adequate spread and allow for liquidity. Additionally, investment purchases are
often match funded by long-term advances in order to achieve a consistent spread
on the investment.

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

25
<PAGE> 26
The following table sets forth information regarding the carrying values of
the investment portfolio at December 31:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS .......................... $ 9,000 $ 5,200 $ --
======== ======== ========

INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
U.S. government and federal agency obligations .. $ 52,490 $ 52,523 $ 54,421
Other bonds and obligations ..................... 14,382 11,496 17,832
-------- -------- --------
Total bonds and obligations ................. 66,872 64,019 72,253
-------- -------- --------

GNMA mortgage-backed securities ................. 37,195 38,711 44,501
FHLMC participation certificates ................ 4,420 7,771 10,051
Collateralized mortgage obligations ............. 482 12,948 25,495
-------- -------- --------
Total mortgage-backed securities ............ 42,097 59,430 80,047
-------- -------- --------
Total investments available for sale ........ $108,969 $123,449 $152,300
======== ======== ========

INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST):
U.S. government and federal agency obligations .. $ 1,500 $ 16,259 $ --
Other bonds and obligations ..................... 12,758 24,349 4,106
-------- -------- --------
Total bonds and obligations ............... 14,258 40,608 4,106
-------- -------- --------

FHLMC participation certificates ................ 78,649 88,080 96,497
FNMA pass-through certificates .................. 67,375 86,920 41,064
GNMA mortgage-backed securities ................. 4,458 4,939 --
Other asset-backed securities ................... 1,407 1,737 1,002
Collateralized mortgage obligations ............. 1,116 1,752 --
-------- -------- --------
Total mortgage-backed securities .......... 153,005 183,428 138,563
-------- -------- --------
Total investments held to maturity ........ $167,263 $224,036 $142,669
======== ======== ========

Total investments ......................... $285,232 $352,685 $294,969
======== ======== ========
</TABLE>

The following table presents an analysis of the maturity distribution and
average yields of investments available for sale and held to maturity at
December 31, 1995. Mortgage-backed securities are shown in the periods
corresponding to scheduled principal amortization computed based on their
weighted average maturities and weighted average rates without regard to
prepayments.

<TABLE>
<CAPTION>
LENGTH OF TIME TO MATURITY
----------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------- --------------- ------------- -------------- -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments available for sale:
Total bonds and obligations. $16,615 5.89% $49,660 5.88% $ -- .--% $ 597 10.68% $ 66,872 5.92%
Total mortgage-backed
securities.............. 913 6.89 2,937 6.61 4,577 6.62 33,670 6.66 42,097 6.66
------- ------- ------- ------- --------
Total investments
available for sale.... $17,528 5.94% $52,597 5.92% $ 4,577 6.62% $34,267 6.73% $108,969 6.21%
======= ==== ======= ==== ======= ==== ======= ==== ======== ====
Investments held to maturity:
Total bonds and obligations $ 4,520 5.76% $ 8,704 6.30% $ 1,034 8.15% $ -- .--% $ 14,258 6.26%
Total mortgage-backed
securities............... 13,227 6.61 49,959 6.60 30,901 7.07 58,918 7.45 153,005 7.03
------- ------- ------- ------- --------
Total investments held
to maturity.......... $17,747 6.39% $58,663 6.56% $31,935 7.10% $58,918 7.45% $167,263 6.96%
======= ==== ======= ==== ======= ==== ======= ==== ======== ====
</TABLE>

26
<PAGE> 27
The following table presents unrealized gains and losses by major
categories of securities as of December 31, 1995. At that date, Andover's net
unrealized gains on investments held to maturity amounted to $2.5 million. The
unrealized gains of $326,000 on investments available for sale is included in
stockholders' equity, net of applicable income taxes at December 31, 1995.

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

U.S. government and federal agency obligations........................................... $ 329 $(284)
Other bonds and obligations.............................................................. 249 (26)
Mortgage-backed securities............................................................... 307 (249)
------ -----
Total investments available for sale.................................................. 885 (559)
------ -----

INVESTMENTS HELD TO MATURITY:

U.S. government and federal agency obligations........................................... $ -- $ (1)
Other bonds and obligations.............................................................. 180 (29)
Mortgage-backed securities............................................................... 2,537 (189)
------ -----
Total investments held to maturity.................................................. $2,717 $(219)
====== =====

Total unrealized gains and losses................................................... $3,602 $(778)
====== =====
</TABLE>

DEPOSITS

Total deposits increased $15.3 million during 1995 to $743.2 million as of
December 31, 1995. In the current interest rate environment, depositors continue
to shift from core deposit accounts into higher paying term deposits. That shift
is best evidenced by the percentage of total deposits held on certificates: from
43% as of December 31, 1993 to 57% as of December 31, 1995. Total deposits
increased $169.1 million during 1994 to $727.9 million as of December 31, 1994,
primarily due to the acquisition of Community's $114.2 million in deposits.
Additionally, the increasing interest rates in 1994 enabled the Bank to
aggressively market its deposit products and successfully increase its time
certificate balances. See Note 9 to the "Consolidated Financial Statements" for
further information.

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

<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- ----------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF INTEREST OF INTEREST OF INTEREST
AMOUNT TOTAL RATE AMOUNT TOTAL RATE AMOUNT TOTAL RATE
------ ----- ---- ------ ----- ---- ------ ----- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposit accounts... $ 54,516 7.3% --% $ 45,968 6.3% --% $ 58,323 10.4% --%
NOW accounts.............. 67,275 9.1 1.00 65,882 9.0 1.19 57,616 10.3 1.20
Regular savings accounts.. 68,052 9.2 2.20 76,571 10.5 2.14 61,919 11.1 2.00
Money market
deposit accounts........ 130,437 17.5 2.90 143,203 19.7 2.50 140,801 25.2 2.18
Variable rate certificates 13,279 1.8 5.64 17,185 2.4 6.28 14,657 2.6 3.64
Fixed rate certificates... 409,646 55.1 5.86 379,049 52.1 5.14 225,457 40.4 4.45
-------- ----- -------- ----- -------- -----
Total deposits.......... $743,205 100.0% 4.13% $727,858 100.0% 3.65% $558,773 100.0% 2.79%
======== ===== ==== ======== ===== ==== ======== ===== ====
</TABLE>

Deposits are derived from customers who work or reside in the Company's
market area and surrounding communities, and from businesses located in that
area. There were no brokered deposits at December 31, 1995, 1994 and 1993.

27
<PAGE> 28
The following table presents Andover's outstanding time certificates in
denominations of $100,000 and over, with remaining maturities at December 31:

<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY 1995 1994 1993
-------------------------- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Three months or less....................................... $ 9,801 $ 3,512 $ 3,912
Three to six months........................................ 7,812 4,268 3,455
Six to twelve months....................................... 18,520 9,564 12,944
Over twelve months......................................... 16,885 28,330 10,245
------- ------- -------
$53,018 $45,674 $30,556
======= ======= =======
</TABLE>

ASSET AND LIABILITY MANAGEMENT

The policies and procedures for managing both on and off balance sheet
activities are established by Andover's asset/liability management committee
(ALCO). The Board of Directors reviews and approves the ALCO policy annually and
monitors related activities on an ongoing basis. The main objective is to
provide a steady and, to the degree possible, increasing net interest margin,
even during periods of volatile market interest rates.

The critical day-to-day roles of the ALCO are implemented by two
committees: the risk management committee and the rate management committee. The
former's primary responsibility is to monitor and assess risk, develop
strategies and tactics to deal with various risk factors and to monitor the
implementation of agreed upon tactics. The rate management committee is
primarily responsible for setting deposit interest rates and is involved in
other banking product pricing issues.

During 1994, the Bank was able to aggressively promote and attract
additional deposit balances in light of the increasing interest rate
environment. As deposit rates continued to increase in 1995, the Banks continued
to attract term certificate balances as depositors shifted their funds out of
core deposits into alternative products. During the past several years, the Bank
continued to rely on borrowed funds as an alternative source of funds to grow
interest earning assets.

During 1995, the Company continued to follow its past practice of selling,
while retaining the servicing rights, certain fixed-rate residential mortgage
loans which were, for the most part, converted prior to sale to mortgage-backed
securities. In conjunction with the mortgage selling (secondary market)
activity, the Bank uses forward contracts in order to reduce exposure to
interest rate risk. The amount of forward coverage of the "pipeline" of
mortgages is set on a day-to-day basis by a line manager, within policy
guidelines, based on the Company's assessment of the general direction of
interest rates and the levels of mortgage origination activity. See Note 18 to
the "Consolidated Financial Statements."

28
<PAGE> 29
The Company's gap analysis, which involves comparing the difference between
assets and liabilities that mature or reprice during a given period of time, is
one measurement of its sensitivity to interest rate fluctuations. These
differences are a primary component of the risk to net interest income. The
following table illustrates the Company's gap position at December 31, 1995.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
-----------------------------------------------------------------------------------
1-180 181-365 1-3 3-5 5+
DAYS DAYS YEARS YEARS YEARS TOTAL
---- ---- ----- ----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Short-term investments ................... $ 9,000 $ -- $ -- $ -- $ -- $ 9,000
Assets held for sale ..................... 5,162 -- -- -- -- 5,162
Investments available for sale ........... 44,621 35,081 28,281 763 223 108,969
Investments held to maturity ............. 15,420 12,110 42,560 30,413 66,760 167,263
Stock in FHLB of Boston .................. 13,171 -- -- -- -- 13,171
Adjustable-rate loans .................... 231,105 145,667 90,596 35,841 23,101 526,310
Fixed-rate loans ......................... 23,726 22,494 73,537 50,816 71,715 242,288
---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive assets ........ 342,205 215,352 234,974 117,833 161,799 1,072,163

Interest sensitive liabilities:
Money market deposit accounts ............ 32,026 30,227 30,648 16,827 20,709 130,437
Certificates of deposit .................. 138,310 141,959 124,924 17,732 -- 422,925
Other deposits ........................... 21,254 19,683 36,419 22,504 35,467 135,327
Borrowed funds ........................... 117,271 24,235 115,402 15,123 595 272,626
---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive liabilities . 308,861 216,104 307,393 72,186 56,771 961,315
---------- ---------- ---------- ---------- ---------- ----------

Net interest rate sensitivity gap .......... $ 33,344 $ (752) $ (72,419) $ 45,647 $ 105,028 $ 110,848
========== ========== ========== ========== ========== ==========

Cumulative net interest rate
sensitivity gap .......................... $ 33,344 $ 32,592 $ (39,827) $ 5,820 $ 110,848
========== ========== ========== ========== ==========

Cumulative net interest rate
sensitivity gap as a percentage of
total assets ............................. 3.0% 2.9% (3.6)% 0.5% 10.0%

AT DECEMBER 31, 1994:

Cumulative net interest rate
sensitivity gap .......................... $ 4,074 $ 44,164 $ (44,008) $ (52,808) $ 79,522
========== =========== ========== ========== ==========

Cumulative net interest rate
sensitivity gap as a percentage of
total assets ............................. 0.4% 4.2% (4.2)% (5.0)% 7.5%
</TABLE>

The balance of interest-sensitive asset and liability accounts has been
allocated among the various periods using common industry techniques. For
example, fixed-rate mortgage loans are shown in the table in the time period
corresponding to scheduled principal amortization and anticipated prepayments
based on their respective weighted average maturities, weighted average rates
and annual conditional prepayment rates at December 31, 1995 that vary from
13.5% - 16.5% as compared with 7.5% - 9.5% at December 31, 1994. Adjustable-rate
loans, securities, certificates of deposit and borrowed funds are allocated to
the period in which the rates could be next adjusted or final contractual
maturity on fixed rate instruments. Mortgage-backed securities were allocated
using weighted average maturities, weighted average coupons and annual
conditional prepayment rates of 4.8% - 48.5% at December 31, 1995, versus 3.6% -
12.4% at December 31, 1994.

29
<PAGE> 30
Although a substantial portion of regular savings and NOW accounts are
considered "core deposits" by management and, therefore, relatively insensitive
to interest rates, and despite the fact that any future changes to the interest
rates paid on these accounts is at the sole discretion of management; based upon
the Company's assessment of current market conditions, such accounts have been
included in the "Other Deposits" category and have been allocated between each
time period in recognition of the lagged variable rate feature. The amounts for
1994 have been adjusted based on an updated assessment of the rate sensitivity
of core deposits and is consistent with 1995. The interest rate sensitivity of
the Company's assets and liabilities illustrated in the above table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.

The following table reflects the scheduled maturities of selected loans at
December 31, 1995:

<TABLE>
<CAPTION>
ONE OVER
LESS THAN THROUGH FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction and land loans............... $ 4,017 $ 8,496 $5,625 $18,138
Commercial loans.......................... 9,724 8,064 1,362 19,150
------- ------- ------ -------
$13,741 $16,560 $6,987 $37,288
======= ======= ====== =======
</TABLE>

Of the loans maturing after one year, $951,000, or 4.0%, have fixed rates
and $22.6 million, or 96.0%, have floating or adjustable rates.

LIQUIDITY

The Company's primary source of funds is dividends from its bank
subsidiaries. Andover Bank reinstated the payment of a dividend to the Company
during 1994. Dividends from the Bank to the Company totalled $1.5 million in
1995 and $3.5 million in 1994. ABNH will be severely limited in its ability to
pay dividends during its initial years of operation. The Company made payments
of dividends to stockholders in the amount of $1.9 million, $1.7 million and
$619,000, respectively, for the years ended December 31, 1995, 1994 and 1993.

The goal of the Company's liquidity management process is to assess funding
requirements so as to efficiently meet the cash needs of borrowers and
depositors, while also providing funds for attractive investment opportunities.

The Banks have a diverse base of funding. Sources of liquidity include
maturation, amortization and prepayment of the investment and loan portfolios.
Another source of liquidity is funds purchased from other banks, the sale of
securities under repurchase agreements and borrowings from the FHLB, of which
Andover Bank is a voluntary member. The Banks may also obtain funds from the
Federal Reserve Bank of Boston by pledging certain assets.

At December 31, 1995, the Company had home equity, reserve credit and
commercial unused lines of credit totalling $76.6 million. Outstanding
commitments to originate real estate loans totalled $15.4 million. Unadvanced
portions of real estate loans amounted to $9.9 million. Standby letters of
credit were $557,000. Loans sold with recourse totalled $5.9 million. Management
believes that its sources of liquidity are sufficient to meet these commitments
if and as called upon. See Note 18 to the "Consolidated Financial Statements."

30
<PAGE> 31
Cash flows provided by operating activities decreased by $24.9 million to
$14.5 million at December 31, 1995 and increased by $16.6 million to $39.3
million at December 31, 1994. The change in both years was primarily due to an
increase or decrease in assets held for sale. Cash flows from investing
activities decreased by $95.8 million from 1994 to 1995 and increased $62.0
million from 1993 to 1994. The decrease in 1995 was due to fewer purchases of
investments held to maturity. The increase in 1994 was due to an increase in
total loans combined with slower prepayment experience of the mortgage-backed
securities. Cash flows provided by financing activities decreased $72.3 million
from 1994 to 1995, primarily due to a smaller increase in total deposits and
higher repayments on FHLB advances. Cash flows provided by financing activities
increased $69.5 million from 1993 to 1994, primarily due to the issuance of
$345.1 million of notes payable during 1994 combined with an increase in total
deposits.

CAPITAL RESOURCES

At December 31, 1995, the Company reported total capital of $85.2 million,
or 7.7% of total assets as compared to $72.5 million, or 6.9% at December 31,
1994. The Company and the Banks continue to maintain capital ratios in excess of
all applicable regulatory minimums.

The capital position of banks and bank holding companies are regulated by
various Federal and State agencies. The following table presents regulatory
capital ratios under current regulatory and risk-based capital requirements as
of December 31, 1995:

<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
------------------------
LEVERAGE RATIO TIER 1 TOTAL
-------------- ------ -----
<S> <C> <C> <C>
Andover Bancorp.............................................. 7.8% 13.6% 14.9%
Andover Bank................................................. 7.3 12.9 14.1
Andover Bank NH.............................................. 55.2 69.0 69.8
</TABLE>

Current minimum regulatory requirements as of December 31, 1995 were 4.0%
for the leverage ratio and 4.0% and 8.0%, respectively for the tier 1 and total
risk based capital ratios. Under the FDIC's prompt corrective action regulations
promulgated pursuant to the FDIC Improvement Act of 1991, the Banks have
sufficient capital to be considered "well-capitalized". Therefore, the Banks are
entitled to pay the lowest deposit premium possible.

IMPACT OF INFLATION

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

31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................................................ 33

Consolidated Balance Sheets as of December 31, 1995 and 1994........................................ 34

Consolidated Statements of Operations for each of the years ended
December 31, 1995, 1994 and 1993................................................................. 35

Consolidated Statements of Changes in Stockholders' Equity for each of the
years ended December 31, 1995, 1994 and 1993..................................................... 36

Consolidated Statements of Cash Flows for each of the years ended
December 31, 1995, 1994 and 1993................................................................. 37-38

Notes to Consolidated Financial Statements.......................................................... 39-61
</TABLE>

32
<PAGE> 33
INDEPENDENT AUDITORS' REPORT

The Board of Directors
ANDOVER BANCORP, INC.:

We have audited the accompanying consolidated balance sheets of Andover
Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Andover
Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

/s/ KPMG Peat Marwick LLP

Boston, Massachusetts
January 18, 1996

33
<PAGE> 34
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash and due from banks (note 18) .................................................... $ 19,236 $ 18,182
Short-term investments (note 3) ...................................................... 9,000 5,200
----------- -----------
Cash and cash equivalents .......................................................... 28,236 23,382
----------- -----------
Assets held for sale (market value $5,163 in 1995 and $2,507 in 1994) (note 2) ...... 5,162 2,507
Investments available for sale (amortized cost of $108,643 in 1995
and $130,011 in 1994) (note 3) ..................................................... 108,969 123,449
Investments held to maturity (market value $169,761 in 1995 and
$211,388 in 1994) (notes 3, 10 and 11) ............................................. 167,263 224,036
Loans (notes 4 and 11) ............................................................... 768,598 645,037
Allowance for loan losses (note 4) ................................................... (11,665) (12,343)
----------- -----------
Net loans ....................................................................... 756,933 632,694
----------- -----------
Other real estate owned, net (note 6) ................................................ 4,158 8,796
Premises and equipment, net (note 7) ................................................. 9,537 9,814
Accrued interest receivable .......................................................... 7,164 6,947
Stock in FHLB of Boston, at cost (notes 8 and 11) .................................... 13,171 12,368
Deferred income taxes receivable (note 12) ........................................... 830 6,302
Mortgage servicing assets (note 5) ................................................... 6,609 3,752
Other assets ......................................................................... 2,815 4,625
----------- -----------
Total assets ................................................................ $ 1,110,847 $ 1,058,672
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Deposits (note 9) ............................................................... $ 743,205 $ 727,858
Securities sold under agreements to repurchase (note 10) ........................ 9,212 4,000
Federal Home Loan Bank advances (note 11) ....................................... 263,414 247,185
Mortgagors' escrow accounts ..................................................... 3,526 2,243
Income taxes payable (note 12) .................................................. 1,389 480
Accrued expenses and other liabilities .......................................... 4,936 4,384
----------- -----------
Total liabilities .......................................................... 1,025,682 986,150
----------- -----------
Commitments and contingencies (notes 7 and 18)
Stockholders' equity (notes 13, 15 and 19):
Serial preferred stock, $0.10 par value;
3,000,000 shares authorized, none issued ..................................... -- --
Common stock, $0.10 par value; 15,000,000 shares authorized;
5,154,968 and 5,126,088 shares issued in 1995 and 1994, respectively ......... 515 513
Additional paid-in capital ...................................................... 71,515 71,172
Retained earnings ............................................................... 26,183 18,701
Treasury stock, at cost (917,997 shares) ........................................ (13,247) (13,247)
Unrealized gains (losses) on investments available for sale, net (notes 3 and 12) 199 (4,617)
----------- -----------
Total stockholders' equity ................................................. 85,165 72,522
----------- -----------
Total liabilities and stockholders' equity ................................. $ 1,110,847 $ 1,058,672
=========== ===========
</TABLE>

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

34
<PAGE> 35
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest and dividend income:
Loans ................................................. $ 53,876 $ 41,316 $ 31,959
Mortgage-backed securities ............................ 15,375 15,656 15,043
Investment securities ................................. 6,039 5,529 4,416
Dividends on equity securities (note 8) ............... 970 877 870
Short-term investments ................................ 626 207 243
-------- -------- --------
Total interest and dividend income ................. 76,886 63,585 52,531
-------- -------- --------
Interest expense:
Deposits (note 9) ..................................... 29,246 21,374 16,352
Federal Home Loan Bank advances ....................... 14,409 10,958 9,163
Securities sold under agreements to repurchase ........ 897 1,089 519
-------- -------- --------
Total interest expense ............................. 44,552 33,421 26,034
-------- -------- --------

Net interest and dividend income ................... 32,334 30,164 26,497

Provision for loan losses (note 4) ....................... 1,295 -- --
-------- -------- --------
Net interest and dividend income after provision
for loan losses ................................. 31,039 30,164 26,497
-------- -------- --------
Non-interest income (loss):
Net gains (losses) from sales and redemptions of assets
held for sale (note 2) ............................. 55 (470) 151
Net gains from sales and redemptions
of investment securities (note 3) .................. 3 -- 241
Net gains from sales and redemptions of
mortgage-backed securities (note 3) ................ -- -- 4
Net gains from sales and redemptions
of investments available for sale (note 3) ......... 269 236 --
Losses on real estate operations, net (note 6) ........ (2,003) (2,617) (4,547)
Mortgage banking income ............................... 2,371 1,442 648
Other income (note 14) ................................ 3,098 2,597 2,237
-------- -------- --------
Total non-interest income (loss) ................... 3,793 1,188 (1,266)
-------- -------- --------
Non-interest expense:
Salaries and employee benefits (note 15) .............. 9,623 9,045 7,432
Office occupancy and equipment (note 7) ............... 2,338 2,181 1,895
Data processing ....................................... 1,201 966 887
Mortgage banking expense .............................. 913 415 454
Deposit insurance premiums ............................ 892 1,611 1,475
Marketing ............................................. 847 677 738
Professional fees ..................................... 681 648 660
Merger expense (note 19) .............................. 1,000 -- --
Other operating expense ............................... 2,365 1,985 1,683
-------- -------- --------
Total non-interest expense ......................... 19,860 17,528 15,224
-------- -------- --------

Income before income tax expense ................... 14,972 13,824 10,007
Income tax expense (note 12) ............................. 5,634 4,781 2,449
-------- -------- --------
Net income ......................................... $ 9,338 $ 9,043 $ 7,558
======== ======== ========

Average number of common shares outstanding .............. 4,214 4,179 4,118

Net income per share ..................................... $ 2.22 $ 2.16 $ 1.84
======== ======== ========
</TABLE>

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

35
<PAGE> 36
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993

<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON TOTAL
ADDITIONAL INVESTMENTS STOCK-
COMMON PAID-IN RETAINED TREASURY AVAILABLE HOLDERS'
STOCK CAPITAL EARNINGS STOCK FOR SALE (1) EQUITY
-------- ---------- -------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ......... $ 502 $ 70,067 $ 4,396 $(13,247) $ -- $ 61,718

Net income ........................ -- -- 7,558 -- -- 7,558
Dividends declared and paid
($0.15 per share) ............... -- -- (619) -- -- (619)
Stock options exercised (note 15).. 5 303 -- -- -- 308
Change in unrealized gains
(losses) on investments
available for sale (note 3) .... -- -- -- -- 1,920 1,920
-------- -------- -------- -------- -------- --------
Balance at December 31, 1993 ......... 507 70,370 11,335 (13,247) 1,920 70,885

Net income ........................ -- -- 9,043 -- -- 9,043
Dividends declared and paid
($0.40 per share) ............... -- -- (1,677) -- -- (1,677)
Stock options exercised (note 15).. 6 802 -- -- -- 808
Change in unrealized gains
(losses) on investments
available for sale (note 3) ..... -- -- -- -- (6,537) (6,537)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 ......... 513 71,172 18,701 (13,247) (4,617) 72,522

Net income ........................ -- -- 9,338 -- -- 9,338
Dividends declared and paid
($0.44 per share) ............... -- -- (1,856) -- -- (1,856)
Stock options exercised (note 15).. 2 343 -- -- -- 345
Change in unrealized gains
(losses) on investments
available for sale (note 3) ..... -- -- -- -- 4,816 4,816
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ......... $ 515 $ 71,515 $ 26,183 $(13,247) $ 199 $ 85,165
======== ======== ======== ======== ======== ========
</TABLE>

- --------------------------
(1) Net of related tax effect.

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

36
<PAGE> 37
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 9,338 $ 9,043 $ 7,558
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ................................... 1,295 -- --
Net (gains) losses on sales and provisions
for other real estate owned .............................. 168 (24) 1,722
Net gains from sales and redemptions of investment securities (3) -- (241)
Net gains from sales and redemptions
of mortgage-backed securities ............................ -- -- (4)
Net gains from sales and redemptions of investments
available for sale ....................................... (269) (236) --
Net (gains) losses from sales and writedowns of assets
held for sale ............................................ (55) 470 (151)
Depreciation and amortization ............................... 1,155 919 782
Amortization of fees, discounts and premiums, net ........... 557 1,073 703
(Increase) decrease in:
Assets held for sale ...................................... (2,600) 29,303 10,511
Accrued interest receivable ............................... (217) (1,855) 128
Income taxes receivable ................................... 3,401 2,196 598
Mortgage servicing assets ................................. (2,857) (1,032) 1,033
Other assets .............................................. 1,810 (1,363) 6
Increase (decrease) in:
Mortgagors' escrow accounts ............................... 1,283 885 (17)
Accrued income taxes payable .............................. 909 (171) 651
Accrued expenses and other liabilities .................... 552 121 (596)
--------- --------- ---------
Net cash provided by operating activities .............. 14,467 39,329 22,683
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash of acquired institution ............................ -- 5,372 --
Purchases of investments available for sale ................. -- (9,103) --
Purchases of investment securities and FHLB stock ........... (18,701) (27,730) (32,215)
Purchases of mortgage-backed securities ..................... (2,960) (84,738) (81,193)
Proceeds from sales of investment securities ................ -- -- 3,678
Proceeds from sales of investments available for sale ....... 54,985 18,290 --
Proceeds from maturities and redemptions of
investments available for sale ........................... 8,923 4,398 --
Proceeds from maturities and redemptions of
investment securities ..................................... 5,531 1,052 19,830
Principal repayments of investments available for sale ...... 8,608 15,670 --
Principal repayments of mortgage-backed securities .......... 20,603 42,048 77,074
Net increase in loans ....................................... (128,713) (113,883) (75,908)
Capital expenditures on premises and equipment, net ......... (878) (1,722) (1,585)
Proceeds from disposition of other real estate owned ........ 7,972 10,107 12,876
Capital expenditures on other real estate owned ............. (260) (431) (1,199)
--------- --------- ---------
Net cash used by investing activities .................. (44,890) (140,670) (78,642)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .................................... 15,347 54,908 19,008
Net increase (decrease) in securities sold
under agreements to repurchase ............................ 5,212 (19,922) 1,146
Proceeds from issuance of FHLB advances ..................... 322,450 345,100 265,385
Principal repayments of FHLB advances ....................... (306,221) (271,630) (247,120)
Dividends paid .............................................. (1,856) (1,677) (619)
Stock options exercised ..................................... 345 808 308
--------- --------- ---------
Net cash provided by financing activities .............. 35,277 107,587 38,108
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............. 4,854 6,246 (17,851)
Cash and cash equivalents, beginning of year ..................... 23,382 17,136 34,987
--------- --------- ---------
Cash and cash equivalents, end of year ........................... $ 28,236 $ 23,382 $ 17,136
========= ========= =========
</TABLE>

Statement continued on next page.

37
<PAGE> 38
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1995, 1994 and 1993

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest ......................................................... $ 44,314 $ 33,248 $ 25,956
Income taxes ..................................................... 1,809 3,405 1,509
Cash received during the year for:
Income taxes ..................................................... 499 741 329
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale or investments available for sale ......... 20,314 60,763 154,271
Transfer of investment securities to investments
available for sale ................................................. -- -- 65,639
Transfer of mortgage-backed securities to investments
available for sale ................................................. -- -- 75,307
Transfer of investment and mortgage-backed securities
held for sale to investments available for sale .................... -- -- 8,306
Transfer of loans to other real estate owned .......................... 3,242 4,399 2,078
Transfer of investment securities held to
maturity to investments available for sale (note 1) ................. 38,684 -- --
Transfer of mortgage-backed securities held to
maturity to investments available for sale (note 1) ................. 12,507 -- --
</TABLE>

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

38
<PAGE> 39
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Andover Bancorp, Inc. (the "Company") is a Delaware corporation and the
holding company of Andover Bank and Andover Bank NH (collectively the "Banks").
Andover Bank ("the Bank") is a state-chartered savings bank with its
headquarters located in Andover, Massachusetts. Andover Bank NH ("ABNH") is a
guaranty savings bank chartered in September, 1995 and headquartered in Salem,
New Hampshire. The Company provides a variety of loan and deposit services to
its customers through 11 locations. The Company is supervised by the Board of
Governors of the Federal Reserve System ("FRB") and it is also subject to the
jurisdiction of the Massachusetts Board of Bank Incorporation, while Andover
Bank is subject to regulation and supervision by the Federal Deposit Insurance
Corporation ("FDIC") and the Massachusetts Commissioner of Banks (the
"Commissioner"). The Bank's deposits are insured by the FDIC and the Depositors
Insurance Fund, Inc. ("DIF"). ABNH is subject to regulation and supervision of
the FDIC and the New Hampshire Commissioner of Banks. ABNH's deposits are
insured by the FDIC.

The accounting and reporting policies of Andover Bancorp, Inc. and
subsidiaries conform with generally accepted accounting principles and general
practices within the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and income and expenses for the period. Actual results could differ
significantly from those estimates.

The following is a summary of the more significant accounting policies.

Principles of Consolidation

The consolidated financial statements include the accounts of Andover
Bancorp, Inc. and its subsidiaries, including its principal subsidiaries Andover
Bank and Andover Bank NH. All intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts in the prior years' financial
statements have been reclassified to conform with the current year's
presentation.

Loan Sales, Servicing and Mortgage Servicing Rights

Loans held for sale in the secondary market are stated at the lower of
aggregate amortized cost or market value. Market value is estimated based on
outstanding investor commitments or, in the absence of such commitments, current
investor yield requirements. Net unrealized losses, if any, are provided for in
a valuation allowance by charges to operations. Mortgage-backed securities held
for sale in the trading portfolio in conjunction with the Company's
mortgage-banking operations, are recorded at fair value with unrealized gains or
losses recorded in earnings.

When loans are sold, a gain or loss is recognized to the extent that the
sale proceeds exceed or are less than the carrying value of the loans. Gains and
losses are determined using the specific identification method. The gains and
losses resulting from the sales of loans with servicing retained are adjusted to
recognize the present value of differences between the loan yield to the
investor and the interest rate on the loan, plus the normal servicing fee (and
any required guaranty fee) over the estimated lives of the related loans. The
resulting capitalized excess mortgage servicing fee ("excess") is amortized to
operations using the level yield method adjusted for estimated prepayments.
Prepayment experience is reviewed periodically and, when actual prepayments
exceed estimated prepayments, the balance of excess servicing fees is adjusted
by a charge to earnings. When mortgage loan servicing rights are purchased, the
amount paid is capitalized and amortized to non-interest expense using a method
which approximates the level yield method over the estimated remaining life of
the loans, adjusted for prepayments. Prepayment experience is reviewed
periodically and, when actual prepayments exceed estimated prepayments, the
balance of purchased mortgage servicing rights is adjusted by a charge to
earnings.

In May 1994, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS 122"). The Statement is effective for fiscal years
beginning after December 15, 1995; although early adoption is permitted. SFAS
122 requires that a mortgage banking enterprise recognize as separate assets,
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. Additionally, SFAS 122 requires that the capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights, and that impairment be recognized through a valuation allowance.
Management believes the impact of adoption of SFAS 122 on January 1, 1996
depends on the volume of loans sold and will result in increased income
recognition upon the sale of loans and greater earnings volatility in future
periods as the mortgage servicing rights are amortized.

39
<PAGE> 40
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

Investments

Investments include short-term investments and investments available for
sale, held to maturity and trading. Debt securities are classified as held to
maturity only when there is positive intent and ability to hold them to
maturity. Such securities are recorded at amortized cost, adjusted for
amortization of premiums and accretion of discounts and adjusted as necessary
for estimated prepayments. Trading securities are debt and equity securities
held principally for the purpose of selling in the near term. Such securities
are recorded at fair value, with unrealized gains and losses recorded in
earnings. Investments available for sale are any debt and equity securities not
classified as either held to maturity or trading securities. Such investments
are recorded at fair value with changes in fair value recorded as a separate
component of stockholders' equity, net of the related income tax effect.
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") does not apply to
unsecuritized loans. However, after mortgage loans are converted to
mortgage-backed securities, they are subject to its provisions. Under the
provisions of the FASB's Special Report "A Guide to Implementation of SFAS 115 -
Accounting for Certain Investments in Debt and Equity Securities - Questions and
Answers," the Company reclassified certain investments with an amortized cost of
$51.2 million from held to maturity to available for sale. Gains and losses on
sales of investment and mortgage-backed securities are recognized using the
specific identification method. Premiums and discounts on investment and
mortgage-backed securities are amortized or accreted into income by use of the
level-yield method. The yields on mortgage-backed securities are affected by
prepayments and changes in interest rates. If a decline in fair value below the
amortized cost basis of an investment or mortgage-backed security is judged to
be other than temporary, the cost basis of the security is written down to fair
value. The amount of the writedown is included as a charge against gain on sale
of securities. Short-term investments are carried at cost, which approximates
market value, with original maturities of 90 days or less.

Loans

Accrual of interest income on loans and amortization of net deferred loan
fees are discontinued when loan payments are 90 days or more past due or earlier
when concern exists as to the ultimate collection of principal or interest. When
loans are placed on nonaccrual status, the interest receivable on the loan is
reversed against interest income of the current period. A loan is classified as
restructured if the original interest rate on such loans, repayment terms, or
both, are modified due to the deterioration in the financial condition of the
borrower. Non- performing loans are generally not returned to performing status
until the obligation is brought current, the loan becomes well-secured and in
the process of collection and, in either case, when concern no longer exists as
to the collectibility of principal or interest.

Loan origination fees and related direct incremental loan origination costs
are deferred and amortized over the life of the related loans as yield
adjustments using the level yield method. When loans are sold or paid off, the
unamortized fees and costs are transferred to income. In the fourth quarter of
1995, the Company purchased $59.9 million in loans which had a net discount of
$500,000. This discount will be amortized over the weighted average repricing
term of the underlying loans.

Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure" ("SFAS 118"). These Statements required changes in both the
disclosure and impairment measurement of non-performing loans. Adoption of SFAS
114 had no material impact on the Company's financial statements. Impaired loans
are commercial, commercial real estate, and individually significant mortgage
and consumer loans for which it is probably that the Company will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. The definition of "impaired loans" is not the same as the definition
of "nonaccrual loans," although the two categories overlap. Nonaccrual loans
include impaired loans and are those on which the accrual of interest is
discontinued when collectibility of principal or interest is uncertain or
payments of principal or interest have become contractually past due 90 days.
The Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired, if (i) it is probable that the Company will collect all amounts due in
accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Factors considered

40
<PAGE> 41
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

by management in determining impairment include payment status and collateral
value. The amount of impairment for these types of impaired loans is determined
by the difference between the present value of the expected cash flows related
to the loan, using the original contractual interest rate, and its recorded
value, or, as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral. Mortgage and consumer loans which are not
individually significant are measured for impairment collectively. Loans that
experience insignificant payment delays and insignificant shortfalls in payment
amounts generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to
the principal and interest owed.

Restructured, accruing loans entered into prior to the adoption of these
statements are not required to be reported as impaired unless such loans are not
performing according to the restructured terms at adoption of SFAS No. 114. Loan
restructurings entered into after adoption of SFAS No. 114 are reported as
impaired loans, and impairment is measured as described above using the loan's
pre-modification rate of interest.

Allowance for Loan Losses

Possible losses on loans are provided for under the allowance method of
accounting. The allowance is increased by provisions charged to operating
expense and by recoveries of previously charged off loans. The allowance is
decreased as loans are charged off.

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

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

Other Real Estate Owned

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

Premises and Equipment

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

41
<PAGE> 42
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Employee Benefits

The Company accounts for pension and postretirement benefits on the net
periodic pension cost method for financial reporting purposes in accordance with
SFAS 87, "Employers' Accounting for Pensions" and SFAS 106, "Employers'
Accounting for Postretirement Benefits other than Pensions." This method
recognizes the compensation cost of an employee's benefit over that employee's
approximate service period.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). The new Statement encourages companies to adopt a
new accounting method based on the estimated fair value of employee stock
options and other stock awards under which compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period. SFAS 123 is effective for fiscal years beginning after December 15,
1995. The Company will continue to follow APB Opinion 25 "Accounting for Stock
Issued to Employees." However, the Company will be required to provide expanded
disclosures of pro forma net income and earnings per share and other disclosure
information in the footnotes to the consolidated financial statements as if the
fair value method had been applied.

Earnings Per Share

Earnings per share are calculated based upon the weighted average number of
common shares outstanding during the year. Stock options did not have a dilutive
effect.

(2) ASSETS HELD FOR SALE

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

<TABLE>
<CAPTION>
1995 1994
------ -------
(IN THOUSANDS)
<S> <C> <C>
Loans................................................... $5,162 $ 2,507
====== =======
</TABLE>

At December 31, 1995 and 1994, the market value of assets held for sale
totalled $5,163,000 and $2,507,000, respectively. Proceeds from sales of assets
held for sale totalled $21,552,000, $60,907,000 and $184,903,000, respectively,
for the years ended December 31, 1995, 1994, and 1993. Realized gains on sales
of assets held for sale amounted to $329,000, $529,000 and $2,269,000 in 1995,
1994, and 1993, respectively. Realized losses on such sales and writedowns were
$274,000, $870,000 and $2,111,000 in 1995, 1994 and 1993, respectively. In 1993,
the realized losses include an adjustment for accelerated prepayments totalling
$800,000. Net unrealized losses of $129,000 on assets held for sale were
included in earnings for 1994. Unrealized losses of $7,000 on assets held for
sale were included in earnings for 1993. Proceeds from sales of investment
trading accounts totalled $9,990,000 for the year ended December 31, 1995.
Realized losses on such sales were $10,000 in 1995.

42
<PAGE> 43
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

(3) INVESTMENTS

The amortized cost and approximate market value of the investment portfolio
at December 31, follows:

<TABLE>
<CAPTION>
1995 1994
----------------------------------------- ----------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---- ----- ------ ----- ---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS:
Federal funds sold ................ $ 9,000 $ -- $ -- $ 9,000 $ 5,200 $ -- $ -- $ 5,200
========= ========= ========= ========= ========= ========= ========= =========

INVESTMENTS AVAILABLE FOR SALE:
U. S. government and federal
agency obligations .............. $ 52,445 $ 329 $ (284) $ 52,490 $ 55,404 $ 51 $ (2,932) $ 52,523
Other bonds and obligations ....... 14,159 249 (26) 14,382 11,602 50 (156) 11,496
FHLMC participation certificates .. 4,370 50 -- 4,420 7,844 9 (82) 7,771
GNMA mortgage-backed securities ... 37,186 257 (248) 37,195 41,330 -- (2,619) 38,711
Collateralized mortgage obligations 483 -- (1) 482 13,831 -- (883) 12,948
--------- --------- --------- --------- --------- --------- --------- ---------
$ 108,643 $ 885 $ (559) $ 108,969 $ 130,011 $ 110 $ (6,672) $ 123,449
========= ========= ========= ========= ========= ========= ========= =========

INVESTMENTS HELD TO MATURITY:
U. S. government and federal
agency obligations .............. $ 1,500 $ -- $ (1) $ 1,499 $ 16,259 $ 8 $ (374) $ 15,893
Other bonds and obligations ....... 12,758 180 (29) 12,909 24,349 33 (771) 23,611
FHLMC participation certificates .. 78,649 1,314 (26) 79,937 88,080 -- (4,746) 83,334
FNMA pass-through certificates .... 67,375 1,100 (144) 68,331 86,920 -- (6,402) 80,518
GNMA mortgage-backed securities ... 4,458 123 -- 4,581 4,939 -- (241) 4,698
Collateralized mortgage obligations 1,116 -- (2) 1,114 1,752 -- (32) 1,720
Other asset-backed securities ..... 1,407 -- (17) 1,390 1,737 -- (123) 1,614
--------- --------- --------- --------- --------- --------- --------- ---------
$ 167,263 $ 2,717 $ (219) $ 169,761 $ 224,036 $ 41 $ (12,689) $ 211,388
========= ========= ========= ========= ========= ========= ========= =========

Total investments ............... $ 284,906 $ 3,602 $ (778) $ 287,730 $ 359,247 $ 151 $ (19,361) $ 340,037
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>

The amortized cost and market value of mortgage-backed securities available
for sale and held to maturity at December 31, follows:

<TABLE>
<CAPTION>
1995 1994
--------------------------------------- -----------------------------------
AVAILABLE FOR SALE HELD TO MATURITY AVAILABLE FOR SALE HELD TO MATURITY
------------------ ------------------- ------------------ -------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Originated......................... $ 1,042 $ 1,075 $ 45,941 $ 47,039 $ 1,459 $ 1,468 $ 48,444 $ 45,348
Purchased.......................... 40,997 41,022 107,064 108,314 61,546 57,962 134,984 126,536
-------- ------- -------- -------- -------- ------- -------- --------
$ 42,039 $42,097 $153,005 $155,353 $ 63,005 $59,430 $183,428 $171,884
======== ======= ======== ======== ======== ======= ======== ========
</TABLE>

Proceeds from sales of investments available for sale totalled $54,985,000
and $18,290,000 for the years ended December 31, 1995 and 1994, respectively.
Realized gains and losses on such sales amounted to $510,000 and $241,000 in
1995, respectively, and $250,000 and $14,000 in 1994, respectively. There were
no proceeds from sales of investments held to maturity in 1995 and 1994.
Proceeds from sales of debt securities amounted to $3,303,000 for the year ended
December 31, 1993 and realized gains on such sales amounted to $241,000.
Proceeds from redemptions of investments held to maturity totalled $5,531,000,
$1,052,000 and $19,830,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. Realized gains on such redemptions totalled $3,000 in 1995 and
$4,000 in 1993. There were no realized gains in 1994.

43
<PAGE> 44
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

The maturity distribution of investments available for sale and held to
maturity at December 31, follows:

<TABLE>
<CAPTION>
1995 1994
-------------------------------------- -------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY AVAILABLE FOR SALE HELD TO MATURITY
------------------ ------------------ ------------------ ------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1 year.................... $ 17,442 $ 17,528 $ 17,747 $ 18,027 $ 15,227 $ 14,613 $ 16,256 $ 14,779
1 to 5 years..................... 52,389 52,597 58,663 59,912 58,170 53,564 89,839 82,749
5 to 10 years.................... 4,555 4,577 31,935 32,903 11,865 10,526 43,310 39,229
Over 10 years.................... 34,257 34,267 58,918 58,919 44,749 44,746 74,631 74,631
-------- -------- -------- -------- -------- -------- -------- --------
$108,643 $108,969 $167,263 $169,761 $130,011 $123,449 $224,036 $211,388
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----------------------
Maturities of mortgage-backed securities are based on contractual maturities
with scheduled amortization. Actual maturities will differ from contractual
maturities due to prepayments.

The amortized cost and market value of adjustable rate investments
available for sale and held to maturity by type as of December 31, follows:

<TABLE>
<CAPTION>
1995 1994
-------------------------------------- -------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY AVAILABLE FOR SALE HELD TO MATURITY
------------------ ------------------ ------------------ ------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal agency obligations........ $ 3,000 $ 2,982 $1,500 $1,499 $ 3,000 $ 2,936 $ 3,946 $3,731
Other bonds and obligations....... 1,000 995 500 501 1,000 985 500 501
FHLMC participation certificates.. 4,211 4,261 -- -- 5,388 5,320 -- --
FNMA pass-through certificates.... 3,821 3,866 -- -- -- -- 4,101 3,835
GNMA mortgage-backed securities... 37,186 37,195 -- -- 41,330 38,711 -- --
------- ------- ------ ------ ------- ------- ------- ------
$49,218 $49,299 $2,000 $2,000 $50,718 $47,952 $ 8,547 $8,067
======= ======= ====== ====== ======= ======= ======= ======
</TABLE>

Fixed rate bonds available for sale with an amortized cost of $1,957,000
and $1,269,000 and an approximate market value of $2,018,000 and $1,272,000 were
pledged to secure government deposits at December 31, 1995 and 1994,
respectively. A FNMA pass-through certificate held to maturity with a book value
of $8,553,000 and an approximate market alue of $8,615,000 and a FHLMC
participation certificate with a book value of $5,267,000 and an approximate
market value of $5,296,000 were pledged to collateralize securities sold under
agreements to repurchase at December 31, 1995. A FNMA pass-through certificate
held to maturity with a book value of $4,619,000 and an approximate market value
of $4,223,000 was pledge to collaterlize securities sold under agreements to
repurchase at December 31, 1994.

(4) LOANS

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

44
<PAGE> 45
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

The composition of loans at December 31 follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Real estate loans:
Residential .............................. $ 558,231 $ 452,708
Commercial ............................... 121,909 108,725
Construction and land .................... 18,138 18,021
--------- ---------

Total real estate loans ............. 698,278 579,454
--------- ---------
Consumer loans:
Home improvement, second mortgage and home
equity line of credit ................. 43,463 42,602
Personal ................................. 3,369 2,751
Guaranteed education ..................... 2,149 4,759
Collateral ............................... 2,189 2,052
--------- ---------

Total consumer loans ................ 51,170 52,164
--------- ---------

Commercial loans .............................. 19,150 13,419
--------- ---------

Total loans ......................... 768,598 645,037

Allowance for loan losses ..................... (11,665) (12,343)
--------- ---------

Net loans ........................... $ 756,933 $ 632,694
========= =========
</TABLE>

At December 31, 1995 and 1994, net deferred loan origination fees amounted
to $253,000 and $27,000, respectively. Unadvanced portions of loans amounted to
$9.9 million and $10.6 million at December 31, 1995 and 1994, respectively.

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

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year......................................... $12,343 $13,392 $16,054
Balance of acquired institution...................................... -- 1,715 --
Provision............................................................ 1,295 -- --
Charge-offs.......................................................... (2,767) (3,269) (3,086)
Recoveries........................................................... 794 505 424
------- ------- -------
Balance at end of year............................................... $11,665 $12,343 $13,392
======= ======= =======
</TABLE>

The balance of loans on nonaccrual status because of delinquency or other
problem characteristics amounted to $11,627,000 and $14,516,000 at December 31,
1995 and 1994, respectively.

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

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income in accordance with original loan terms................ $1,596 $ 1,537 $1,428
Interest income recognized............................................ (118) (107) (114)
Interest income applied as a reduction in loan balance................ (438) (347) (480)
------ ------- ------
Foregone interest income.............................................. $1,040 $ 1,083 $ 834
====== ======= ======
</TABLE>

45
<PAGE> 46
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

Restructured loans amounted to $5,583,000 and $2,036,000 at December 31,
1995 and 1994, respectively. Interest income that would have been recognized, if
restructured loans had been performing in accordance with their original terms
in 1995, 1994 and 1993 was $410,000, $145,000 and $248,000, respectively. The
actual amount of interest on these loans that was recognized in interest income
in 1995, 1994 and 1993 was $340,000, $100,000 and $199,000, respectively. There
are no commitments to lend additional funds to borrowers whose loans have been
modified in troubled debt restructurings. All foregone interest on restructured
loans that went into nonaccrual status during 1995, 1994 and 1993 is included in
the foregone interest on nonaccrual loans.

At December 31, 1995, total impaired loans were $11.7 million, of which
$4.9 million had related allowances of $.8 million and $6.8 million which did
not require a related allowance. All of the $11.7 million in impaired loans have
been measured using the fair value of the collateral method. During the year
ended December 31, 1995, the average recorded value of impaired loans was $12.1
million and the related amount of interest income recognized was $170,000, all
of which was recorded on a cash basis, and approximately $820,000 of interest
income that would have been recognized under original terms. The recognition
policy of interest income on impaired loans is the same as for other loans.

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

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year.................................................. $2,202 $1,876
New loans granted............................................................. 27 640
Retirement/reduction of directors and officers................................ (474) (216)
Repayment of principal........................................................ (45) (98)
------ ------
Balance at end of year........................................................ $1,710 $2,202
====== ======
</TABLE>

The outstanding balances of loans to directors and principal officers
included above totalled $221,000 and $233,000, respectively, at December 31,
1995 and 1994. Loans included above were made in the Bank's ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectibility.

(5) MORTGAGE SERVICING ASSETS

A summary of the components of the mortgage servicing assets for the years
ended December 31 follows:

<TABLE>
<CAPTION>
EXCESS PURCHASED TOTAL
(IN THOUSANDS)
<S> <C> <C> <C>
Balance as of December 31, 1992.................................. $ 3,753 $ -- $ 3,753
Capitalized...................................................... 1,617 -- 1,617
Amortization..................................................... (2,650) -- (2,650)
------- ------ -------
Balance as of December 31, 1993.................................. 2,720 -- 2,720

Purchased and capitalized........................................ 444 1,385 1,829
Amortization..................................................... (765) (32) (797)
------- ------ -------
Balance as of December 31, 1994.................................. 2,399 1,353 3,752

Purchased and capitalized........................................ 144 3,555 3,699
Amortization..................................................... (240) (602) (842)
------- ------ -------
Balance as of December 31, 1995.................................. $ 2,303 $4,306 $ 6,609
======= ====== =======
</TABLE>

At December 31, 1995, 1994 and 1993 mortgage loans partially or wholly
owned by others and serviced by the Company amounted to approximately
$780,356,000, $513,227,000 and $458,159,000, respectively, and are not reflected
in the accompanying consolidated financial statements because they are not
assets of the Company.

46
<PAGE> 47
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

During 1995 and 1994, the Company purchased mortgage servicing rights to
$303.6 million and $82.9 million, respectively, in residential first mortgage
loans. These purchased balances are included in the loans serviced for others.
Amortization of the excess mortgage servicing rights are included in mortgage
banking income while amortization of the purchased mortgage servicing rights are
included in mortgage banking expenses.

(6) OTHER REAL ESTATE OWNED

The composition of other real estate owned at December 31 follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Residential real estate......................................................... $1,131 $1,245
Commercial real estate.......................................................... 572 3,484
Multi-family real estate........................................................ 1,820 2,405
Construction and land........................................................... 1,048 2,377
------ ------
4,571 9,511
Valuation allowance............................................................. (413) (715)
------ ------
$4,158 $8,796
====== ======
</TABLE>

An analysis of the valuation allowance for the years ended December 31
follows:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................................. $ 715 $ 1,086 $ 1,700
Provision.................................................... 750 1,375 1,850
Net charge-offs.............................................. (1,052) (1,746) (2,464)
------- ------- -------
Balance at end of year....................................... $ 413 $ 715 $ 1,086
======= ======= =======
</TABLE>

Included above are properties substantively repossessed of $384,000 and
$2,283,000 at December 31, 1995 and 1994, respectively. Of the properties
included as other real estate owned at December 31, 1995, the Company had
outstanding purchase and sales agreements or firm offers of $1.2 million on
properties with a carrying value approximating that amount. There is no
assurance such sales will be consummated.

Net gains of $582,000 resulted from the sale of $7,972,000 and net gains of
$1,399,000 resulted from the sale of $10,107,000 of other real estate owned
during 1995 and 1994, respectively.

The components of losses on real estate operations, net, for the years
ended December 31 follows:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net gains on sales........................................... $ 582 $ 1,399 $ 128
Rental income................................................ 123 348 421
Provisions for other real estate owned....................... (750) (1,375) (1,850)
Other operating expenses, net................................ (1,314) (2,228) (2,291)
Foreclosure expenses......................................... (644) (761) (955)
------- ------- -------
$(2,003) $(2,617) $(4,547)
======= ======= =======
</TABLE>

(7) PREMISES AND EQUIPMENT

The composition of premises and equipment at December 31 follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and buildings............................................................ $10,895 $10,922
Furniture, fixtures and equipment............................................. 3,682 3,003
Leasehold improvements........................................................ 173 27
Construction in progress...................................................... 113 33
------- -------
14,863 13,985
Less: accumulated depreciation................................................ (5,326) (4,171)
------- -------
$ 9,537 $ 9,814
======= =======
</TABLE>

47
<PAGE> 48
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

Rent expense was $81,000, $208,000 and $144,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. Rental income on portions of the
Company owned and occupied premises totalled $354,000, $355,000 and $288,000 for
the years ended December 31, 1995, 1994 and 1993, respectively.

A summary of future minimum rental expense and income under non-cancellable
operating leases at December 31, 1995, follows:

<TABLE>
<CAPTION>
MINIMUM MINIMUM
RENTAL RENTAL
EXPENSE INCOME
------- ------
(IN THOUSANDS)
<S> <C> <C>
1996.............................................................................. $ 99 $233
1997.............................................................................. 82 62
1998.............................................................................. 65 49
1999.............................................................................. 26 38
2000.............................................................................. 22 38
Thereafter........................................................................ 132 --
</TABLE>

The Bank leased a building from a director in 1994 and 1993. Total rental
expense relating to this building amounted to $200,000 and $90,000 for the years
ended December 31, 1994 and 1993, respectively. Included in the 1994 amount was
a payment of $167,000 for the early termination of the lease offset by the
recognition of a deferred gain of $69,000. In the opinion of management, the
lease was made in the Bank's ordinary course of business and on substantially
the same terms as those prevailing at the time for comparable transactions with
other persons.

(8) STOCK IN FEDERAL HOME LOAN BANK OF BOSTON

As a voluntary member of the Federal Home Loan Bank ("FHLB") of Boston, the
Bank is required to invest in $100 par value stock of the FHLB of Boston in the
amount of 1% of its outstanding home loans or 5% of its outstanding advances
from the FHLB of Boston, whichever is higher. As and when such stock is
redeemed, the Bank would receive from the FHLB of Boston an amount equal to the
par value of the stock. At its discretion, the FHLB of Boston may declare
dividends on this stock. Such dividends, which are included in dividend income
on equity securities, amounted to $877,000, $834,000 and $702,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.

(9) DEPOSITS

The composition of deposits at December 31 follows:

<TABLE>
<CAPTION>
1995 1994
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest bearing:
Demand deposit accounts........................ $ 54,516 --% $ 45,968 --%
Interest bearing:
NOW accounts................................... 67,275 1.00 65,882 1.19
Regular savings accounts....................... 68,052 2.20 76,571 2.14
Money market deposit accounts.................. 130,437 2.90 143,203 2.50
Variable rate certificates..................... 13,279 5.64 17,185 6.28
Fixed rate certificates........................ 409,646 5.86 379,049 5.14
-------- --------
Total deposits............................ $743,205 4.13% $727,858 3.65%
======== ==== ======== ====
</TABLE>

48
<PAGE> 49
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

Time certificates in excess of $100,000 at December 31, 1995 and 1994
amounted to $53,018,000 and $45,674,000, respectively. There were no brokered
deposits at December 31, 1995 and 1994.

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

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Now accounts....................................................... $ 711 $ 725 $ 807
Regular savings accounts........................................... 1,554 1,512 1,368
Money market deposit accounts...................................... 3,548 3,460 3,562
Certificates of deposit............................................ 23,433 15,677 10,615
------- ------- -------
$29,246 $21,374 $16,352
======= ======= =======
</TABLE>

The average interest rate on time certificates at December 31, 1995, by the
earlier of its repricing or period of maturity follows:

<TABLE>
<CAPTION>
AVERAGE
AMOUNT RATE
------ ----
(IN THOUSANDS)
<S> <C> <C>
Maturity in:
1996.......................................................................... $280,228 5.74%
1997.......................................................................... 105,119 6.08
1998.......................................................................... 19,836 6.12
1999.......................................................................... 15,333 6.26
2000.......................................................................... 2,409 6.07
--------
$422,925 5.85%
========
</TABLE>

Included in the table above are variable rate time certificates, the
majority of which mature in 1996.

(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). These agreements are treated as financings, and
the obligations to repurchase securities sold are reflected as a liability in
the consolidated balance sheets and the securities underlying the agreements
remain in the asset accounts. The securities underlying the agreements are held
by third parties as custodian. Generally, the outstanding collateral consists of
U.S. government and federal agency obligations and mortgage-backed participation
certificates.

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

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at December 31........................................... $ 9,212 $ 4,000 $23,922
Outstanding collateral:
Carrying value.................................................... 13,820 4,619 24,364
Market value...................................................... 13,911 4,223 24,408
Average balance outstanding during the year.......................... 14,798 25,228 15,893
Maximum outstanding at any month-end................................. 32,382 35,949 32,681
Weighted average rate at year-end.................................... 5.82% 6.17% 3.40%
Weighted average rate during the year................................ 6.06% 4.32% 3.27%
</TABLE>

The reverse repurchase agreements outstanding at December 31, 1995, mature
on January 17, 1996. The reverse repurchase agreement outstanding at December
31, 1994, matured on January 17, 1995.

The Bank has lines of credit established with banks totalling $51,600,000
at December 31, 1995. The Bank also has established reverse repurchase lines of
credit in the amount of $210,000,000. These lines would be subject to the amount
of securities available for collateralization purposes.

49
<PAGE> 50
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

(11) FEDERAL HOME LOAN BANK ADVANCES

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

<TABLE>
<CAPTION>
1995 1994
----------------------- --------------------
AMOUNT WEIGHTED AMOUNT WEIGHTED
------- AVERAGE ------- AVERAGE
RATE RATE
---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 1 year............................................. $132,293 5.76% $117,125 6.28%
Over 1 year to 2 years.................................... 78,453 6.51 38,661 5.36
Over 2 years to 3 years................................... 36,948 5.53 54,192 6.87
Over 3 years to 5 years................................... 15,123 5.65 31,569 5.37
Over 5 years.............................................. 597 6.46 5,638 5.84
-------- --------
$263,414 5.94% $247,185 6.14%
======== ==== ======== ====
</TABLE>

Included in the above maturities are $20,500,000 in FHLB amortizers based
on contractual maturities with scheduled amortization. Loans from the FHLB of
Boston are secured by the Bank's stock in that institution, its residential real
estate mortgage portfolio and the remaining U.S. government obligations not
otherwise pledged (see notes 3 and 10).

(12) FEDERAL AND STATE INCOME TAXES

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

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense:
Federal.............................................. $ 1,938 $ 1,781 $ 2,030
State................................................ 299 202 457
------- ------- -------
2,237 1,983 2,487
------- ------- -------
Deferred income tax expense (benefit):
Federal............................................... 2,857 2,629 1,177
State................................................. 1,140 1,169 285
Change in valuation allowance......................... (600) (1,000) (1,500)
------- ------- -------
3,397 2,798 (38)
------- ------- -------
Total income tax expense.................................. $ 5,634 $ 4,781 $ 2,449
======= ======= =======
</TABLE>

The total income tax expense has been increased to reflect the adjustment
to the deferred tax asset for the tax impact of the Massachusetts tax rate
reduction as part of the Bank Tax Reform Law signed by the Governor of
Massachusetts on July 27, 1995.

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

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense at statutory rate .................... $ 5,240 $ 4,700 $ 3,402
Tax effect of:
Dividends received deduction ............................... (9) (11) (10)
State tax, net of federal benefit before valuation allowance 935 905 490
Change in valuation allowance .............................. (600) (1,000) (1,500)
Other, net ................................................. 68 187 67
------- ------- -------
$ 5,634 $ 4,781 $ 2,449
======= ======= =======

Effective income tax rate ....................................... 37.6% 34.6% 24.5%
======= ======= =======
</TABLE>

50
<PAGE> 51
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

The existing net deductible temporary differences that give rise to the net
deferred income tax asset are expected to reverse in periods in which the
Company will generate net taxable income. At December 31, 1995, the net deferred
tax asset is supported by recoverable income taxes of approximately $3.1
million. It is management's belief that the valuation allowance is adequate to
reduce the total deferred tax asset to an amount that is more likely than not to
be realized. It should be noted, however, that factors beyond management's
control, such as the general state of the economy and real estate values, can
affect levels of taxable income and that no assurance can be given that
sufficient taxable income will be generated to fully absorb gross deductible
temporary differences.

Of the change in the valuation reserve of $1.2 million, approximately
$600,000 was attributable to the unrealized losses on securities available for
sale and consequently is not recorded in the statement of operations.

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

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loan loss deduction....................................................... $ 2,358 $ 5,515
Unrealized losses on writedown of other real estate owned................. 1,665 2,367
Deferred benefits......................................................... 552 500
Security valuation adjustments on investments available for sale.......... -- 2,546
Other..................................................................... 481 440
------- -------
Gross deferred assets..................................................... 5,056 11,368
Valuation allowance....................................................... (1,328) (2,528)
------- -------
Net deferred tax assets before deferred tax liabilities..................... 3,728 8,840
------- -------
Deferred tax liabilities:
Depreciation.............................................................. 432 256
Deferred expenses......................................................... 1,857 1,350
Prepaid expenses.......................................................... -- 356
Excess mortgage servicing fees............................................ 16 144
Security valuation adjustments on investments available for sale.......... 127 --
Miscellaneous security valuation adjustments.............................. 225 152
Other..................................................................... 241 280
------- -------
Gross deferred liabilities................................................ 2,898 2,538
------- -------
Net deferred income taxes receivable........................................ $ 830 $ 6,302
======= =======
</TABLE>

(13) STOCKHOLDERS' EQUITY

Preferred Stock

The Company has established a series of 100,000 shares of preferred stock
designated as Series A Junior Participating Cumulative Preferred Stock, par
value $0.10 per share ("Series A Stock") and has declared a dividend of one
Preferred Stock Purchase Right (the "Right") for each outstanding share of the
Company's Common Stock.

Pursuant to a Shareholder Rights Plan, each Right entitles the holder to
purchase a unit consisting of one one-hundredth of a share of Series A Stock,
par value $0.10 per share, at an initial cash exercise price of $90.00 per unit,
subject to adjustment. The Rights are not exercisable and remain attached to all
outstanding shares of Common Stock until the earliest of (i) ten days following
a public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired beneficial ownership of 20% or more of the
outstanding shares of Common Stock (the date of said announcement being referred
to as the "Stock Acquisition Date"), (ii) ten business days following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person or (iii) the declaration by the Board of
Directors that a person is an "Adverse Person," as such term is defined in the
Shareholder Rights Plan.

51
<PAGE> 52
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994, and 1993

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

The holders of Series A Stock would be entitled to preferred rights with
respect to dividends, voting and liquidation.

Retained Earnings

The retained earnings account at December 31, 1995, includes approximately
$3.1 million of bad debt reserves for income tax purposes which may be subject
to tax if not used to absorb loan losses. Because the Company does not intend to
use the reserves for purposes other than to absorb loan losses, deferred taxes
of approximately $1.3 million have not been provided for these amounts.

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

At the time of its conversion from mutual to stock form of ownership, the
Bank established a liquidation account of $22,983,000, its net worth at December
31, 1985, for the benefit of eligible account holders who continue to maintain
their accounts in the Bank after the conversion. The liquidation account has
been and will continue to be reduced annually to the extent that eligible
account holders have reduced their qualifying deposits. Subsequent increases
will not restore an eligible account holder's interest in his liquidation
subaccount. In the event of a complete liquidation, and only in such event, each
eligible account holder will be entitled to receive a distribution from the
liquidation account equal to the then current adjusted qualifying balance of his
subaccount. The balance of the liquidation account at December 31, 1995, was
approximately $892,000 (unaudited).

(14) OTHER INCOME

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

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Deposit account service charges.............................. $1,579 $1,507 $1,291
Rental income................................................ 354 355 288
Gain on sale of a non-marketable security.................... 220 -- --
Loan late charges and other fees............................. 243 176 95
Other........................................................ 702 559 563
------ ------ ------
$3,098 $2,597 $2,237
====== ====== ======
</TABLE>

(15) EMPLOYEE BENEFITS

Pension Plan

The Company sponsors a non-contributory defined benefit pension plan that
covers all employees who meet specified age and length of service requirements,
which is administered by the Savings Banks Employees Retirement Association
("SBERA"). The plan provides for benefits to be paid to eligible employees at
retirement based primarily upon their years of service with the Company and
compensation levels near retirement. Contributions to the plan are funded
currently and reflect benefits attributed to employees' service to date, as well
as services expected to be earned in the future. The plan assets are invested
primarily in U.S. government obligations, corporate bonds and equity securities.

52
<PAGE> 53
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

The funded status of the plan for the years ended October 31, the plan's
latest valuation dates and amounts to be amortized systematically over
subsequent periods, follow:

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Vested benefits............................................................. $ 2,637 $ 2,497
Non-vested benefits......................................................... 57 22
------- -------
Accumulated benefit obligation.............................................. 2,694 2,519
Additional benefits related to future compensation levels................... 2,444 1,421
------- -------
Projected benefit obligation................................................ 5,138 3,940
Plan assets at fair value................................................... 3,463 2,825
------- -------
Plan assets less than projected benefit obligation.......................... (1,675) (1,115)
Unrecognized net loss....................................................... 792 274
Unamortized transition asset................................................ (210) (224)
------- -------
Accrued pension cost........................................................ $(1,093) $(1,065)
======= =======
</TABLE>

Net periodic pension expense for the years ended December 31 included the
following components:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost - benefits earned during the year................ $401 $ 548 $ 328
Interest cost on projected benefit obligation................. 315 319 224
Actual return on plan assets.................................. (531) (174) (351)
Net amortization and deferral................................. 301 (59) 141
---- ----- -----
Net periodic pension expense.................................. $486 $ 634 $ 342
==== ===== =====

Assumptions used to develop the net periodic pension
benefit obligation follows:

Discount rate................................................. 7.00% 8.00% 7.00%
Rate of increase in compensation levels....................... 5.00% 5.00% 5.00%

Assumptions used to develop the net periodic pension
expense follows:

Discount rate................................................. 8.00% 7.00% 7.50%
Rate of increase in compensation levels....................... 5.00% 5.00% 5.00%
Expected long-term rate of return on assets................... 9.00% 9.00% 9.00%
</TABLE>

Postretirement Benefits Other Than Pensions

In addition to the Bank's non-contributory defined benefit pension plan,
the Bank provides certain health care and life insurance benefits for retired
employees and dependents. This unfunded plan also covers active employees over
the age of 55 and 20 years of service to the Bank for health benefits only and
subject to a limitation upon retirement.

The status of the plan for the year ended December 31 follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents....................................................... $214 $191
Active employees.............................................................. 50 27
---- ----
Total accumulated postretirement benefit obligation............................. $264 $218
==== ====
Accrued postretirement benefit cost............................................. $274 $269
==== ====
</TABLE>

53
<PAGE> 54
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

Net periodic postretirement benefit expense for the years ended December 31
included the following components:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost................................................. $18 $15 $ 16
Service cost.................................................. --- --- ----
Net amortization and deferred................................. (1) (1) (2)
--- --- ----
Net periodic postretirement benefit expense................... $17 $14 $ 14
=== === ====
Assumptions used to develop the net periodic postretirement
benefit expense follows:

Discount rate................................................... 7.00% 8.00% 7.00%
Medical inflation rate.......................................... 12.0 to 6.0% 12.0 to 6.0% 12.0 to 6.0%
Medical inflation ultimate rate................................. 6.00% 6.00% 6.00%
Life insurance rate of increase................................. 2.50% 5.00% 5.00%
</TABLE>

The effect of a one-percentage point increase in the assumed health care
cost trend for each future year is immaterial to the net periodic postretirement
health care cost and the accumulated postretirement benefit obligation.

Stock Option Plan

Under the Company's 1986 Stock Option Plan for the benefit of officers and
other employees, 500,000 shares of authorized but unissued Common Stock were
reserved for issuance. In February, 1995, the Company adopted a Stock Incentive
Plan, in addition to and separate from the 1986 Stock Option Plan, which was
approved by shareholders at the 1995 Annual Meeting. A total of 207,612 shares
of authorized but unissued Common Stock were reserved for issuance. The exercise
price of any option granted will not be less than the fair market value of the
Common Stock on the date of grant of the option. Stock options are exercisable
over various periods commencing the date of the grant and in no event later than
ten years after the date of the grant. No charges to expense are made as a
result of granting or exercising options.

A summary of stock option plan activity follows:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(NUMBER OF SHARES)
<S> <C> <C> <C>
Outstanding at beginning of year.................................. 236,889 189,647 200,752
Granted...................................................... 72,000 110,000 37,500
Exercised.................................................... (28,880) (60,506) (48,605)
Forfeited.................................................... -- (2,252) --
------- ------- ---------
Outstanding at end of year........................................ 280,009 236,889 189,647
======= ======= =======
Shares reserved for future grants................................. 288,612 153,000 260,748
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Exercisable at end of year................................ 260,009 211,889 166,399
Option price per share outstanding........................ $3.25 - $21.125 $3.25 - $21.00 $3.25 - $17.50
Average per share price on options exercised.............. $11.37 $11.91 $5.88
</TABLE>

The average exercise price on the 280,009 options outstanding at December
31, 1995, was $16.178.

54
<PAGE> 55
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1995, 1994 and 1993

Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership Plan (the "ESOP") that
covers all employees who meet specified age and length of service requirements.
Contributions are made for the purchase of additional shares of Company stock
and accordingly, a charge to salaries and employee benefits expense is recorded.
Approximately 19,819 shares of Common Stock were purchased during 1995 at an
average price of $20.19 per share, which when combined with forfeited shares are
allocated to participants proportionate to their gross wages. Contributions by
the Company to the ESOP for participants for the years ended December 31, 1995,
1994 and 1993 were $402,000, $380,000 and $302,500, respectively.

Thrift Incentive Plan

The Company has an employee tax deferred thrift incentive plan (401K) under
which individual employee contributions to the plan are matched within certain
limitations by the Company. All employees who meet specified age and length of
service requirements are eligible to participate in the 401K plan. The amounts
matched by the Company are included in salaries and employee benefits expense.
The amounts matched for the years ended December 31, 1995, 1994 and 1993 were
$49,000, $49,000 and $10,000, respectively.

Officers Incentive Compensation Plan

The Incentive Compensation Plan provides for the payment of bonuses to
officers under certain circumstances based upon the Company's pre-tax earnings
adjusted for gains or losses from sales of assets, targeted returns on assets
and equity, its performance versus its peer group, and the individual's
accomplishment of established goals and objectives. Amounts are to be allocated
to participants as determined by the Company's Compensation and Option Committee
based on the recommendation of the President and subject to approval by its
Board of Directors. In 1995, 1994 and 1993, $255,000, $263,000 and $200,000,
respectively, was charged to salaries and employee benefits expense under this
plan.

Executive Officer Employment Agreements

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

Deferred Compensation Plan

The Company has adopted deferred compensation agreements for its directors
whereby a director can elect to defer earned fees to future years with benefits
commencing at retirement. The plan accrues interest based on an equivalent rate
to a term certificate of deposit, however, the plan is unfunded as of December
31, 1995. The deferred compensation earned by the directors for the years ended
December 31, 1995, 1994 and 1993 totalled $48,100, $52,300 and $20,300,
respectively.

(16) FAIR VALUES OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of the Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments" ("SFAS 107"). Fair value estimates are based on existing
on- and off-balance-sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities include real
estate acquired by foreclosure, the deferred income tax asset, office properties
and equipment, and core deposit and other intangibles. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates. Accordingly, the aggregate fair value amounts presented
do not represent the

55
<PAGE> 56
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1995, 1994 and 1993

underlying value of the Company. The estimated fair value amounts have been
determined by using available quoted market information or other appropriate
valuation methodologies.

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

The estimation methodologies used, book values and estimated fair values
for the Company's financial instruments at December 31 follow.

Financial instruments actively traded in a secondary market have been
valued using quoted available market prices are as follows:

<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets held for sale............................. $ 5,162 $ 5,163 $ 2,507 $ 2,507
Investments available for sale................... 108,969 108,969 123,449 123,449
Investments held to maturity..................... 167,263 169,761 224,036 211,388
</TABLE>

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

<TABLE>
<CAPTION>
1995 1994
-------------------------- ------------------------
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans receivable, net........................... $756,933 $764,488 $632,694 $624,072
Excess servicing................................ 2,303 2,709 2,399 2,928
Fixed rate certificates......................... 409,646 412,186 379,049 377,675
Federal Home Loan Bank advances................. 263,414 264,790 247,185 240,836
</TABLE>

The fair values of financial instruments with no maturity or short-term
maturities approximates their carrying values are as follows:

<TABLE>
<CAPTION>
1995 1994
------------------------ -----------------------
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash............................................. $ 19,236 $ 19,236 $ 18,182 $ 18,182
Short-term investments........................... 9,000 9,000 5,200 5,200
Accrued interest receivable...................... 7,164 7,164 6,947 6,947
Stock in FHLB.................................... 13,171 13,171 12,368 12,368
Demand deposit accounts.......................... 54,516 54,516 45,968 45,968
NOW accounts..................................... 67,275 67,275 65,882 65,882
Regular savings accounts......................... 68,052 68,052 76,571 76,571
Money market deposit accounts.................... 130,437 130,437 143,203 143,203
Variable rate certificates....................... 13,279 13,279 17,185 17,185
Securities sold under agreements to repurchase... 9,212 9,212 4,000 4,000
Mortgagors' escrow accounts...................... 3,526 3,526 2,243 2,243
</TABLE>

56
<PAGE> 57
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1995, 1994 and 1993

The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate fair
value. The fair values for investments available for sale and held to maturity
are based on quoted bid prices received from securities dealers. Commitments to
originate loans and forward commitments to sell loans have been considered in
the value of assets held for sale. Loans are estimated by discounting
contractual cash flows adjusted for prepayment estimates and using discount
rates approximately equal to current market rates on loans with similar
characteristics and maturities. The incremental credit risk for non-performing
loans has been considered in the determination of the fair value of loans.
Excess servicing is based on the present value of the estimated cash flows using
a current risk rate and taking into consideration estimated prepayments. Fixed
rate certificates and Federal Home Loan Bank advances are based on the
discounted value of contractual cash flows. The discount rates used are
representative of approximate rates currently offered on instruments with
similar remaining maturities. The carrying values for cash and short-term
investments approximate the fair value because of the short maturity of these
instruments. The carrying values for accrued interest receivable, variable rate
certificates, securities sold under agreements to repurchase and mortgagors'
escrow accounts approximate fair value because of the short-term nature of these
financial instruments. Stock in the Federal Home Loan Bank of Boston equals the
carrying value reported in the balance sheet because this stock is redeemable
only at full par by the FHLB. The fair values reported for demand deposit
accounts, NOW accounts, regular savings accounts and money market accounts are
equal to their respective book values since they are equal to the amounts
payable on demand at the reporting date. The Company's commitments for unused
lines and outstanding standby letters of credit and unadvanced portions of loans
are at floating rates and, therefore, there is no fair value adjustment. The
credit risk associated with the Company's loans sold with recourse is considered
in the allowance for loan losses, but it cannot be separately determined.

(17) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS

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

BALANCE SHEETS

<TABLE>
<CAPTION>
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and interest-bearing deposit in subsidiaries.............................. $ 1,623 $ 6,064
Investment in subsidiaries, at equity.......................................... 83,637 66,096
Other assets................................................................... 2 425
------- -------
Total assets......................................................... $85,262 $72,585
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued income taxes...................................................... $ 2 $ 2
Accrued expenses.......................................................... 95 61
------- -------
Total liabilities.................................................... 97 63
------- -------
Stockholders' equity:
Serial preferred stock, $0.10 par value per share; 3,000,000
shares authorized, none issued......................................... -- --
Common stock, $0.10 par value per share; 15,000,000
shares authorized; 5,154,968 and 5,126,088 shares issued
in 1995 and 1994, respectively......................................... 515 513
Additional paid-in capital................................................ 71,515 71,172
Retained earnings......................................................... 26,183 18,701
Treasury stock, at cost (917,997 shares).................................. (13,247) (13,247)
Unrealized gains (losses) on investments available for sale, net.......... 199 (4,617)
------- -------
Total stockholders' equity........................................... 85,165 72,522
------- -------
Total liabilities and stockholders' equity........................... $85,262 $72,585
======= =======
</TABLE>

57
<PAGE> 58
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
December 31, 1995, 1994 and 1993

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Dividends from bank subsidiaries.............................. $ 1,500 $3,512 $ --
Interest income from deposits in bank subsidiaries............ 95 91 102
------- ------ ------
Total operating income..................................... 1,595 3,603 102
Non-interest expenses......................................... 1,362 315 235
------- ------ ------
Income (loss) before income tax expense and
equity in net income of subsidiary......................... 233 3,288 (133)
Income tax expense (benefit).................................. (380) 20 1
------- ------ ------
Income (loss) before equity in net income of subsidiaries..... 613 3,268 (134)
Equity in net income of subsidiary............................ 8,725 5,775 7,692
------- ------ ------
Net income.................................................... $ 9,338 $9,043 $7,558
======= ====== ======
</TABLE>

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

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 9,338 $ 9,043 $ 7,558
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries...... (8,725) (5,775) (7,692)
(Increase) decrease in other assets..................... 423 (293) (132)
Increase (decrease) in other liabilities................ 34 20 (11)
------- ------- -------
Net cash provided (used) by operating activities... 1,070 2,995 (277)
------- ------- -------
Cash flows from investing activities:
Investment in subsidiary................................ (4,000) -- --
------- ------- -------
Net cash used by financing activities.............. (4,000) -- --
------- ------- -------
Cash flows from financing activities:
Stock options exercised................................. 345 808 308
Dividends paid to stockholders.......................... (1,856) (1,677) (619)
------- ------- -------
Net cash used by financing activities.............. (1,511) (869) (311)
------- ------- -------
Net increase (decrease) in cash and interest-bearing
deposit in subsidiaries.................................... (4,441) 2,126 (588)
Cash and interest-bearing deposit in subsidiaries at
beginning of year.......................................... 6,064 3,938 4,526
------- ------- -------
Cash and interest-bearing deposit in subsidiaries at
end of year................................................ $ 1,623 $ 6,064 $ 3,938
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Income taxes............................................ $ -- $ 20 $ 1
</TABLE>

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

The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans, standby letters of credit,
recourse arrangements on assets sold, and forward commitments to sell loans. The
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the Consolidated Balance Sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.

58
<PAGE> 59
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For forward commitments to sell loans and mortgage-backed
securities, the contract or notional amounts do not represent exposure to credit
loss. The Company monitors the credit risk of its forward commitments through
credit approvals, limits, and monitoring procedures.

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

<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
---------------
1995 1994
---- ----
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:

Commitments to originate loans:
Fixed rate loans........................................................... $ 6,871 $ 2,585
Adjustable rate loans...................................................... 8,545 16,867
------- -------
Total commitments to originate loans..................................... 15,416 19,452
Unused lines of credit....................................................... 76,584 72,968
Standby letters of credit.................................................... 557 201
Loans sold with recourse..................................................... 5,872 7,507
Unadvanced portions of loans................................................. 9,891 10,642

Financial instruments whose notional or contract amounts exceed the amount of
credit risk:

Forward commitments to sell loans and mortgage-backed securities............. $ 8,000 $ 2,000
</TABLE>

Commitments to originate loans, unused lines of credit, and unadvanced
portions of loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since a portion of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies but may include accounts
receivable, inventory, equipment and real estate. Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance by a
customer to a third party. The credit risk in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.

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

Forward commitments to sell loans or mortgage-backed securities are
contracts which the Company enters into for the purpose of reducing the interest
rate risk associated with originating loans for sale. In order to fulfill a
forward commitment, the Company typically exchanges its current production of
loans for mortgage-backed securities through FNMA or FHLMC which are then
delivered to a national securities firm at a future date at prices or yields
specified by the contracts.

Risks may arise from the possible inability of the Company to originate loans
to fulfill these contracts, in which case the Company would normally purchase
securities in the open market to deliver against the contract. Unrealized gains
and losses on contracts used to hedge the Company's closed loans and pipeline of
loans expected to close are considered in adjusting carrying values of the loans
held for sale to the lower of cost or market.

59
<PAGE> 60
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

As a nonmember of the Federal Reserve System, the Company is required to
maintain certain reserve requirements of vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement, included
in "Cash and due from banks," was $4,268,000 and $3,110,000 at December 31, 1995
and 1994, respectively.

A number of legal claims against the Company arising in the normal course of
business were outstanding at December 31, 1995. Management, after reviewing
these claims with legal counsel, is of the opinion that the resolution of these
claims will not have a material effect on the Company's financial position.

(19) ACQUISITIONS

On April 1, 1994, the Bank acquired Community Savings Bank ("Community") a
mutual savings bank headquartered in Lawrence, Massachusetts. The $115.8
acquisition was accounted for by the purchase method and resulted in negative
goodwill. The results of operations of Community have been included in the
Company's consolidated statements of operations since the date of the
acquisition. The consolidated proforma results of the Company for 1994, assuming
the acquisition had taken place on January 1, 1994, were minimally impacted by
the acquisition of Community.

On September 19, 1994, the Company signed a definitive agreement to acquire
Finest Financial Corp. ("Finest") and its subsidiary, Pelham Bank and Trust
Company. In the second quarter of 1995, the stockholders of Finest failed to
approve the merger and Andover recorded a charge to earnings of $1.0 million in
connection with merger related expenses.

60
<PAGE> 61
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1995, 1994 and 1993

(20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Summaries of consolidated operating results on a quarterly basis for the
years ended December 31, 1995 and 1994 follow:

<TABLE>
<CAPTION>
1995 QUARTERS
-----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Interest and dividend income.................... $18,648 $18,980 $19,333 $19,925
Interest expense................................ 10,621 10,918 11,360 11,653
------- ------- ------- -------
Net interest and dividend income................ 8,027 8,062 7,973 8,272
Provision for loan losses....................... 150 175 480 490
Losses on real estate operations............... (582) (454) (505) (462)
Non-interest income............................. 1,479 1,342 1,571 1,404
Merger expense................................ -- 1,000 -- --
Non-interest expense............................. 4,668 5,013 4,394 4,785
------- ------- ------- -------
Income before income tax expense ............... 4,106 2,762 4,165 3,939
Income tax expense.............................. 1,595 1,055 1,562 1,422
------- ------- ------- -------
Net income....................................... $ 2,511 $ 1,707 $ 2,603 $ 2,517
======= ======= ======= =======

Net income per share............................. $ 0.60 $ 0.40 $ 0.62 $ 0.60
======= ======= ======= =======

Dividends per share.............................. $ 0.10 $ 0.10 $ 0.12 $ 0.12
======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
1994 QUARTERS
------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Interest and dividend income.................... $13,024 $15,876 $16,844 $17,841
Interest expense................................ 6,470 7,895 9,127 9,929
------- ------- ------- -------
Net interest and dividend income................ 6,554 7,981 7,717 7,912
Provision for loan losses..................... -- -- -- --
Losses on real estate operations............... (688) (633) (450) (846)
Non-interest income............................. 414 1,120 1,083 1,188
Non-interest expense............................ 3,892 4,735 4,426 4,475
------- ------- ------- -------
Income before income tax expense................ 2,388 3,733 3,924 3,779
Income tax expense.............................. 836 1,275 1,360 1,310
------- ------- ------- -------
Net income....................................... $ 1,552 $ 2,458 $ 2,564 $ 2,469
======= ======= ======= =======

Net income per share............................. $ 0.37 $ 0.59 $ 0.61 $ 0.59
======= ======= ======= =======

Dividends per share.............................. $ 0.10 $ 0.10 $ 0.10 $ 0.10
======= ======= ======= =======
</TABLE>

The quarterly summaries of consolidated operating results presented above
reflect the acquisition of Community on April 1, 1994. The acquisition was
accounted for using the purchase method.

Earnings per common share is calculated by dividing net earnings by the
average common shares outstanding each quarter. Therefore, the sum of the
quarters may not equal the net earnings per common share for the year.

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
ANDOVER BANCORP, INC.:

We consent to incorporation by reference in Registration Statement No. 33-21975
on Form S-8 of Andover Bancorp, Inc. of our report dated January 18, 1996,
relating to the consolidated balance sheets of Andover Bancorp, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995, which
report is included herein.

/s/ KPMG PEAT MARWICK LLP

Boston, Massachusetts
March 18, 1996

<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS DATED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 19,236
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,969
<INVESTMENTS-CARRYING> 167,263
<INVESTMENTS-MARKET> 169,761
<LOANS> 768,598
<ALLOWANCE> 11,665
<TOTAL-ASSETS> 1,110,847
<DEPOSITS> 743,205
<SHORT-TERM> 9,212
<LIABILITIES-OTHER> 9,851
<LONG-TERM> 263,414
0
0
<COMMON> 515
<OTHER-SE> 84,650
<TOTAL-LIABILITIES-AND-EQUITY> 1,110,847
<INTEREST-LOAN> 53,876
<INTEREST-INVEST> 23,010
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 76,886
<INTEREST-DEPOSIT> 29,246
<INTEREST-EXPENSE> 44,552
<INTEREST-INCOME-NET> 32,334
<LOAN-LOSSES> 1,295
<SECURITIES-GAINS> 327
<EXPENSE-OTHER> 19,860
<INCOME-PRETAX> 14,972
<INCOME-PRE-EXTRAORDINARY> 14,972
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,338
<EPS-PRIMARY> 2.22
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.14
<LOANS-NON> 11,627
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,583
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,343
<CHARGE-OFFS> 2,767
<RECOVERIES> 794
<ALLOWANCE-CLOSE> 11,665
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>